16878 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 11 

[TD 9319] 

RIN 1545–BD52 

Limitations on Benefits and 

Contributions Under Qualified Plans 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations and removal of 

temporary regulations. 

SUMMARY: This document contains final 

regulations under section 415 of the 

Internal Revenue Code (Code) regarding 

the limitations of section 415, including 

updates to the regulations for numerous 

statutory changes since comprehensive 

final regulations were last published 

under section 415. The final regulations 

also make conforming changes to 

regulations under sections 401(a), 

401(a)(9), 401(k), 402, 416, and 457, and 

make other minor corrective changes to 

regulations under sections 401(a)(4), 

414(s), 457, and 924. These regulations 

affect administrators of, participants in, 

and beneficiaries of qualified employer 

plans and certain other retirement 

plans. 

DATES: Effective Date: These regulations 

are effective April 5, 2007. 

Applicability Dates: These regulations 

generally apply for limitation years 

beginning on or after July 1, 2007. See 

§§ 1.401(k)–1(e)(8), 1.415(a)–1(g), 1.457– 

6(c)(2)(i), and 1.457–12 regarding the 

applicability dates of these regulations. 

FOR FURTHER INFORMATION CONTACT: 

Vernon S. Carter at (202) 622–6060 or 

Linda S.F. Marshall at (202) 622–6090 

(not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains amendments 

to the Income Tax Regulations (26 CFR 

Parts 1 and 11) under section 415 of the 

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) 

(including section 401(a)(9)), 401(k), 

402, 416, and 457, as well as minor 

corrective changes to the regulations 

under section 457 and changes to other 

regulations under sections 401(a) 

(including section 401(a)(4)), 414(s), and 

924 to update cross-references to the 

final regulations under section 415. 

Section 415 was added to the Code by 

the Employee Retirement Income 

Security Act of 1974 (88 Stat. 829), 

Public Law 93–406 (ERISA), and has 

been amended many times since. 

Section 415 provides a series of limits 

on benefits under qualified defined 

benefit plans and on 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 under a welfare 

benefit fund 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 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 percent 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)(3), 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)(4), 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 percent 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) (CRA), 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), the Working Families 

Tax Relief Act of 2004, Public Law 108– 

311 (118 Stat. 1166) (WFTRA), the Gulf 

Opportunity Zone Act of 2005, Public 

Law 109–135 (119 Stat. 2577) (GOZA), 

and the Pension Protection Act of 2006, 

Public Law 109–280 (120 Stat. 780) 

(PPA ’06). 

Although some limited 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 CB 360) (see 

§ 601.601(d)(2)) provides guidance on 


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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 CB 536) (see 

§ 601.601(d)(2)) 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 CB 458) (see 

§ 601.601(d)(2)) 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. 98–1 (1998–1 CB 249) 

(modifying and superseding Rev. Rul. 

95–29, 1995–1 CB 81) (see 

§ 601.601(d)(2)) provides 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 CB 326) (see 

§ 601.601(d)(2)) 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 CB 1340) 

(see § 601.601(d)(2)) 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 CRA. 

• Rev. Rul. 2001–51 (2001–2 CB 427) 

(see § 601.601(d)(2)) 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. 

• Rev. Rul. 2001–62 (2001–2 CB 632) 

(superseding Rev. Rul. 95–6, 1995–1 CB 

80) (see § 601.601(d)(2)) provides 

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. 

• Notice 2002–2 (2002–1 CB 285) (see 

§ 601.601(d)(2)) provides guidance 

regarding the treatment of reinvested 

employee stock ownership plan (ESOP) 

dividends under section 415(c), to 

reflect changes made by SBJPA. 

• Rev. Rul. 2002–27 (2002–1 CB 925) 

(see § 601.601(d)(2)) 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 CB 116) 

(see § 601.601(d)(2)) 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 (2004–2 CB 879) 

(see § 601.601(d)(2)) provides guidance 

regarding the actuarial assumptions that 

must be used for distributions with 

annuity starting dates occurring during 

plan years beginning in years 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. 

For copies of recently issued Revenue 

Procedures, Revenue Rulings, Notices, 

and other guidance published in the 

Internal Revenue Bulletin or the 

Cumulative Bulletin, please visit the IRS 

Web site at http://www.irs.gov. 

Some previously issued guidance has 

been superseded by subsequent 

statutory changes. For example, the 

simplified actuarial adjustment factors 

formerly permitted to be used to adjust 

certain forms of benefit for purposes of 

applying the limitations of section 

415(b) pursuant to Rev. Rul. 80–253 

(1980–2 CB 159) (see § 601.601(d)(2)) 

were not permitted to be used after 

statutory changes imposed the use of 

specified actuarial assumptions to make 

these adjustments. In addition, the 

projected post-retirement adjustments to 

the section 415(b)(1)(B) compensation 

limit that were required to be taken into 

account for purposes of sections 404 

and 412 under Rev. Rul. 81–195 (1981–

2 CB 104) (see § 601.601(d)(2)) were not 

required or permitted to be taken into 

account for those purposes following 

the addition of section 404(j) in TEFRA. 

The Treasury Department 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. On May 31, 2005, a 

notice of proposed rulemaking (REG–

130241–04) was published in the 

Federal Register (70 FR 31214) to issue 

new regulations under section 415 (the 

proposed regulations). The guidance 

items described in this preamble were 

reflected in the proposed regulations 

with some modifications. In addition, 

the proposed regulations reflected other 

statutory changes not previously 

addressed by guidance, and included 

some other changes and clarifications to 

the 1981 regulations. To the extent 

practicable, the preamble to the 

proposed regulations identified and 

explained substantive changes from the 

1981 regulations or existing guidance. 

Following publication of the proposed 

regulations, comments were received 

and a public hearing was held on 

August 17, 2005. Subsequently, Notice 

2005–87 (2005–2 CB 1097) (see 

§ 601.601(d)(2)) was issued to address 

certain concerns about the effective date 

provisions of the proposed regulations. 

After consideration of the comments 

received, the proposed regulations are 

adopted by this Treasury decision, 

subject to a number of changes that are 

summarized in the preamble. 

Explanation of Provisions 

Overview 

These 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 

regulations are as follows: 

• The current statutory limitations 

under sections 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, including 

specification of parameters, for benefit 

adjustments under defined benefit 

plans. 


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1The proposed regulations also contained 

corresponding changes to regulations under section 

403(b) with respect to amounts payable following 

severance from employment. These changes will be 

incorporated into regulations under section 403(b) 

when those regulations are finalized. 

• 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 compensationbased limitation under section 

415(b)(1)(B) for governmental plans and 

multiemployer 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) combined limitation on 

participation in 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 WFTRA. 

• Changes to section 415(c) under 

which certain types of arrangements are 

no longer subject to the limitations of 

section 415(c) (such as individual 

retirement accounts other than SEPs) 

and other types of arrangements have 

become subject to the limitations of 

section 415(c) (such as certain 

individual medical accounts). 

• The inclusion in compensation (for 

purposes of section 415) of certain 

salary reduction amounts not included 

in gross income. 

• The modification for distributions 

with annuity starting dates in plan years 

beginning in years 2004 and 2005 made 

by PFEA with respect to the interest rate 

assumptions in section 415(b)(2)(E) for 

converting certain forms of benefits to 

an actuarially equivalent straight life 

annuity. 

• The following modifications to 

section 415 that were made by PPA ’06: 

(i) Changes to the interest rate 

assumptions in section 415(b)(2)(E) that 

are used for converting certain forms of 

benefits to an equivalent straight life 

annuity (section 303 of PPA ’06); (ii) 

elimination of the active participation 

requirement in determining a 

participant’s high-3 years of service in 

section 415(b)(3) (section 832 of PPA 

’06); (iii) exemption from the section 

415(b)(1)(B) compensation limit for 

certain benefits provided under a 

defined benefit plan maintained by an 

organization described in section 

3121(w)(3)(A) (section 867 of PPA ’06); 

and (iv) expansion of the definition of 

qualified participant in section 

415(b)(2)(H) to include certain 

participants in a defined benefit plan 

maintained by an Indian tribal 

government (section 906(b) of PPA ’06). 

These regulations 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) or section 

457(b). These 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 

by the later of 21⁄2 months following 

severance from employment or the end 

of the year in which the severance 

occurs. These regulations include 

corresponding changes to the 

regulations under sections 401(k) and 

457 that provide that amounts payable 

following severance from employment 

can only be deferred if those amounts 

are within these same exceptions.1 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. The rules governing 

amounts received following severance 

from employment are discussed in this 

preamble in more detail under the 

paragraph heading ‘‘§ 1.415(c)–2: 

Definition of compensation.’’ 

Provisions of the Regulations 

General Rules (§ 1.415(a)–1) 

Section 1.415(a)–1 of these 

regulations sets forth general rules 

relating to limitations under section 415 

and provides an overview of the 

remaining regulations, including crossreferences to special rules that apply to 

section 403(b) annuities, multiemployer 

plans, governmental plans, and plans 

that are not subject to the requirements 

of section 411. In addition, § 1.415(a)–1 

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, 

a definition of the term ‘‘severance from 

employment,’’ and rules that apply in 

other special situations. Section 

1.415(a)–1 generally retains the rules set 

forth in the proposed regulations. 

The proposed regulations eliminated 

the rule under the 1981 regulations 

under which a multiemployer plan 

could satisfy the limitations of section 

415 separately with respect to benefits 

or contributions from each employer. 

Thus, the proposed regulations required 

the benefits or annual additions with 

respect to a participant under a 

multiemployer plan to satisfy the 

limitations of section 415 on an 

aggregate basis. Some commentators 

asked that the rule from the 1981 

regulations be retained. The IRS and the 

Treasury Department have determined 

that there is no statutory basis for 

permitting disaggregation of a 

multiemployer plan for this purpose. 

Furthermore, statutory changes made 

since the issuance of the 1981 

regulations have made this permissive 

disaggregation rule from the 1981 

regulations less needed and more 

conducive to significant abuses. In 

EGTRRA (and as made permanent in 

PPA ’06), multiemployer plans were 

exempted from the limitation for 

defined benefit plans based on high-3 

average compensation. This change 

eliminated the need for multiemployer 

plans to obtain compensation 

information with respect to each 

participant from multiple participating 

employers. In TRA ’86, the phase-in 

period for the dollar limitation for 

defined benefit plans was changed from 

10 years of service to 10 years of plan 

participation. As a result of this change, 

the permissive disaggregation rule from 

the 1981 regulations allows for the 

multiplication of section 415 limits 

within a multiemployer plan that could 

not be otherwise achieved by simply 

establishing separate single employer 

plans. Accordingly, these final 

regulations retain the rule from the 

proposed regulations that does not 

allow disaggregation of a multiemployer 

plan. In this regard, see the discussion 

under the paragraph heading 

‘‘§ 1.415(c)–2: Definition of 

Compensation’’ for a rule that treats all 

employers contributing to a 

multiemployer plan as a single 

employer for purposes of the restriction 

on the recognition of compensation paid 

after severance from employment with 

an employer. 


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2Section 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). 

Section 1.415(a)–1(d)(3)(v) provides 

rules regarding a plan’s incorporation by 

reference of cost-of-living increases in 

the applicable limitations pursuant to 

section 415(d), including default rules 

that apply in the absence of contrary 

plan provisions. In providing rules for 

incorporation by reference, the 

proposed regulations provided that 

annual increases in the applicable 

limitations pursuant to section 415(d) 

do 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. 

One commentator pointed out that 

this provision in the proposed 

regulations modified the default 

treatment under the 1981 regulations 

(which provide that adjustments to the 

applicable limitations are not made after 

a participant’s separation from service 

unless the plan so provides). In 

response to this comment, the final 

regulations retain the rule from the 1981 

regulations under which the section 

415(d) annual increases in the 

applicable limitations do not apply with 

respect to a participant for increases that 

become effective after the participant’s 

severance from employment with the 

employer maintaining the plan (or, if 

earlier, after the annuity starting date in 

the case of a participant who has 

commenced receiving benefits) unless 

the plan specifies that this annual 

increase applies to such a participant. 

Thus, annual increases in the applicable 

limitations apply to a participant who 

has severed from employment with the 

employer maintaining the plan or who 

has commenced receiving benefits only 

if the plan specifies that those annual 

increases apply to such a participant. 

Limitations Applicable to Defined 

Benefit Plans (§ 1.415(b)–1) 

Section 1.415(b)–1 of these 

regulations sets forth rules for applying 

the limitations on benefits under a 

defined benefit plan. Under these 

limitations, the annual benefit must not 

exceed the lesser of $160,000 (as 

adjusted pursuant to section 415(d)) and 

100 percent of the participant’s average 

compensation for the period of the 

participant’s high-3 years of service. 

These regulations generally define the 

period of a participant’s high-3 years of 

service as the period of 3 consecutive 

calendar years during which the 

employee had the greatest aggregate 

compensation from the employer. 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 

$160,000 dollar limitation under section 

415(b)(1)(A) is actuarially adjusted for 

benefit payments that commence before 

age 62 or after age 65. Section 1.415(b)–

1 generally retains the rules set forth in 

the proposed regulations except as 

indicated below. 

The proposed regulations provided 

that, in addition to applying to benefits 

payable to participants and 

beneficiaries, the limitations of section 

415(b) apply to accrued benefits 

(regardless of whether the benefit is 

vested) and benefits payable from an 

annuity contract distributed to a 

participant. Some commentators argued 

that it is inappropriate to apply the 

limitations of section 415(b) to a 

participant’s accrued benefit in the case 

of a plan that is not subject to the 

requirements of section 411, since such 

a plan sometimes does not define an 

accrued benefit and benefits under such 

a plan can always be reduced if needed 

so that payments under the plan will 

satisfy the limitations of section 415. In 

response, these regulations provide that 

the rule applying section 415(b) to limit 

a participant’s accrued benefit applies 

only to a plan that is subject to the 

requirements of section 411. However, a 

plan that is not subject to the 

requirements of section 411 is still 

subject to the requirements of section 

415(b) with respect to the annual benefit 

payable to a participant at any time 

under the plan. As indicated in the 

preamble to the proposed regulations, 

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. 

A. Actuarial Assumptions Used to 

Convert Benefits to a Straight Life 

Annuity 

Pursuant to section 415(b)(2)(B) 

(which provides for benefits paid in a 

form other than a straight life annuity to 

be adjusted to an actuarially equivalent 

straight life annuity in accordance with 

Treasury regulations), these 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 

as well as published guidance that has 

been issued since the prior final 

regulations were published in 1981. The 

statutory changes reflected in these 

rules include, for plan years beginning 

in years 2004 and 2005, the use of a 5.5 

percent interest rate for benefits that are 

subject to the present value rules of 

section 417(e)(3),2 as set forth in PFEA, 

as well as the modifications under 

section 303 of PPA ’06 to the 

equivalency calculations for benefits 

that are subject to the present value 

rules of section 417(e)(3) (which are 

applicable to distributions with annuity 

starting dates in plan years beginning 

after December 31, 2005). In addition to 

setting forth rules for adjusting forms of 

benefit other than straight life annuities, 

these regulations permit the IRS to issue 

published guidance setting forth 

simplified methods for making these 

adjustments. 

Under these 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 and a particular optional form 

of benefit are actuarially equivalent is 

overridden only when the optional form 

of benefit under the plan is more 

valuable than the corresponding straight 

life annuity when the two forms are 

compared using the statutorily specified 

actuarial assumptions. 

The rules in these 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 


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form of benefit that is not subject to the 

minimum present value rules of section 

417(e)(3). Under the simplified 

calculation, instead of first determining 

the actuarial assumptions used under 

the plan and then 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)(3), however, 

because under a plan those forms of 

benefit are often determined as the 

actuarial equivalent of the deferred 

annuity, rather than as the actuarial 

equivalent of the immediate straight life 

annuity. Instead, for a benefit paid in a 

form to which section 417(e)(3) applies, 

pursuant to section 415(b)(2)(E), the 

actuarially equivalent straight life 

annuity benefit generally is determined 

as the greatest of three annual amounts. 

The first is 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. The second is 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 

percent interest assumption and the 

applicable mortality table for the 

distribution under § 1.417(e)–1(d)(2). 

The third is 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(e)–1(d)(3) 

and the applicable mortality table for 

the distribution under § 1.417(e)–

1(d)(2)), divided by 1.05. This rule 

reflects the amendment of section 

415(b)(2)(E) by section 303 of PPA ’06. 

One commentator asked whether the 

rules regarding adjustments for forms of 

benefit that are subject to the minimum 

present value standards of section 

417(e)(3) apply to plans that are not 

subject to the requirements of section 

417. Section 415(b)(2)(E) applies based 

on the form of the benefit, and not the 

status of the plan, and therefore the final 

regulations provide that these rules also 

apply to plans that are not subject to the 

requirements of section 417. 

Some commentators expressed 

concern that the examples illustrating 

the rules for actuarial adjustments 

converted optional forms of benefit into 

straight life annuities payable monthly, 

and they noted that had the conversion 

been to a straight life annuity payable 

on the first day of each year, the straight 

life annuity would have been smaller 

and therefore a greater benefit would 

have been permissible under section 

415(b). Under section 415(b)(2)(B), the 

Secretary is delegated authority to 

prescribe regulations for adjusting a 

benefit so that it is equivalent to a 

benefit payable annually in the form of 

a straight life annuity. These regulations 

provide that if a benefit is payable in the 

form of a straight life annuity, no 

adjustment is made to account for 

differences in the timing of payments 

during a year (for example, no 

adjustment is made on account of the 

annuity being payable in annual or 

monthly installments). Thus, if the 

section 415(b) dollar limit for a 

limitation year is $180,000, a plan is not 

permitted to provide for 12 monthly 

payments of $15,583, which is 

actuarially equivalent to an annual 

benefit of $180,000 payable on the first 

day of the year. 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 

payable on the first day of each month 

that is actuarially equivalent to the 

benefit payable in such other form. 

Some commentators expressed 

concerns regarding the application of 

these actuarial adjustments in the case 

of annuity forms of benefit that are 

increased automatically each year 

pursuant to plan terms. Commentators 

argued that, in testing such a form of 

benefit for compliance with section 415, 

increases to the section 415(b) limits 

pursuant to section 415(d) should be 

taken into account. Thus, commentators 

asserted that a form of benefit with an 

automatic increase feature should 

satisfy section 415(b) so long as 

payments made pursuant to the benefit 

during each limitation year are less than 

the section 415(b) limit in effect for the 

limitation year. 

In response to these comments, these 

final regulations provide that, for a form 

of benefit that is not subject to the 

requirements of section 417(e)(3), no 

adjustments are made to reflect these 

automatic increases if certain 

requirements are satisfied. Specifically, 

the form of benefit without regard to the 

automatic increase feature must satisfy 

the requirements of section 415(b), and 

the plan must provide that in no event 

will the amount payable to a participant 

under the form of benefit in any 

limitation year be greater than the 

section 415(b) limit applicable at the 

annuity starting date, as increased in 

subsequent years pursuant to section 

415(d). If these requirements are not 

satisfied, the annual benefit with respect 

to a benefit that is subject to automatic 

increases must reflect the value of these 

automatic increases under the rules 

described above. 

B. Inclusion of Social Security 

Supplements in Annual Benefit 

As under the proposed regulations, 

these 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 qualified social 

security supplement (QSUPP) within 

the meaning of § 1.401(a)(4)–12. 

C. Determination of High-3 Average 

Compensation 

The proposed regulations contained 

two new provisions that would have 

had a significant effect on the 

determination of a participant’s average 

compensation for the participant’s high3 consecutive years. The first provision 

changed a rule in the 1981 final 

regulations by restricting the 

compensation used for this purpose to 

compensation earned in periods during 

which the participant was an active 

participant in the plan. Pursuant to the 

amendment of section 415(b)(3) made 

by section 832 of PPA ’06 (which 

eliminated the active participation 

requirement for purposes of determining 

average compensation for years 

beginning after December 31, 2005), this 

change has not been incorporated into 

the final regulations. 

The second provision in the proposed 

regulations clarified 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 high3 consecutive years. Because a plan is 

not permitted to base benefits on 

compensation in excess of the limitation 


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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 2006 at 

age 75 (so that the age-adjusted dollar 

limitation could be as high as $390,953, 

depending on plan provisions), and the 

participant had compensation in excess 

of the applicable section 401(a)(17) limit 

for years 2003, 2004, and 2005, 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), which is $205,000 

(the average of $200,000, $205,000, and 

$210,000). 

Commentators objected to this second 

provision. These regulations retain this 

provision from the proposed regulations 

because the IRS and the Treasury 

Department believe that this 

interpretation is based on the best 

reading of applicable statutory 

requirements. However, these 

regulations include a grandfather 

provision under which a defined benefit 

plan 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 end of the limitation year that is 

immediately prior to the effective date 

of these final regulations for the plan 

pursuant to plan provisions (including 

plan provisions relating to the plan’s 

limitation year) that were both adopted 

and in effect before April 5, 2007, but 

only if such plan provisions meet the 

requirements of statutory provisions, 

regulations, and other published 

guidance relating to section 415 in effect 

immediately before the effective date of 

these final regulations. In determining 

whether plan provisions meet the 

requirements of statutory provisions, 

regulations, and other published 

guidance relating to section 415 in effect 

immediately before the effective date of 

these final regulations, plan provisions 

are permitted to reflect compensation in 

excess of the section 401(a)(17) limit, 

and the benefits based on such 

compensation are eligible for the 

grandfather rules. 

These regulations set forth rules for 

computing the limitation of section 

415(b)(1)(B) of 100 percent of the 

participant’s average compensation for 

the period of the participant’s high-3 

years of service for a participant who is 

employed with the employer for less 

than 3 consecutive calendar years. For 

such a participant, the period of the 

participant’s high-3 years of service is 

the actual number of consecutive years 

of service (including fractions of years, 

but not less than one year). In such a 

case, the limitation of section 

415(b)(1)(B) of 100 percent of the 

participant’s average 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 service 

over the actual period of service 

(including fractions of years, but not 

less than one year). In a change from the 

proposed regulations, these regulations 

provide that, in the case of a participant 

who has had a severance from 

employment with the employer 

maintaining the plan and who is 

subsequently rehired by that employer, 

the period of the participant’s high-3 

years of service is calculated by 

excluding any years for which the 

participant performs no services for and 

receives no compensation from the 

employer maintaining the plan (the 

break period), and by treating the year 

of service immediately prior to and the 

year of service immediately after the 

break period as if the years were 

consecutive. 

These regulations also modify the 

proposed regulations by providing a 

rule that applies in the case of an 

employee who is rehired after severing 

employment. If the plan provides for the 

adjustment of a participant’s 

compensation limit in accordance with 

section 415(d) for limitation years 

following the limitation year in which 

the employee severs employment, the 

rehired employee’s compensation limit 

under section 415(b) is the greater of 

100 percent of the participant’s average 

compensation for the period of the 

participant’s high-3 years of service, as 

determined prior to the employee’s 

severance from employment and as 

adjusted pursuant to section 415(d), or 

100 percent of the participant’s average 

compensation for the period of the 

participant’s high-3 years of service, 

taking into account service both before 

and after rehire. This rule was added 

because a participant’s compensation 

limit should not be lower than it would 

otherwise be merely because the 

participant in rehired. 

D. Treatment of Benefits Paid Partially 

in the Form of a QJSA 

Under section 415(b)(2)(B), the 

survivor annuity 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). As under the proposed 

regulations, these regulations 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 these 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 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, 

these 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. This methodology is 

retained from the proposed regulations 

because the IRS and the Treasury 

Department believe that generally a 

plan’s actuarial equivalence for section 

415 purposes should be the same as 

actuarial equivalence for other purposes 

and because of the need to have an 

administrable rule when a plan uses 

factors that are not explicitly based on 

an interest rate and mortality table. 

Some commentators expressed 

concern that these rules effectively 

result in no increase to the dollar 

limitation where a plan that is not 

subject to the requirements of section 

411 does not increase the participant’s 

benefit to reflect a delay in 

commencement beyond age 65. No 

change has been made to address this 

concern because the IRS and the 

Treasury Department believe it is not 

appropriate to increase the dollar 

limitation for commencement after age 

65 where, under the plan terms, there is 

no increase to the participant’s benefit 

on account of delayed commencement 

(so that any increase in a participant’s 

benefit is solely on account of 

additional service or compensation). In 

response to other commentator 


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concerns, these regulations provide that 

an actuarial increase to a participant’s 

benefit for commencement after age 65 

is taken into account for this purpose 

even if the actuarial increase offsets 

additional benefit accruals under the 

plan. 

These 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 that are generally 

consistent with Notice 83–10 and Notice 

87–21. Under these rules, to the extent 

that a forfeiture does not occur upon the 

participant’s death before the annuity 

starting date, generally no adjustment is 

made to reflect the probability of the 

participant’s death during the relevant 

time period (which is the period before 

age 62 or after age 65), and to the extent 

a forfeiture occurs upon the 

participant’s death before the annuity 

starting date, an adjustment must be 

applied to reflect the probability of the 

participant’s death during the relevant 

time period. 

These regulations also provide a 

simplified method for applying these 

mortality adjustment rules. 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. This 

simplified method eliminates the need 

to determine the extent of a forfeiture 

upon death in the case where a plan 

provides for a qualified preretirement 

survivor annuity. 

One commentator asked whether, for 

purposes of adjusting the dollar limit for 

commencement prior to age 62, a plan 

is permitted to make a mortality 

adjustment for ages below age 62, even 

if the plan does not provide for a 

forfeiture upon the participant’s death 

before the annuity starting date where it 

is before age 62. Recognizing that 

mortality adjustments would result in a 

lower limit in such a case, these 

regulations permit such an adjustment 

to be made if the plan so provides. 

Some commentators expressed 

concern that the application of the rules 

that adjust the section 415(b)(1)(A) 

dollar limit for pre-age 62 benefit 

commencement as set forth in the 

proposed regulations could result in the 

limit decreasing as a participant ages 

under certain circumstances. To address 

this concern, these regulations provide 

that, notwithstanding the generally 

applicable rules for age adjustments to 

the dollar limitation, the age-adjusted 

section 415(b)(1)(A) dollar limit does 

not decrease on account of an increase 

in age or the performance of additional 

service. 

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), as amended by section 906(b) 

of PPA ’06, these regulations provide 

that the early retirement reduction does 

not apply to certain participants in 

plans of state, Indian tribal government, 

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, Indian tribal 

government, or political subdivision 

thereof 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, Indian tribal 

government, 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. 

These regulations clarify that the 

application of this rule depends on 

whether the employer is a police 

department or fire department of the 

state, Indian tribal government, or 

political subdivision, rather than on the 

job classification of the individual 

participant. Also, this rule applies based 

on the function of an organization rather 

than based on the name of the 

organization. 

G. Application of $10,000 Exception 

Pursuant to section 415(b)(4), the 

benefits payable with respect to a 

participant under a defined benefit plan 

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. As under the proposed 

regulations, these regulations clarify 

that the alternative $10,000 limitation 

under section 415(b)(4) 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 

These regulations retain the rules 

from the 1981 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 an employee can 

elect whether to make the contributions, 

and 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 the portion of the 

participant’s benefit that is conditioned 

upon these employee contributions. 

Any other employee contributions (plus 

earnings thereon) are treated as a 

separate defined contribution plan 

rather than as part of a defined benefit 

plan. 

These regulations retain the rule from 

the 1981 regulations that the annual 

benefit attributable to mandatory 

employee contributions is determined 

under the rules of section 411(c) and 

regulations promulgated under section 

411, regardless of whether section 411 

applies to the plan. These regulations 

also 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. 

One commentator asked how to 

determine the annual benefit 

attributable to mandatory employee 

contributions under section 411(c) in 

the case of a plan that is not subject to 

the requirements of section 411 and 417, 

and suggested the use of the plan’s 

factors for this purpose. This suggestion 

was not incorporated into these final 

regulations because the amount payable 

with respect to employee contributions 


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that is in excess of the amount that 

would be payable with respect to such 

contributions using the rules of section 

411(c) is effectively a subsidy that 

should be included in determining the 

participant’s annual benefit under the 

plan. These regulations also provide 

that, for purposes of determining the 

accumulated contributions described in 

section 411(c)(2)(C), where the plan is 

not subject to the requirements of 

section 411, the plan must determine 

what would have been the applicable 

effective date of section 411(a)(2) as if 

section 411 applied to the plan, and in 

determining the annual benefit that is 

actuarially equivalent to these 

accumulated contributions, the plan 

must determine the interest rate that 

would have been required under section 

417(e)(3) as if section 417 applied to the 

plan. 

Another commentator asked why the 

repayment of an employee contribution 

is not treated as an employee 

contribution under this rule. No change 

to the regulations has been made to 

reflect this concern because, while the 

repayment is not treated as an employee 

contribution for purposes of section 415, 

the original employee contribution is 

still considered an employee 

contribution for this purpose. 

I. Exclusion of Annual Benefit 

Attributable to Rollover Contributions 

From Annual Benefit 

These regulations clarify that the 

annual benefit does not include the 

annual benefit attributable to rollover 

contributions made to a defined benefit 

plan (that is, 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) and treating the rollover 

contributions as employee contributions 

(regardless of whether sections 411 and 

417 apply 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 

credits higher interest or 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 reflects the excess of 

those annuity payments over the 

amounts that would be payable using 

the rules of section 411(c) because such 

excess is effectively a subsidy which is 

included in determining the 

participant’s annual benefit under the 

plan. 

These final regulations clarify that the 

rule that excludes the annual benefit 

attributable to rollover contributions 

applies to rollover contributions from an 

eligible retirement plan, as defined in 

section 402(c)(8)(B). Thus, the rule 

applicable to rollovers is not limited 

solely to rollovers from qualified plans. 

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 and Terminated Plans 

These regulations generally retain the 

provisions in the proposed regulations 

that modify the rules of the 1981 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 to the 1981 final 

regulations are designed to ensure that 

transferred benefits are not counted 

more than once when the transferor 

plan and the transferee plan are 

aggregated under section 415(f) and 

§ 1.415(f)–1, and to prevent the 

circumvention of the limitations of 

section 415(b) through benefit transfers 

to plans of unrelated employers. The 

rules of section 415(b) that apply upon 

a transfer of benefits between plans 

operate independently from the 

requirements of section 414(l), and 

compliance with the requirements of 

section 414(l) does not ensure 

compliance with these rules. 

The proposed regulations provided 

that, 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 

disregarded in determining the annual 

benefit under the transferor plan. The 

final regulations modify this rule. This 

modification is being made in 

conjunction with modifications to the 

proposed regulations with respect to the 

aggregation of plans among formerly 

affiliated employers (discussed in more 

detail under the heading ‘‘§ 1.415(f)–1: 

Aggregating plans’’). Generally, under 

the modified section 415(f) aggregation 

rules, there are situations in which only 

a portion of the benefits provided under 

plans maintained by formerly affiliated 

employers is taken into account when 

applying section 415 on an aggregated 

basis to each employer. Given this 

modification to the aggregation rules, 

the determination of whether 

transferred benefits are nonetheless 

treated as provided by the transferor 

plan is properly based on whether the 

transferred benefits are included in the 

portion of the transferee plan that is 

aggregated with the transferor plan. 

Thus, the final regulations provide that, 

to the extent the benefits transferred to 

a transferee plan are otherwise 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), the transferred benefits are not 

also treated as being provided under the 

transferor plan (because these benefits 

will be taken into account by the 

transferor plan when it is aggregated 

with the transferee plan). 

The proposed regulations provided 

that where there has been a transfer of 

liabilities between plans and 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), the assets associated 

with those transferred liabilities (other 

than surplus assets) are treated by the 

transferor plan as distributed as a singlesum distribution. These final 

regulations modify this proposed 

transfer rule in two respects. First, for 

the reasons described in the paragraph 

above, this transfer rule is applicable 

only if the benefits transferred to the 

transferee plan are not otherwise 

required to be taken into account by the 

transferor plan pursuant to section 

415(f) and § 1.415(f)–1. Second, the final 

regulations modify this proposed rule in 

response to comments expressing 

concern with the administrative 

complexity associated with the 

calculation of the deemed single-sum 

distribution. Instead of treating the 

assets associated with the transferred 

liabilities as a deemed single-sum 

distribution, the final regulations treat 

the transferred liabilities as comprising 

a plan that must be aggregated with the 


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transferor plan, that had terminated 

with sufficient assets to pay benefit 

liabilities under the plan and had 

purchased annuities to provide plan 

benefits. 

Although such a transfer is treated as 

a plan termination 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 also included 

along with other benefits provided 

under the transferor plan in determining 

the participant’s annual benefit under 

the transferor plan. 

While some commentators expressed 

concern that this resulted in double 

counting of benefits, in most such cases, 

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 

transferor plan (in combination with the 

transferred benefits). Furthermore, these 

rules prevent the transferor plan from 

avoiding the limitations of section 415 

for participants by spinning off the 

participants’ benefits to a plan of an 

unrelated employer and then accruing 

additional benefits for the participants. 

For example, without these rules, the 

benefit of an executive in a plan 

maintained by the executive’s employer 

could be transferred to a plan 

maintained by a business that is owned 

by the executive and that is not 

aggregated with the executive’s 

employer for purposes of section 415, 

and the executive could accrue an 

additional benefit up to the section 415 

limits under the plan maintained by the 

executive’s employer. 

The final regulations provide rules 

specifying how to take into account 

benefits provided under a terminated 

plan. If a defined benefit plan is 

terminated with sufficient assets to pay 

accrued benefits and a participant in the 

plan has not yet commenced benefits 

under the plan, for purposes of 

satisfying section 415(b) with respect to 

the participant, the final regulations 

require that all other defined benefit 

plans maintained by the employer that 

maintained the terminated plan take 

into account the benefits provided 

pursuant to the annuities purchased to 

provide benefits under the terminated 

plan at each possible annuity starting 

date. The final regulations provide that 

if a defined benefit plan is terminated 

and there are not sufficient assets for the 

payment of the accrued benefit of all 

plan participants, all other defined 

benefit plans maintained by the 

employer that maintained the 

terminated plan are required to take into 

account the benefits that are actually 

provided under the terminated plan. For 

example, if the terminated plan is 

subject to Title IV of ERISA, the other 

plans maintained by the employer that 

maintained the terminated plan take 

into account the benefits that are 

provided by the Pension Benefit 

Guaranty Corporation. If the terminated 

plan was not subject to Title IV of 

ERISA, the other plans take into account 

the benefits that are actually paid by the 

terminated plan. The multiple annuity 

starting date rules apply to the extent 

that benefits from a terminated plan and 

an ongoing plan do not commence at the 

same time. 

These regulations clarify that if a 

participant elects to transfer a 

distributable benefit to a defined benefit 

plan pursuant to § 1.411(d)–4, A–3(c), 

the transfer is treated in the same 

manner as an amount that is distributed 

and then rolled over (specifically, the 

transferred benefit is treated by the 

transferor plan as a distribution, and the 

annual benefit provided by the 

transferee plan does not include the 

annual benefit attributable to the 

amount transferred). This rule applies 

regardless of whether the requirements 

of section 411 apply to the plan and, in 

the case of a transfer from a defined 

contribution plan that is not subject to 

the requirements of section 411 (such as 

a governmental plan) to a defined 

benefit plan, the rule applies even if the 

participant’s benefits are not 

distributable from the defined 

contribution at the time of the transfer. 

K. 10-Year Phase-in of Limitations 

Based on Years of Participation and 

Years of Service 

As under the proposed regulations, 

these regulations 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 modify the rules set forth 

in the 1981 regulations for applying the 

10-year phase-in of the compensation 

limit based on years of service. These 

regulations, like the proposed 

regulations, follow the guidance set 

forth in Notice 87–21 for applying the 

10-year phase-in based on years of 

participation, and apply analogous rules 

for purposes of applying the 10-year 

phase-in based on years of service. 

L. Exception to Compensation-Based 

Limit for Certain Church Plans 

The final regulations also reflect the 

amendment of section 415(b)(11) by 

PPA ’06. Under the amendment, the 

section 415(b)(1)(B) compensation-based 

limit that is generally applicable to 

defined benefit plans is not applicable 

to a participant in a plan maintained by 

a church described in section 

3121(w)(3)(A) if the participant has 

never been a highly compensated 

employee (as defined in section 414(q)) 

of the church. These regulations provide 

that if such a participant later becomes 

a highly compensated employee of the 

church, the plan is not treated as failing 

to satisfy the compensation-based limit 

provided that no plan amendments 

increasing the participant’s benefits are 

adopted in the year the participant 

becomes a highly compensated 

employee and there is no increase in the 

participant’s accrued benefit derived 

from employer contributions in 

subsequent years. 

Multiple Annuity Starting Dates 

(§ 1.415(b)–2) 

Section 1.415(b)–2 of the proposed 

regulations set forth rules for computing 

the annual benefit under one or more 

defined benefit plans in the case of 

multiple annuity starting dates. 

Multiple annuity starting dates exist, for 

example, where benefit distributions to 

a participant have previously 

commenced under a plan that is 

aggregated for purposes of section 415 

with a plan for which the participant 

receives current accruals. In addition, 

the multiple annuity starting date rules 

apply for purposes of determining the 

annual benefit of a participant where a 

new distribution election is effective 

during the current limitation year with 

respect to a distribution that previously 

commenced. The multiple annuity 

starting date rules also apply when 

benefit payments are increased, unless 

the benefit increase complies with one 

of the safe harbors provided in the 

regulations. 

Numerous commentators raised 

concerns regarding these rules. Based on 

these comments, the IRS and the 

Treasury Department have determined 

that revisions to these rules are needed 

before these rules are adopted in final 

form. Accordingly, these regulations 

reserve a place for regulations regarding 

multiple annuity starting dates. The IRS 

and the Treasury Department are 

developing new proposed regulations 

regarding multiple annuity starting 

dates, and corresponding revisions to 

regulations under § 1.401(a)(9)–6. 


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In the interim, § 1.415(b)–1 of these 

regulations provides that if a participant 

has or will have distributions 

commencing at more than one annuity 

starting date, the limitations of section 

415 must be satisfied as of each of the 

annuity starting dates, taking into 

account the benefits that have been or 

will be provided at all of the annuity 

starting dates. In determining the annual 

benefit of a participant as of a particular 

annuity starting date, the plan is 

required to actuarially adjust past and 

future distributions with respect to the 

benefit that commenced at the other 

annuity starting dates. 

Limitations Applicable to Defined 

Contribution Plans § 1.415(c)–1 

Section 1.415(c)–1 of these 

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 percent 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 in section 415(c) and 

§ 1.415(c)–1 of the regulations 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 benefit accounts. 

These regulations reflect a number of 

statutory changes to section 415(c) that 

were made after the issuance of the 1981 

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 accounts. These 

regulations also make some other 

changes to the 1981 regulations, as 

discussed below. Consistent with the 

change to section 403(b)(1) made in 

JCWAA, these 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. Section 415(b) applies to 

the contract if the contract is a church 

plan that is covered by the grandfather 

rule of section 251(e)(5) of TEFRA. 

Consistent with Rev. Rul. 2002–45, 

the 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 a 

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. 

Commentators suggested that restorative 

payments should also include payments 

made to restore losses to a plan resulting 

from actions by a fiduciary for which 

there is a reasonable risk of liability for 

breach of a fiduciary duty under other 

applicable federal or state law, to take 

into account contributions under plans 

that are not subject to Title I of ERISA 

in appropriate circumstances. These 

regulations adopt this suggestion. 

Accordingly, 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 under Title I of ERISA or 

under other applicable federal or state 

law. The regulations specifically list 

certain payments that satisfy this rule, 

including payments to a plan made 

pursuant to a 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, and 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. 

As under the proposed regulations, 

these final regulations provide that the 

Commissioner may in appropriate cases, 

considering all of the facts and 

circumstances, treat transactions 

between the plan and the employer, 

transactions between the plan and the 

employee, or certain allocations to 

participants’ accounts as giving rise to 

annual additions. For example, in 

general, the Commissioner will treat 

payments made to a plan by an 

employer or another party 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 or other 

Federal or state law generally as 

contributions that give rise to annual 

additions. As under the proposed 

regulations, these regulations clarify 

that where an employee or employer 

transfers assets to a plan in exchange for 

consideration that is less than the fair 

market value of the assets transferred to 

the plan, there is an annual addition in 

the amount of the difference between 

the value of the assets transferred and 

the consideration. 

For taxable employers, these 

regulations retain the rule under the 

1981 regulations that an employer 

contribution is not treated as credited to 

a participant’s account for a particular 

limitation year unless the contribution 

is 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 

final regulations modify the 

corresponding rule for tax-exempt 

employers in the proposed regulations. 

Under the final regulations, a 

contribution to a plan by a tax-exempt 

employer is taken into account for a 

limitation year for purposes of section 

415(c) if the contribution is credited to 

a participant’s account no later than the 

15th day of the tenth calendar month 

following the end of the calendar year 

or fiscal year (as applicable, depending 

on the basis on which the employer 

keeps its books) with or within which 

the particular limitation year ends. This 

date corresponds to the due date for 

Form 5500, ‘‘Annual Return/Report of 

Employee Benefit Plan,’’ (with 

extensions) in cases in which the 

calendar or fiscal year coincides with 

the plan year and generally corresponds 

to the date for taxable employers who 

request filing extensions. 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 final regulations clarify that if the 

allocation of an annual addition is 

dependent under the terms of the plan 

upon the satisfaction of a condition that 

has not been satisfied by the date as of 

which the annual addition is allocated, 

then the annual addition is considered 

allocated as of the date the condition is 

satisfied. This is a change from the 

proposed regulations, under which this 

rule only applied if the allocation was 

dependent upon participation in the 

plan as of a particular date. 

Additionally, the final regulations 

clarify that an annual addition that is 

made pursuant to a corrective 

amendment that complies with the 

requirements of § 1.401(a)(4)–11(g) is 


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16888 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

credited to the account of a participant 

for a particular limitation year if it is 

allocated to the participant’s account 

under the terms of the corrective 

amendment as of any date within that 

limitation year. 

These 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. The regulations also 

reflect a special rule for church 

employees performing services outside 

the United States, as amended by 

GOZA. Under this special rule, for any 

individual who is a church employee 

performing any services for the church 

outside the United States during the 

limitation year, 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 

$3,000 (but only if the individual’s 

adjusted gross income does not exceed 

$17,000). These regulations 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 

clarify the interaction between the 

generally applicable church employee 

rule and the rule for church employees 

performing services outside the United 

States. 

As under the proposed regulations, 

these regulations do not include the 

correction methods for excess annual 

additions applicable under § 1.415–

6(b)(6) of the 1981 regulations. 

Conforming changes have been made to 

§ 1.401(a)–2(b), § 1.401(a)(9)–5, A–

9(b)(1), and § 1.402(c)–2, A–4(a) to 

reflect this deletion. 

Despite the deletion, the deleted 

correction methods are generally 

permitted under the Employee Plans 

Compliance Resolution System 

(EPCRS), Rev. Proc. 2006–27 (2006–22 

IRB 945) (see § 601.601(d)(2)). In section 

2.02(2) of Rev. Proc. 2006–27, comments 

were requested on whether the 

correction methods in former § 1.415–

6(b)(6), including the maintenance of 

suspense accounts, should be retained 

as options under EPCRS. Pending the 

issuance of further guidance that takes 

into account those comments, plans that 

are eligible for the Self-Correction 

Program under section 4 of Rev. Proc. 

2006–27 may implement corrections 

using the methods in former § 1.415–

6(b)(6), but only if the requirements of 

section 9 of Rev. Proc. 2006–27 are 

satisfied, and those corrections will also 

be taken into account for purposes of 

the Voluntary Correction and Audit 

Closing Agreement Programs under 

EPCRS. 

These regulations generally retain the 

rules under the 1981 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, these regulations, like the 

proposed regulations, 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 the 

1981 regulations, which required 

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 CB 125) (see § 601.601(d)(2)) 

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 percent is used to amortize 

waived contributions, the interest rate 

must be 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. 

Definition of Compensation (§ 1.415(c)–

2) 

Section 1.415(c)–2 of these 

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. These regulations reflect 

a number of statutory changes to section 

415(c)(3) that were made after the 

issuance of the 1981 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, these 

regulations make some other changes to 

the 1981 regulations, as discussed in 

this preamble. 

The proposed regulations provided 

specific guidelines regarding when 

amounts received following severance 

from employment are considered 

compensation for purposes of section 

415. The proposed regulations provided 

that the following are types of postseverance payments that are not 

excluded from compensation because of 

timing if they are paid within 21⁄2- 

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. 

Commentators made a number of 

suggestions regarding the post-severance 

compensation rules. Some 

commentators requested a lengthening 

of the 21⁄2-month period to as long as a 

year, or exceptions from the 21⁄2-month 

rule under certain circumstances (such 

as teacher pay that is paid on a 12- 

month basis for each 9-month school 

year, or residual payments that are made 

to entertainment industry employees 

years after the services are performed). 

Some commentators requested changes 

to the types of compensation that are 

permitted or required to be taken into 

account for ease of plan administration. 

The final regulations lengthen the 

time during which certain postseverance payments are taken into 

account from the 21⁄2-month period 

under the proposed regulations. The 

final regulations provide that in order 

for payments after severance from 

employment to be treated as 

compensation within the meaning of 

section 415(c)(3), payments made for 

services provided to a former employer 

must be made by the later of 21⁄2-months 

after the severance from employment or 

the end of the limitation year that 

includes the date of severance from 

employment. In addition, a 

governmental plan (within the meaning 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16889 

of section 414(d)) is permitted to 

provide that the calendar year that 

includes the date of severance from 

employment is substituted for the 

limitation year that includes the date of 

severance from employment for this 

purpose. 

The final regulations also provide that 

post-severance payments of accrued 

bona fide sick, vacation, and other leave 

that are paid within the timeframe 

described in the preceding paragraph 

are not included in compensation 

unless the plan specifically includes 

such payments. Additionally, the final 

regulations permit a plan to specify that 

a post-severance payment from a 

nonqualified unfunded deferred 

compensation plan may be included in 

compensation if the payment is made 

within the timeframe described in the 

preceding paragraph, but only if the 

payment would have been made at the 

same time if the employee had 

continued his or her employment and 

only to the extent that the payment is 

includible in the employee’s gross 

income. 

As under the proposed regulations, 

the rule under the final regulations 

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. The 

final regulations modify the proposed 

regulations by adding another exception 

to the post-severance timing rule for 

compensation paid to a permanently 

and totally disabled participant, 

provided certain conditions are 

satisfied. As provided under the 

proposed regulations, the final 

regulations also contain corresponding 

amendments to the regulations under 

sections 401(k) and 457 that provide 

that amounts received following 

severance from employment can be 

deferred only if they are considered 

compensation under the rules of section 

415. 

Whether a person has a severance 

from employment with the employer 

that maintains a plan is determined for 

purposes of section 415 in the same 

manner as under § 1.401(k)–1(d)(2), 

except that for purposes of determining 

the employer of an employee, the rules 

of section 415(h) are taken into account 

(under which the phrase ‘‘more than 50 

percent’’ is substituted for the phrase 

‘‘at least 80 percent’’ each place it 

appears in section 1563(a)(1) for 

purposes of applying section 414(b) and 

(c)). Thus, an employee has a severance 

when the employee ceases to be an 

employee of the employer maintaining 

the plan, and an employee does not 

have a severance from employment if, in 

connection with a change of 

employment, the employee’s new 

employer maintains the plan with 

respect to the employee. In addition, the 

determination of whether an employee 

ceases to be an employee of the 

employer maintaining the plan is based 

on all of the relevant facts and 

circumstances. In the case of a 

multiemployer plan, a payment after 

severance from employment from an 

employer for whom services were 

provided is considered to be 

compensation within the meaning of 

section 415(c)(3) as long as the 

individual receiving the payment is 

employed by any employer maintaining 

the multiemployer plan. Thus, in the 

case of a multiemployer plan, an 

employee is treated as having a 

severance from employment only when 

the employee is no longer providing 

services to any employer maintaining 

the multiemployer plan. This rule is 

consistent with the treatment of a 

multiemployer plan as a single plan that 

is not disaggregated for purposes of 

applying the limitations of section 415. 

As noted above, the final regulations 

provide that a plan cannot take into 

account compensation in excess of the 

section 401(a)(17) limit. In addition, the 

final regulations provide that elective 

deferrals can only be made from 

compensation as defined in section 

415(c)(3). However, in applying these 

two rules, a plan is not required to 

determine a participant’s compensation 

on the basis of the earliest payments of 

compensation during a year. 

Commentators also requested 

clarification as to the treatment of 

nonresident aliens under all of the 

alternative definitions of compensation 

that the regulations allow. 

Commentators had noted that the 

various alternative definitions of 

compensation permitted under the 1981 

regulations could be interpreted as 

including compensation paid to 

nonresident aliens, but the 

commentators observed that this issue 

was not sufficiently clear. 

These regulations provide that 

amounts paid to an individual as 

compensation for services do not fail to 

be treated as compensation merely 

because those amounts are not 

includible in the individual’s gross 

income on account of the location of the 

services. Similarly, these regulations 

also provide that amounts paid to an 

individual as compensation for services 

do not fail to be treated as compensation 

merely because those amounts are paid 

by an employer with respect to which 

payments of compensation to the 

individual are excluded from gross 

income. Thus, for example, the 

determination of whether an amount is 

includible as compensation is made 

without regard to the exclusions from 

gross income under sections 872, 893, 

894, 911, and 933. 

Under these modified rules, an 

employee who is a nonresident alien 

with no United States sourced income is 

not prevented from participating in a 

qualified plan sponsored by the 

employee’s employer on account of the 

limitations of section 415 that relate to 

the employee’s compensation. These 

rules, however, do not modify other 

requirements with respect to such an 

employee’s participation in a qualified 

plan, such as the rules relating to the 

entity that is properly entitled to a 

deduction for contributions made to the 

plan on account of the employee’s 

participation. 

These regulations also provide a rule 

of administrative convenience under 

which section 415 compensation does 

not include compensation paid to a 

nonresident alien, provided that the 

individual does not participate in the 

plan and the compensation is not 

effectively connected with the conduct 

of a trade or business within the United 

States, and only to the extent that the 

compensation is excludable from the 

individual’s gross income either on 

account of the location of the services or 

because compensation paid by the 

employer is excludable from gross 

income. This is relevant for purposes of 

determining who is a key employee 

under the top heavy rules of section 416 

and who is a highly compensated 

employee under the rules of section 

414(q). 

Like the proposed regulations, these 

final regulations generally retain the 

rules in the 1981 regulations regarding 

section 415 compensation and 

contributions to and distributions from 

plans of deferred compensation. 

Accordingly, these regulations provide 

that distributions from a plan of 

deferred compensation (whether or not 

qualified) are not compensation for 

section 415 purposes (but permit a plan 

to include as compensation amounts 

received by an employee pursuant to a 

nonqualified unfunded plan for the year 

in which the amounts are actually 

received) and provide that contributions 

made by an employer (other than 

elective contributions) to a plan of 

deferred compensation (whether or not 


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qualified) are not compensation to the 

extent that the contributions are not 

includible in the income of the 

employee for the taxable year in which 

contributed. The final regulations clarify 

that section 415 compensation includes 

amounts that are includible in the gross 

income of an employee under the rules 

of section 409A or section 457(f)(1)(A) 

or because the amounts are 

constructively received by the 

employee. The final regulations also 

clarify that a plan is permitted to 

include as compensation amounts 

received by an employee pursuant to a 

nonqualified deferred compensation 

plan only to the extent such amounts 

are includible in gross income. 

Cost-of-Living Adjustments (§ 1.415(d)–

1) 

Section 1.415(d)–1 of these 

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 

Code. These 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, 

these regulations make several other 

changes to the 1981 regulations, as 

discussed in this preamble. Section 

1.415(d)–1 generally retains the rules set 

forth in the proposed regulations except 

as indicated in this preamble. 

These regulations 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 these 

regulations, the adjusted dollar 

limitation is applicable to current 

employees who are participants in a 

defined benefit plan and is permitted to 

apply 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 benefits. If a 

participant has commenced receiving 

benefits, the annual increase is only 

permitted to be applied 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 to the extent the 

participant 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. 

These regulations retain the safe 

harbor set forth in the proposed 

regulations 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). Under this safe 

harbor, if a plan incorporates by 

reference the annual section 415(d) costof-living adjustments to the limitations 

of section 415, a distribution that is 

increased solely as a result of the 

application of the section 415(d) cost-ofliving adjustments to the applicable 

limits will be treated as continuing to 

satisfy the requirements of section 

415(b) and is not subject to the multiple 

annuity starting date rules. In 

connection with the changes discussed 

in the following paragraph, this safe 

harbor has been relocated to § 1.415(a)–

1(d)(3)(v). 

Commentators expressed concern that 

the safe harbor in the proposed 

regulations did not cover situations 

where benefits are increased 

periodically by plan amendments that 

reflect the section 415(d) cost-of-living 

adjustments. After consideration of 

these comments, the IRS and the 

Treasury Department have determined 

that additional safe harbors are 

appropriate. Accordingly, under these 

final regulations, if a plan is amended 

to apply the adjusted section 415(b) 

limits in accordance with either of two 

safe harbors, a distribution that is 

increased pursuant to the amendment 

will be treated as continuing to satisfy 

the requirements of section 415(b). 

A plan amendment satisfies the first 

safe harbor if the employee has received 

one or more distributions that satisfy the 

requirements of section 415(b) before 

the date the adjustment to the 

applicable limits is effective, the 

increased distribution is solely as a 

result of the amendment of the plan to 

reflect the adjustment to the applicable 

limits pursuant to section 415(d), and 

the amounts payable to the employee on 

and after the effective date of the 

adjustment are not greater than the 

amounts that would otherwise be 

payable without regard to the 

adjustment, multiplied by a fraction 

determined for the limitation year, the 

numerator of which is the limitation 

under section 415(b) (which is 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 section 415(d) 

adjustment, and the denominator of 

which is such limitation under section 

415(b) in effect for the distribution 

immediately before the section 415(d) 

adjustment. 

A plan amendment satisfies the 

second safe harbor if the employee has 

received one or more distributions that 

satisfy the requirements of section 

415(b) before the date on which the 

increased distribution is effective, and 

the amounts payable to the employee on 

and after the effective date for the 

increased distribution are not greater 

than the amounts that would otherwise 

be payable without regard to the 

increase, multiplied by the cumulative 

adjustment fraction. The cumulative 

adjustment fraction is equal to the 

product of all of the annual fractions 

(described in the first safe harbor) that 

would have applied after benefits 

commence if the plan had been 

amended each year to incorporate the 

section 415(d) adjustments to the 

applicable section 415(b) limits in 

accordance with the first safe harbor. In 

determining the cumulative adjustment 

fraction, if for the limitation year for 

which the adjustment in the section 

415(b)(1)(A) dollar limit pursuant to 

EGTRRA is first effective (generally, the 

first limitation year beginning after 

December 31, 2001), the section 

415(b)(1)(A) dollar limit applicable to a 

participant is less than the section 

415(b)(1)(B) compensation limit, then 

the annual fraction for such year is 1.0. 

Aggregating Plans (§ 1.415(f)–1) 

Section 1.415(f)–1 of these regulations 

sets forth rules for aggregating plans 

pursuant to section 415(f). Section 

1.415(f)–1 generally retains the rules set 

forth in the proposed regulations except 

as indicated in this preamble. Under 

section 415(f) and these regulations, for 

purposes of applying the limitations of 

section 415(b) and (c), all defined 

benefit plans that have ever been 

maintained by an employer are treated 

as one defined benefit plan, and all 

defined contribution plans that have 

ever been maintained by 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 


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group rules of section 414(m), and the 

leased employee rules of section 414(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). These basic 

employer aggregation rules were also 

contained in the 1981 regulations. 

One commentator noted that the 

proposed regulations incorrectly 

reflected the rules of section 415(h) 

(which applies a 50 percent standard in 

lieu of an 80 percent standard for 

purposes of applying the control rules) 

by applying those rules in determining 

whether two or more organizations are 

a brother-sister group of trades or 

businesses under common control 

under the rules in § 1.414(c)–2(c). These 

final regulations provide that the rules 

of section 415(h) do not apply for this 

purpose. 

These final regulations make various 

changes and clarifications to the 1981 

regulations relating to aggregating plans. 

As under the proposed regulations, 

these final regulations 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. 

As under the proposed regulations, 

the final regulations provide that 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, as under 

the proposed regulations, these final 

regulations 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 (1996). 

These final regulations make several 

other changes to the employer 

aggregation rules. These changes limit 

the extent to which a plan maintained 

by an employer must aggregate benefits 

accrued under a plan that was formerly 

maintained by the employer or that was 

maintained by an entity that was 

formerly affiliated with the employer 

under the employer aggregation rules of 

§ 1.415(a)–1(f)(1) and (2) (which provide 

that a plan maintained by any member 

of a controlled group of employers or an 

affiliated service group is deemed to be 

maintained by all members of the 

group). Under these final regulations, a 

‘‘formerly affiliated plan’’ of an 

employer is treated as if it were a plan 

that terminated immediately prior to the 

‘‘cessation of affiliation’’ with sufficient 

assets to pay benefit liabilities under the 

plan, and had purchased annuities to 

provide plan benefits. The final 

regulations define a formerly affiliated 

plan of an employer as a plan that, 

immediately prior to the cessation of 

affiliation, was actually maintained by 

one or more of the entities that 

constitute the employer (as determined 

under the employer affiliation rules of 

§ 1.415(a)–1(f)(1) and (2)), and that, 

immediately after the cessation of 

affiliation, is not actually maintained by 

any of the entities that constitute the 

employer (as determined under the 

employer affiliation rules of § 1.415(a)–

1(f)(1) and (2)). The final regulations 

define a cessation of affiliation as the 

event that causes an entity to no longer 

be aggregated with one or more other 

entities as a single employer under the 

employer affiliation rules (such as a sale 

of a subsidiary) or an event that causes 

a plan to not actually be maintained by 

any of the entities that constitute the 

employer (such as a transfer of 

sponsorship of a plan to an unrelated 

employer). 

A similar rule is provided under these 

final regulations with respect to a plan 

(or portion of a plan) maintained by a 

predecessor employer that is not 

assumed by the successor employer. As 

under the proposed regulations, the 

final regulations provide that all plans 

ever maintained by an employer or 

predecessor employer are aggregated. 

For purposes of applying this 

aggregation rule, these final regulations 

limit the extent to which plans that are 

not maintained by an employer but that 

are maintained by the employer’s 

predecessor employer are taken into 

account when aggregating the 

employer’s plans. This limit provides 

that a plan that is not maintained by the 

employer and is maintained by the 

employer’s predecessor employer is 

treated as if the plan terminated (with 

sufficient assets to pay benefit liabilities 

under the plan) immediately prior to the 

event giving rise to the predecessor 

employer relationship. The effect of 

these rules is that, for purposes of 

aggregating the predecessor employer’s 

plans with plans maintained by the 

employer, benefits accrued after the 

transfer of benefits from the predecessor 

employer’s plan to the employer’s plan 

are excluded. 

These final regulations also add a rule 

that prevents the double counting of a 

participant’s benefit when applying the 

aggregation rules. For example, in 

aggregating defined benefit plans of a 

predecessor employer with the defined 

benefit plans of an employer following 

a transfer of benefits to the plan 

maintained by the employer from the 

plan maintained by the predecessor 

employer, the transferee plan 

(maintained by the employer) does not 

double count a participant’s benefit by 

taking into account both the transferred 

benefits and the portion of the transferor 

plan (maintained by the predecessor 

employer) that is deemed to have 

terminated on account of the transfer 

pursuant to § 1.415(b)–1(b)(3)(i)(B). 

Instead, the transferee plan includes the 

benefits that are actually provided 

under the transferee plan when 

applying the aggregation rule. 

The proposed regulations provided 

rules for applying the requirements of 

section 415(f)(2) when an employer has 

more than one defined benefit plan. 

Pursuant to section 415(f)(2), the 

proposed regulations provided that the 

compensation limit of section 

415(b)(1)(B) is applied separately with 

respect to each plan, and in applying 

the compensation limit to the aggregated 

plans, the plans calculate a participant’s 

average compensation for the 

participant’s high 3 years of service by 

taking into account compensation for all 

years of active participation in the 

aggregated plans. Because the 

requirements of section 415(f)(2) have 

been rendered moot by the amendment 

to section 415(b)(3) made by section 832 

of PPA ’06, these rules have not been 

incorporated into the final regulations. 

These 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 phasein rules. 

These 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 


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16892 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

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 general, under these regulations, 

the benefits provided by all plans 

maintained by all employers 

maintaining a multiemployer plan (as 

defined in section 414(f)) are taken into 

account in applying the limitations of 

section 415 to the 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. By contrast, 

when a multiple employer plan is 

aggregated with a single employer plan 

maintained by the same employer, all of 

the benefits provided by the multiple 

employer plan must be taken into 

account in determining whether the 

aggregated plans satisfy section 415. 

These regulations also provide that a 

multiemployer plan is not aggregated 

with any other multiemployer plan for 

purposes of determining any section 415 

limitation. In addition, a multiemployer 

plan is not aggregated with any other 

non-multiemployer plan for purposes of 

applying the 100 percent of 

compensation benefit limit to nonmultiemployer plans under section 

415(b)(1)(B). 

Disqualification of Plans and Trusts 

(§ 1.415(g)–1) 

Section 1.415(g)–1 of these final 

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, § 1.415(g)–1 of these 

regulations replicates the rules of 

§ 1.415–9 of the 1981 regulations 

regarding ordering rules for 

disqualifying plans and trusts that are 

aggregated for purposes of compliance 

with section 415. In addition, the final 

regulations provide rules for 

disqualification where an individual 

medical benefit account (as described in 

section 415(l)) and a post-retirement 

medical benefits account for key 

employees (as described in section 

419A(d)) is aggregated with a qualified 

defined contribution plan for purposes 

of applying section 415(c). If the total of 

the annual additions under both plans 

exceeds those limitations for a 

particular limitation year, the qualified 

defined contribution plan (rather than 

the medical benefit account) is 

disqualified for the limitation year. 

Limitation Year (§ 1.415(j)–1) 

Section 1.415(j)–1 of the regulations 

sets forth rules regarding limitation 

years that are used as the period for 

demonstrating compliance with section 

415. Section 1.415(j)–1 generally retains 

the rules set forth in the proposed 

regulations except as indicated in this 

preamble. In addition to setting forth 

general rules that generally correspond 

to rules under the 1981 regulations, 

these 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 CB 

165) (see § 601.601(d)(2)). 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 limitation years are 

aggregated, the rules of section 415(b) 

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). 

These final regulations add a rule that 

applies to a terminating defined 

contribution plan. If a defined 

contribution plan is terminated effective 

as of a date other than the last day of 

the plan’s limitation year, the plan is 

deemed to have been amended to 

change its limitation year. As a result of 

this deemed amendment, the section 

415(c)(1)(A) dollar limit must be prorated under the short limitation year 

rules. 

Sections 415(m) and (n) 

Sections 415(m) and (n) have not been 

addressed in these regulations. 

Comments received concerning these 

provisions in response to the notice of 

proposed rulemaking that preceded 

these regulations will be considered for 

guidance at a later date. 

Section 416 Regulations 

These regulations update the 

definition of compensation used for 

purposes of applying the top heavy 

rules of section 416. Pursuant to 

statutory amendments to the definition 

of compensation under section 415(c)(3) 

under SBJPA and CRA (which were 

generally effective for years beginning 

after December 31, 1997), these 

regulations update the alternative 

definition of compensation permitted 

under the section 416 regulations 

(which is based on compensation 

reported on Form W–2, ‘‘Wage and Tax 

Statement’’) to include amounts that 

would be included on Form W–2 but for 

an election under sections 125, 

132(f)(4), 401(k), 403(b), 408(k), 

408(p)(2)(A)(i), or 457(b). 

Section 457 Regulations 

These regulations 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 (§ 1.457–

4(d)). The additional revisions do not 

include any substantive changes, but 

merely make clarifications, including 

revisions in an example illustrating the 

section 457 catch-up rules (§ 1.457–5(d) 

Example 2) and a change in the rules 

relating to unforeseeable emergencies to 

reflect revisions in the definition of a 

dependent (made under WFTRA, which 

modified the definition of the term 

‘‘dependent’’ under section 152) 

(§ 1.457–6(c)). 

Effective Dates 

In General 

These regulations generally apply to 

limitation years beginning on or after 

July 1, 2007. However, § 1.401(k)–1(e)(8) 

applies with respect to compensation 

paid (or that would have been paid but 

for a cash or deferred election) in plan 

years beginning on or after July 1, 2007, 

and the amendment to § 1.457–4(d) 

applies to taxable years beginning on or 

after December 31, 2001 (see § 1.457–

12). See §§ 1.457–6(c)(2)(i) and 1.457–12 

for the applicability of the modifications 

to §§ 1.457–5, 1.457–6, and 1.457–10. In 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16893 

the case of a governmental plan (within 

the meaning of section 414(d)), 

§§ 1.415(a)–1, 1.415(b)–1, 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 that begin more than 90 

days after the close of the first regular 

legislative session of the legislative body 

with authority to amend the plan that 

begins on or after July 1, 2007. However, 

a governmental plan is permitted to 

apply the provisions of §§ 1.415(a)–1, 

1.415(b)–1, 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 

on or after July 1, 2007. 

In response to commentator concerns, 

and as provided in Notice 2005–87, 

these regulations reflect revisions to the 

effective date provisions of the proposed 

regulations to expand the benefits that 

are grandfathered from the application 

of these regulations. Under these 

regulations, a defined benefit plan 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 end of the 

limitation year that is immediately prior 

to the effective date of these final 

regulations for the plan pursuant to plan 

provisions (including plan provisions 

relating to the plan’s limitation year) 

that were both adopted and in effect 

before April 5, 2007, but only if such 

plan provisions meet the requirements 

of statutory provisions, regulations, and 

other published guidance in effect 

immediately before the effective date of 

these final regulations. For this purpose, 

plan provisions will not be treated as 

failing to satisfy the requirements of 

statutory provisions, regulations, and 

other published guidance in effect 

immediately before the effective date of 

these final regulations merely because 

the plan has not been amended to reflect 

changes to section 415(b) made by PFEA 

and PPA ’06. In addition, for this 

purpose, plan provisions will not be 

treated as failing to satisfy the 

requirements of section 415(b)(1)(B) 

merely because the plan’s definition of 

compensation for a limitation year that 

is used for purposes of applying the 

limitations of section 415(b)(1)(B) 

reflects compensation for a plan year 

that is in excess of the limitation under 

section 401(a)(17) that applies to that 

plan year. Thus, plans that were in 

compliance with the rules of section 415 

as in effect for limitation years prior to 

the effective date of these regulations for 

the plan will not be disqualified based 

on benefits that arise pursuant to plan 

provisions that were both adopted and 

in effect before April 5, 2007, and that 

accrue prior to the effective date of these 

regulations for the plan, even if those 

benefits no longer comply with the 

requirements of section 415 as set forth 

under these 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 these regulations for the 

plan unless such additional benefits, 

together with the participant’s other 

accrued benefits, comply with these 

regulations. 

The preamble to the proposed 

regulations provided that, pending 

issuance of final regulations, taxpayers 

may rely on the modifications contained 

in the proposed regulations 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. 

Accordingly, taxpayers may apply those 

proposed amendments for periods prior 

to the effective date of these final 

regulations. The final regulations also 

provide that taxpayers may apply the 

post-severance compensation payments 

and other compensation timing rules 

contained in the final regulations in 

§ 1.415(c)–2(e) for years prior to the 

effective date of these final regulations. 

This early application also is used for 

purposes of determining compensation 

in §§ 1.401(k)–1(e)(8) and 1.457–4(d). 

Plan Amendment Timing 

Generally, a provision of a plan that 

results in a failure of the plan to satisfy 

these final regulations is a disqualifying 

provision described in § 1.401(b)–

1(b)(3)(i). Therefore, the remedial 

amendment period rules of § 1.401(b)–1 

apply. For example, in the case of a plan 

with a calendar plan year and a calendar 

limitation year that is maintained by an 

employer with a calendar taxable year 

(and the plan is not a governmental 

plan), the plan’s remedial amendment 

period with respect to a disqualifying 

plan provision as a result of these final 

regulations ends on the date prescribed 

by law for the filing of the employer’s 

income tax return (including 

extensions) for the 2008 taxable year. In 

addition, special timing rules apply in 

the case of certain plan amendments 

made pursuant to changes made to 

section 415 by PFEA and PPA ’06. 

Under section 101(c) of PFEA (prior to 

amendment by PPA ’06), a plan 

amendment to reflect the 5.5 percent 

interest rate assumption that is generally 

required to be used for distributions 

with annuity starting dates in plan years 

beginning in years 2004 and 2005 under 

section 101(b)(4) of PFEA (for 

determining the actuarially equivalent 

straight life annuity for a form of benefit 

that is subject to section 417(e)) must be 

made on or before the last day of the 

first plan year beginning on or after 

January 1, 2006. Section 301(c) of PPA 

’06 modified section 101(c) of PFEA by 

extending the due date for the 

amendment required under section 

101(b)(4) of PFEA to on or before the 

last day of the first plan year beginning 

on or after January 1, 2008. Thus, 

pursuant to section 101(c) of PFEA (as 

amended by PPA ’06), in the case of an 

amendment to a plan with a calendar 

year plan year to reflect the interest rate 

assumption specified by section 

101(b)(4) of PFEA, the plan is treated as 

having been operated in accordance 

with its terms and the amendment does 

not violate section 411(d)(6), provided 

that the plan is operated in conformity 

with the amendment and the 

amendment is adopted no later than 

December 31, 2008. 

Under section 1107 of PPA ’06, a plan 

amendment that is made pursuant to 

PPA ’06 (or a regulation issued by the 

Secretary under PPA ’06) must be made 

on or before the last day of the first plan 

year beginning on or after January 1, 

2009 (January 1, 2011, in the case of a 

governmental plan within the meaning 

of section 414(d)). Under section 1107 of 

PPA ’06, if the plan is amended by such 

date and the plan is operated in 

conformity with the amendment, the 

plan is treated as having been operated 

in accordance with its terms and the 

amendment does not cause the plan to 

fail to meet the requirements of section 

411(d)(6). A plan amendment is treated 

as an amendment that is made pursuant 

to a statutory amendment made by PPA 

’06 (or a regulation issued by the 

Secretary under PPA ’06) if the 

amendment is: (i) A plan amendment to 

reflect the changes to the assumptions 

in section 415(b)(2)(E) that are used for 

converting certain forms of benefits to 

an equivalent straight life annuity in a 

limitation year beginning on or after 

January 1, 2006 (section 303 of PPA ’06); 

(ii) a plan amendment to reflect the 

modifications to the purchase of 

permissive service credit rules of 

section 415(n) (section 821 of PPA ’06); 

(iii) a plan amendment to incorporate 

the exemption from the section 

415(b)(1)(B) compensation limit for 

certain benefits provided under a 

defined benefit plan maintained by an 

organization described in section 

3121(w)(3)(A) (section 867 of PPA ’06); 

and (iv) a plan amendment to reflect the 

expansion of the definition of qualified 

participant in section 415(b)(2)(H) to 

include certain participants in a defined 

benefit plan maintained by an Indian 

tribal government (section 906(b) of PPA 

’06). However, section 1107 of PPA ’06 


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16894 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

does not apply for other amendments 

required by these regulations, unless 

such amendments are pursuant to a 

provision of PPA ’06 that did not amend 

section 415 (for example, section 906 of 

PPA ’06, relating to the definition of 

governmental plan in section 414(d)). 

Accordingly, there is no extension of the 

remedial amendment period for such 

amendments, and such amendments are 

subject to the requirements of section 

411(d)(6). 

Special Analyses 

It has been determined that this 

Treasury decision 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, the notice 

of proposed rulemaking that preceded 

these regulations was submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

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), and 

Christopher A. Crouch, formerly of the 

Office of Division Counsel/Associate 

Chief Counsel (Tax Exempt and 

Government Entities). However, other 

personnel from the IRS and the Treasury 

Department 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. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR parts 1 and 11 

are 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. For each section set forth in the 

table, remove the text that appears in 

the column labeled ‘‘Remove’’ and add 

the text that appears in the column 

labeled ‘‘Add’’ in its place. 

Regulation cite Remove Add 

§ 1.401(a)–1(b)(1)(iii) ......................................... 1.415–1(d)(1) .................................................... 1.415(a)–1(d)(1) 

§ 1.401(a)(4)–2(c)(2)(ii) ...................................... 1.415–6(b)(2)(i) ................................................. 1.415(c)–1(b)(4) 

§ 1.414(s)–1(c)(2) .............................................. 1.415–2(d)(2) and (d)(3) ................................... 1.415(c)–2(b) and (c) 

§ 1.414(s)–1(c)(2) .............................................. 1.415–2(d)(10) and (d)(11) ............................... 1.415(c)–2(d)(2), (d)(3) and (d)(4) 

§ 1.414(s)–1(c)(2) .............................................. 1.415–2(d)(13) .................................................. 1.415(c)–2(d)(1) 

§ 1.924(c)–1(d)(6) .............................................. paragraphs (d)(1) and (2) of § 1.415–2 ............ § 1.415(c)–2(b) and (c) 

■ Par. 3. Section 1.401(a)–2(b) is revised 

to read as follows: 

§ 1.401(a)–2 Impossibility of diversion 

under qualified plan or trust. 

* * * * * 

(b) Section 415 suspense account. 

Notwithstanding paragraph (a) of this 

section, a plan, or trust forming part of 

a plan, may provide for the reversion to 

the employer, upon termination of the 

plan, of amounts contributed to the plan 

that exceed the limitations imposed 

under section 415(c), to the extent set 

forth in rules prescribed by the 

Commissioner in revenue rulings, 

notices, or other guidance published in 

the Internal Revenue Bulletin (see 

§ 601.601(d)(2) of this chapter). 

■ Par. 4. Section 1.401(a)(9)–5, A–

9(b)(1) is revised to read as follows: 

§ 1.401(a)(9)–5 Required minimum 

distributions from defined contribution 

plans. 

* * * * * 

A–9. * * * 

(b) * * * 

(1) Elective deferrals (as defined in 

section 402(g)(3)) and employee 

contributions that, pursuant to rules 

prescribed by the Commissioner in 

revenue rulings, notices, or other 

guidance published in the Internal 

Revenue Bulletin (see § 601.601(d)(2) of 

this chapter), are returned to the 

employee (together with the income 

allocable thereto) in order to comply 

with the section 415 limitations. 

* * * * * 

■ Par. 5. 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. With respect to compensation 

that is paid (or would have been paid 

but for a cash or deferred election) in 

plan years beginning on or after July 1, 

2007, 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)) and who is 

not permanently and totally disabled (as 

defined in section 22(e)(3)) can make a 

cash or deferred election with respect to 

an amount paid after severance from 

employment, unless the amount is paid 

by the later of 21⁄2 months after 

severance from employment or the end 

of the year that includes the date of 

severance from employment and is 

described in § 1.415(c)–2(e)(3)(ii) or (iii). 

* * * * * 

■ Par. 6. Section 1.402(c)–2, A–4(a) is 

revised to read as follows: 

§ 1.402(c)–2 Eligible rollover distributions; 

questions and answers. 

* * * * * 

A–4 * * * 

(a) Elective deferrals (as defined in 

section 402(g)(3)) and employee 

contributions that, pursuant to rules 

prescribed by the Commissioner in 

revenue rulings, notices, or other 

guidance published in the Internal 

Revenue Bulletin (see § 601.601(d)(2) of 

this chapter), are returned to the 

employee (together with the income 

allocable thereto) in order to comply 

with the section 415 limitations. 

* * * * * 


pwalker on PROD1PC71 with RULES2
Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16895 

§§ 1.415–1 through 1.415–10 [Removed] 

■ Par. 7. Sections 1.415–1 through 

1.415–10 are removed. 

■ Par. 8. 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. 

(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. 

(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. 

(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. 

(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. If the contributions 

and other additions under an annuity 

contract that otherwise satisfies the 

requirements of section 403(b) exceed 

the limitations of section 415(c) and 

§ 1.415(c)–1 with respect to any 

participant for any limitation year 

(regardless of whether the annuity 

contract is a defined contribution plan 

or a defined benefit plan), then the 

portion of the contract that includes 

such excess annual addition fails to be 

a section 403(b) annuity contract, and 

the remaining portion of the contract is 

a section 403(b) annuity contract. 

However, 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. In addition, if the 

benefit under an annuity contract that is 

a defined benefit plan and that 

otherwise satisfies the requirements of 

section 403(b) exceeds the limitations of 

section 415(b) and § 1.415(b)–1 with 

respect to any participant for any 

limitation year, then the contract fails to 

be a section 403(b) annuity contract. 

(3) Section 403(b) annuity contract. 

For purposes of section 415 and 

regulations promulgated under section 

415, the term section 403(b) annuity 

contract includes arrangements that are 

treated as annuity contracts for purposes 

of section 403(b). Thus, 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 limits 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 limits 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 special rules 

for section 403(b) annuity contracts. For 

special 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 section 403(b) annuity 

contracts); 

(ii) Section 1.415(f)–1(f) (relating to 

rules for section 403(b) annuity 

contracts for purposes of aggregating 

plans); 

(iii) Section 1.415(g)–1(b)(3)(iv)(C) 

(regarding disqualification of a section 

403(b) annuity contract aggregated with 

a qualified defined contribution plan if 

the aggregated plans exceed the 

limitations of section 415(c)); 

(iv) Section 1.415(g)–1(c) (relating to 

the plan year for section 403(b) annuity 

contracts); and 

(v) Section 1.415(j)–1(e) (relating to 

the limitation year for section 403(b) 

annuity contracts). 

(3) Cross references to special rules 

for governmental plans. For special 

rules relating to governmental plans, 

see—

(i) Paragraph (f)(4) of this section 

(regarding permissive service credits); 

(ii) Paragraph (g)(2) of this section 

(providing a delayed effective date for 

governmental plans); 

(iii) 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); 

(iv) Section 1.415(b)–1(a)(7)(ii) 

(regarding a special limitation for 

certain governmental plans making an 

election during 1990); 

(v) Section 1.415(b)–1(b)(4) (regarding 

qualified governmental excess benefit 

arrangements); 

(vi) Section 1.415(b)–1(d)(3) and (4) 

(regarding age adjustments to the dollar 

limit of section 415(b)(1)(A) for 

employees of police and fire 

departments and members of the Armed 

Forces of the United States, and for 

survivor and disability benefits); 

(vii) 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 under 

governmental plans); 

(viii) Section 1.415(c)–1(b)(2)(ii) and 

(3)(iii) (regarding amounts not treated as 

annual additions under governmental 

plans); and 

(ix) Section 1.415(c)–2(e)(5) 

(providing an alternative rule for 

inclusion of compensation after a 

severance from employment for 

governmental plans). 

(4) Cross references to special rules 

for multiemployer plans. For special 

rules relating to multiemployer plans as 

defined in section 414(f), 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) Paragraph (f)(5)(ii) of this section 

(providing a special definition of 

severance from employment for 

multiemployer plans); 


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16896 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

(iii) Section 1.415(b)–1(a)(6)(ii) 

(providing an exception from the 

compensation-based limit for 

multiemployer plans); 

(iv) 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); 

(v) Section 1.415(f)–1(g) (providing 

special rules for aggregating 

multiemployer plans with other plans); 

and 

(vi) 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 aggregated 

plans exceed the limitations of section 

415). 

(5) Cross references to special rules 

for plans that are not subject to the 

requirements of section 411. For special 

rules relating to plans that are not 

subject to the requirements of section 

411, see—

(i) Paragraph (d)(1) of this section and 

§ 1.415(b)–1(a)(7)(iii) (providing that the 

rule limiting accruals to the section 

415(b) limits does not apply to plans 

that are not subject to the requirements 

of section 411); and 

(ii) Section 1.415(b)–1(b)(2)(iii) 

(providing rules for applying the section 

411(c) factors in determining the annual 

benefit attributable to employee 

contributions for plans that are not 

subject to the requirements of section 

411). 

(6) Cross references to special rules 

for plans maintained by churches. For 

special rules relating to plans 

maintained by churches as defined in 

section 3121(w)(3)(A), see §§ 1.415(b)–

1(a)(6)(iv) and 1.415(b)–1(a)(7)(iv) 

(providing an exception from the 

compensation-based limit for 

participants who have never been a 

highly compensated employee of the 

church). 

(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 

distribution under a defined benefit 

plan or annual addition under a defined 

contribution plan will exceed the 

limitations of section 415. In addition, 

a defined benefit plan that is subject to 

the requirements of section 411 must 

preclude the possibility that any accrual 

under the plan will exceed the 

limitations of section 415. A defined 

benefit plan may include provisions that 

automatically freeze or reduce the rate 

of benefit accrual (or limit the benefit 

payable in the case of a plan that is not 

subject to the requirements of section 

411), and a defined contribution plan 

may include provisions that 

automatically limit the annual addition 

to a level necessary to prevent the 

limitations of section 415 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)(iii). 

Because § 1.401(a)–1(b)(1)(iii) requires 

that the operation of such a provision 

preclude discretion by the employer, if 

two defined benefit plans that are 

aggregated under the rules of section 

415(f) would otherwise provide for 

aggregate benefits that might exceed the 

limits of section 415(b), the plan 

provisions must specify (without 

involving employer discretion) how 

benefits will be limited to prevent a 

violation of section 415(b). 

(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 (in other words, 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 the Uruguay Round 

Agreements Act of 1994, Public Law 

103–465 (108 Stat. 4809) (GATT), apply 

(as permitted by Q&A–12 of Rev. Rul. 

98–1 (1998–1 CB 249) (see 

§ 601.601(d)(2) of this chapter), which 

reflects the amendments to section 767 

of GATT made by section 1449 of the 

Small Business Job Protection Act of 

1996, Public Law 104–188 (110 Stat. 

1755)), 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 if 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 profitsharing plans annual additions must be 

reduced if aggregate annual additions 

would otherwise exceed the limitations 

of section 415(c). 

(iv) Former requirements. A plan is 

not permitted to incorporate by 

reference formerly applicable 

requirements of section 415 that are no 

longer in force (such as the limits of 

former section 415(e)). 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16897 

(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 any amount 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. See 

§ 1.415(d)–1(a)(3) for rules relating to 

when the annual adjustments to the 

dollar and compensation limitations are 

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. 

(C) Application of increase in defined 

benefit dollar limit to participants who 

have incurred a severance from 

employment or commenced receiving 

benefits. If a plan incorporates by 

reference the annual adjustments to the 

limitations of section 415 pursuant to 

this paragraph (d)(3)(v), the plan will be 

treated as applying the section 415(d) 

cost-of-living adjustments to the 

maximum extent permitted under the 

safe harbor described in § 1.415(d)–

1(a)(5), except to the extent provided in 

this paragraph (d)(3)(v)(C). Thus, such a 

plan is not subject to the requirements 

of § 1.415(b)–1(b)(1)(iii) (providing 

special rules for determining the annual 

benefit of an employee in the case of 

multiple annuity starting dates) with 

respect to benefit increases that result 

solely from an increase in the section 

415(b) limits pursuant to section 415(d). 

If a plan incorporates by reference the 

annual adjustments to the limitations of 

section 415 pursuant to this paragraph 

(d)(3)(v), the annual increase under 

section 415(d) of the dollar limitation 

described in section 415(b)(1)(A) does 

not apply with respect to a participant 

if the increase is effective after the 

participant’s severance from 

employment with the employer 

maintaining the plan (or, if earlier, after 

the annuity starting date in the case of 

a participant who has commenced 

receiving benefits), unless the plan 

specifies that this annual increase 

applies. Similarly, if a plan incorporates 

by reference the annual adjustments to 

the limitations of section 415 pursuant 

to this paragraph (d)(3)(v), the annual 

increase under section 415(d) of the 

compensation-based limitation 

described in section 415(b)(1)(B) does 

not apply with respect to a participant 

for increases that are effective after the 

participant’s severance from 

employment with the employer 

maintaining the plan (or, if earlier, after 

the annuity starting date in the case of 

a participant who has commenced 

receiving benefits), unless the plan 

specifies that this annual increase 

applies. 

(D) Treatment of cost-of-living 

adjustments for funding and deduction 

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, regardless of whether the 

plan reflects the increase automatically 

through operation of plan provisions in 

accordance with this paragraph (d)(3)(v) 

or the plan is amended to reflect the 

increase (pursuant to § 1.415(d)–1(a)(5)). 

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 

pursuant to this paragraph (d)(3)(v), 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, 412, and 431. 

(e) Rules for plans maintained by 

more than one employer. Except as 

provided in § 1.415(f)–1(g)(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 a participant in such a 

plan, the total compensation received by 

the participant from all of the employers 

maintaining the plan is taken into 

account under the plan, unless the plan 

specifies otherwise. 

(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 

regulations promulgated under section 

414(c), 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) that is part of a group of 

trades or businesses that are 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) and in the 

regulations under section 414(c) (except 

for purposes of determining whether 

two or more organizations are a brothersister group of trades or businesses 

under common control under the rules 

in § 1.414(c)–2(c)). 

(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 


pwalker on PROD1PC71 with RULES2
16898 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

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 

percent 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 a participant 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) Definition of severance from 

employment—(i) General rule. For 

purposes of this section and 

§§ 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, whether an 

employee has a severance from 

employment with the employer that 

maintains a plan is determined in the 

same manner as under § 1.401(k)–1(d)(2) 

except that, for purposes of determining 

the employer of an employee, the 

modifications provided under section 

415(h) (described in paragraph (f)(1) of 

this section) to the employer aggregation 

rules apply. Thus, an employee has a 

severance from employment when the 

employee ceases to be an employee of 

the employer maintaining the plan, and 

an employee does not have a severance 

from employment if, in connection with 

a change of employment, the employee’s 

new employer maintains such plan with 

respect to the employee. The 

determination of whether an employee 

ceases to be an employee of the 

employer maintaining the plan is based 

on all of the relevant facts and 

circumstances. 

(ii) Multiemployer plans. A 

participant in a multiemployer plan 

(within the meaning of section 414(f)) is 

not treated as having incurred a 

severance from employment with the 

employer maintaining the 

multiemployer plan for purposes of this 

section and §§ 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 if 

the participant continues to be an 

employee of another employer 

maintaining the multiemployer plan. 

(6) 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. See 

§ 1.401(a)–13(g)(4)(iv). 

(7) 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, this 

section and §§ 1.415(b)–1, 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 

July 1, 2007. 

(2) Governmental plans. In the case of 

a governmental plan as defined in 

section 414(d), this section and 

§§ 1.415(b)–1, 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 that 

begin more than 90 days after the close 

of the first regular legislative session of 

the legislative body with authority to 

amend the plan that begins on or after 

July 1, 2007. A governmental plan is 

permitted to apply the provisions of this 

section and §§ 1.415(b)–1, 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 on or after July 1, 2007, 

provided the plan applies all the 

applicable provisions of this section and 

§§ 1.415(b)–1, 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 for such limitation years. 

(3) Option to apply regulations earlier. 

A plan may apply the rules in 

§ 1.415(c)–2(e) regarding post-severance 

compensation payments for limitation 

years prior to the effective date 

described in paragraphs (g)(1) and (2) of 

this section. This early application 

affects the rules relating to the 

definition of compensation in 

§ 1.401(k)–1(e)(8) and § 1.457–4(d). 

(4) Grandfather rule for preexisting 

benefits. A defined benefit plan 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 end of the 

limitation year that is immediately prior 

to the effective date of final regulations 

under this section and §§ 1.415(b)–1, 

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) or (2) of 

this section) pursuant to plan provisions 

(including plan provisions relating to 

the plan’s limitation year) that were 

both adopted and in effect before April 

5, 2007, but only if such plan provisions 

meet the applicable requirements of 

statutory provisions, regulations, and 

other published guidance relating to 

section 415 in effect immediately before 

the effective date of final regulations 

under this section and §§ 1.415(b)–1, 

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) or (2) of 

this section). Plan provisions will not be 

treated as failing to satisfy these 

requirements merely because the plan 

has not been amended to reflect changes 

to section 415(b) made by the Pension 

Funding Equity Act of 2004, Public Law 

108–218 (118 Stat. 596), and the 

Pension Protection Act of 2006, Public 

Law 109–280 (120 Stat. 780). In 

addition, plan provisions will not be 

treated as failing to satisfy these 

requirements merely because the plan’s 

definition of compensation for a 

limitation year that is used for purposes 

of applying the limitations of section 

415(b)(1)(B) reflects compensation for a 

plan year that is in excess of the 

limitation under section 401(a)(17) that 

applies to that plan year. If benefits 

under a plan are accrued after the 

applicable effective date under 

paragraph (g)(1) or (2) of this section, 

then the sum of the benefits 

grandfathered under the first sentence of 

this paragraph (g)(4) and benefits 

accrued after the applicable effective 

date must satisfy the requirements of 

section 415, taking into account the 

requirements of this section and 

§§ 1.415(b)–1, 1.415(c)–1, 1.415(c)–2, 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16899 

1.415(d)–1, 1.415(f)–1, 1.415(g)–1, and 

1.415(j)–1. 

■ Par. 9. 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 

(whether or not the benefit is vested) 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 percent 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 

promulgated under section 415, 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) annuity 

contract that is not described in section 

414(i) is treated as a defined benefit 

plan for purposes of section 415 and 

regulations promulgated under section 

415. 

(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 (except as provided in 

paragraph (a)(7)(iii) of this section), 

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 that is subject to the 

requirements of section 411 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) Average compensation for period 

of high-3 years of service—(i) In general. 

Except as otherwise provided in this 

paragraph (a)(5), 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 (taking into account the rule in 

paragraph (a)(5)(iii) of this section) 

during which the employee had the 

greatest aggregate compensation (as 

defined in § 1.415(c)–2) from the 

employer, and the average 

compensation for the period of a 

participant’s high-3 years of service is 

determined by dividing the aggregate 

compensation for this period by 3. 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 is not permitted to base 

benefits on compensation in excess of 

the limitation under section 401(a)(17), 

a plan’s definition of compensation for 

a year that is used for purposes of 

applying the limitations of section 415 

is not permitted to reflect compensation 

for a year that is in excess of the 

limitation under section 401(a)(17) that 

applies to that year. See §§ 1.401(a)(17)–

1(a)(3)(i) and 1.401(a)(17)–1(b)(3)(ii) for 

rules regarding the effective date of 

increases in the section 401(a)(17) 

compensation limitation for a plan year 

and for a 12-month period other than 

the plan year. 

(ii) Short periods of service. For a 

participant who is employed with an 

employer for less than 3 consecutive 

years, the period of the participant’s 

high-3 years of service is the actual 

number of consecutive years of service 

(including fractions of years, but not 

less than one year). In such a case, the 

limitation of section 415(b)(1)(B) of 100 

percent of the participant’s average 

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 service by 

the number of years in that period 

(including fractions of years, but not 

less than one year). The rule in 

paragraph (a)(5)(iii) of this section is 

used for purposes of determining a 

participant’s consecutive years of 

service. 

(iii) Break in service. In the case of a 

participant who has had a severance 

from employment with an employer that 

maintains the plan and who is 

subsequently rehired by the employer, 

the period of the participant’s high-3 

years of service is calculated by 

excluding all years for which the 

participant performs no services for and 

receives no compensation from the 

employer maintaining the plan (referred 

to as the break period), and by treating 

the year of service immediately prior to 

and the year of service immediately 

after the break period as if such years of 

service were consecutive. See 

§ 1.415(d)–1(a)(2)(iii) for a special rule 

for determining a rehired participant’s 

section 415(b)(1)(B) compensation limit 

in the case of a plan that adjusts the 

compensation limit for limitation years 

after the limitation year in which the 

participant incurs a severance from 

employment. 

(iv) Examples. For purposes of these 

examples, except as otherwise stated, 

the plan year and the limitation year are 

the calendar year, and the plan uses the 

calendar year for purposes of 

determining the period of high-3 years 

of service. In addition, except as 

otherwise stated, it is assumed that the 

plan’s normal retirement age is 65, and 

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. It is also assumed that none of the 

plans in the examples are governmental 

plans. The following examples illustrate 

the rules of this paragraph (a)(5): 

Example 1. (i) Facts. Plan A, which was 

established on January 1, 2008, covers 

Participant M, who was hired on January 1, 

1990. Participant M’s compensation (as 

defined in § 1.415(c)–2) from the employer 

maintaining the plan is $140,000 each year 

for 1990 through 1992, is $120,000 each year 

for 1993 through 2007, and is $165,000 for 

2008 and 2009. Assume that for Plan A’s 

2008 and 2009 limitation years, the section 

415(b)(1)(A) age-adjusted dollar limit for M is 

$185,000 and $190,000, respectively, prior to 

the reduction of the age-adjusted dollar limit 

pursuant to paragraph (g)(1) of this section 

(which requires a reduction in the dollar 

limit if a participant has less than 10 years 

of participation in the plan). 


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16900 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

(ii) Conclusion. As of the end of the 2008 

limitation year, the period of M’s high-3 

consecutive years of service runs from 

January 1, 1990, through December 31, 1992, 

and M’s average compensation for this period 

is $140,000. Thus, the limitation under 

section 415(b)(1)(B) for the 2008 limitation 

year is $140,000. As of the end of the 2009 

limitation year, the period of M’s high-3 

consecutive years of service runs from 

January 1, 2007, through December 31, 2009, 

and M’s average compensation for this period 

is $150,000. Thus, the limitation under 

section 415(b)(1)(B) for the 2009 limitation 

year is $150,000. 

Example 2 (i) Facts. Participant N is a 

participant in Plan B. N’s compensation for 

2008, 2009, and 2010 is $300,000 for each 

year. N’s average compensation for the period 

of N’s high-3 years of service (determined 

before the application of section 401(a)(17)) 

is $300,000, based on N’s compensation for 

2008, 2009, and 2010. For all years before 

2008, Participant N’s compensation was less 

than the then-applicable section 401(a)(17) 

limit. On January 1, 2011, N commences 

receiving benefits from Plan B at the age of 

75, 10 years after attaining N’s normal 

retirement age under Plan B, when the ageadjusted section 415(b)(1)(A) dollar limit for 

benefits commencing at that age is $293,453. 

(ii) Conclusion. Pursuant to § 1.415(c)–2(f) 

and section 401(a)(17), Plan B is not 

permitted to provide for a definition of 

compensation that includes compensation for 

a year that is in excess of the limitation under 

section 401(a)(17) that applies to that year. 

Accordingly, the limitation under section 

415(b)(1)(B) based on N’s average 

compensation for the period of N’s high three 

years of service must not reflect 

compensation for a year that is in excess of 

the limitation under section 401(a)(17) that 

applies to that year. Thus, if the limitation 

under section 401(a)(17) for years beginning 

in 2008, 2009, and 2010 is $230,000, 

$235,000, and $240,000, respectively, then 

the limitation under section 415(b)(1)(B) 

based on N’s average compensation for the 

period of N’s high three years of service is 

$235,000. 

Example 3. (i) Facts. The facts are the same 

as in Example 2, except that N commences 

receiving benefits from Plan B on January 1, 

2008, at the age of 75, 10 years after attaining 

N’s normal retirement age under Plan B. In 

addition, N’s period of high three years of 

service is from January 1, 2003, through 

December 31, 2005, and N’s average 

compensation for this period is $300,000. 

The section 401(a)(17) limits for 2003, 2004 

and 2005 are $200,000, $205,000, and 

$210,000, respectively. As of December 31, 

2007, pursuant to plan provisions adopted 

and in effect on January 1, 2007, N’s accrued 

benefit under Plan B, payable in the form of 

a straight life annuity, actuarially adjusted to 

reflect commencement 10 years after normal 

retirement age, is $300,000. Plan B has not 

been amended during 2007, and that as of 

December 31, 2007, Plan B satisfied all of the 

requirements of section 415(b) with respect 

to N’s accrued benefit, pursuant to statutory 

provisions, regulations, and other published 

guidance in effect immediately before the 

limitation year beginning on January 1, 2008. 

(ii) Conclusion. Under § 1.415(a)–1(g)(4), 

Plan B is considered to satisfy the section 

415(b)(1)(B) compensation limit with respect 

to N’s benefit payable at age 75 of $300,000 

(which N accrued prior to January 1, 2008), 

for limitation years beginning after December 

31, 2007. This is because § 1.415(a)–1(g)(4) 

provides that plan provisions will not be 

treated as failing to satisfy the requirements 

of section 415(b)(1)(B) merely because the 

plan’s definition of compensation that is 

used for purposes of applying the limitations 

of section 415(b)(1)(B) reflects compensation 

in excess of the section 401(a)(17) limitation 

for limitation years beginning before January 

1, 2008. N, however, cannot accrue any 

additional benefits under Plan B for 

limitation years beginning after December 31, 

2007, until N’s section 415(b)(1)(B) 

compensation limit, as limited by § 1.415(c)–

2(f) and section 401(a)(17), increases above 

$300,000. 

Example 4. (i) Facts. Participant O 

participates in Plan C, maintained by 

Employer X. Plan C does not adjust a 

participant’s section 415(b)(1)(B) 

compensation limit for limitation years after 

the limitation year in which the participant 

incurs a severance from employment. Prior to 

separating from employment with X in 2010, 

O’s average compensation for O’s period of 

high-3 years of service is $50,000, based on 

O’s compensation for 2007, 2008, and 2009, 

which was $50,000 for each year. O’s 

compensation for 2010 was $45,000. O’s 

compensation is $0 for 2011. In 2012, O is 

rehired by X and resumes participation in 

Plan C. O’s compensation in 2012 is $45,000, 

and is $70,000 in 2013. 

(ii) Conclusion. As of the end of the 2013 

limitation year, O’s average compensation for 

O’s period of high-3 years of service is 

$53,333, based on O’s compensation in 2010, 

2012, and 2013. See paragraph (a)(5)(iii) of 

this section. 

Example 5. (i) Facts. The facts are the same 

as in Example 4, except that, in accordance 

with § 1.415(a)–1(d)(3)(v), Plan C 

incorporates by reference section 415(d) 

adjustments to a participant’s section 

415(b)(1)(B) compensation limit for 

limitation years after the limitation year in 

which the participant incurs a severance 

from employment. Assume that the annual 

adjustment factor described in § 1.415(d)–

1(a)(2)(ii) for 2011 through 2013 is 1.03 for 

each year. Thus, disregarding O’s rehire by X, 

O’s average compensation for O’s period of 

high-3 years of service for the 2013 limitation 

year is equal to $54,636 ($50,000 * 1.03 * 

1.03 * 1.03). 

(ii) Conclusion. Under § 1.415(d)–

1(a)(2)(iii), O’s average compensation for O’s 

period of high-3 years of service for the 2013 

limitation year is $54,636. 

(6) Exceptions from compensation 

limit. The limit under paragraph 

(a)(1)(ii) of this section (100 percent of 

the participant’s average compensation 

for the participant’s 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)); 

(iii) A collectively bargained plan that 

is described in section 415(b)(7); or 

(iv) A participant in a plan 

maintained by an organization 

described in section 3121(w)(3)(A) who 

has never been a highly compensated 

employee (within the meaning of 

section 414(q)) of the organization. 

(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). 

(iii) Defined benefit plans not subject 

to the requirements of section 411. In 

the case of a defined benefit plan that 

is not subject to the requirements of 

section 411, the limitations described in 

this paragraph (a) are not required to be 

applied to the annual benefit accrued by 

a participant before the benefit is 

payable. However, such a defined 

benefit plan is subject to the limitations 

described in this paragraph (a) with 

respect to the annual benefit payable to 

a participant at any time under the plan. 

(iv) Application of compensation 

limitation exception to a church 

employee who becomes a highly 

compensated employee—(A) In general. 

If a participant who was described in 

paragraph (a)(6)(iv) of this section for a 

prior limitation year later becomes a 

highly compensated employee (within 

the meaning of section 414(q)) of the 

organization that maintains the defined 

benefit plan, the plan is not treated as 

failing to satisfy the compensationbased limitation described in paragraph 

(a)(1)(ii) of this section with respect to 

the participant if the requirements of 

paragraph (a)(7)(iv)(B) of this section are 

satisfied with respect to the participant. 

(B) Limitation on accruals. The 

requirements of this paragraph 

(a)(7)(iv)(B) are satisfied with respect to 

a participant if no plan amendments 

increasing the participant’s benefits are 

adopted during the limitation year in 

which the participant first becomes a 

highly compensated employee (within 

the meaning of section 414(q)) of the 

organization that maintains the plan, 

and there is no increase in the 

participant’s accrued benefit derived 

from employer contributions (including 

increases as a result of increased 

compensation or service) in subsequent 

limitation years. 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16901 

(b) Annual benefit—(1) In general—(i) 

Definition of annual benefit—(A) 

Straight life annuities. For purposes of 

this section and § 1.415(b)–2, the term 

annual benefit means a benefit that is 

payable in the form of a straight life 

annuity. A straight life annuity means 

an annuity payable in equal 

installments for the life of the 

participant that terminates upon the 

participant’s death. Examples of benefits 

that are not in the form of a straight life 

annuity include an annuity with a postretirement death benefit and an annuity 

providing a guaranteed number of 

payments. If a benefit is payable in the 

form of a straight life annuity, no 

adjustment is made to the benefit to 

account for differences in the timing of 

payments during a year (for example, no 

adjustment is made on account of the 

annuity being payable in annual or 

monthly installments). 

(B) Other benefit forms. 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 payable on the first day of each 

month 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), 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—(A) General rule. If a participant 

has or will have distributions 

commencing at more than one annuity 

starting date, then the limitations of 

section 415 must be satisfied as of each 

of the annuity starting dates, taking into 

account the benefits that have been or 

will be provided at all of the annuity 

starting dates. This will happen, for 

example, where benefit distributions to 

a participant have previously 

commenced under a plan that is 

aggregated for purposes of section 415 

with a plan under which the participant 

receives current accruals. In 

determining the annual benefit for such 

a participant as of a particular annuity 

starting date, the plan must actuarially 

adjust the past and future distributions 

with respect to the benefits that 

commenced at the other annuity starting 

dates. For limitation years to which 

§ 1.415(b)–2 applies, these adjustments 

must be made using the rules of 

§ 1.415(b)–2. For purposes of this 

paragraph (b)(1)(iii) and § 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). 

(B) Scope of multiple annuity starting 

date rules. The rules provided in this 

paragraph (b)(1)(iii) and § 1.415(b)–2 

apply for purposes of determining the 

annual benefit of a participant where a 

new distribution election is effective 

during the current limitation year with 

respect to a distribution that previously 

commenced. The rules of this paragraph 

(b)(1)(iii) and § 1.415(b)–2 also apply for 

determining the annual benefit of a 

participant for purposes of applying the 

limitations of section 415(b) and this 

section where benefit payments are 

increased as a result of plan terms or a 

plan amendment applying a cost-ofliving adjustment or similar benefit 

increase, unless the increase is 

described in paragraph (b)(1)(iii)(C) of 

this section. 

(C) Safe harbors for certain benefit 

increases. An increase to benefit 

payments as a result of plan terms or a 

plan amendment applying a cost-ofliving adjustment or similar benefit 

increase is described in this paragraph 

(b)(1)(iii)(C) if the increase—

(1) Has previously been accounted for 

as part of the annual benefit under the 

rules of paragraph (c) of this section; 

(2) Is not required to be accounted for 

as part of the annual benefit, pursuant 

to the exception for certain automatic 

benefit increase features under 

paragraph (c)(5) of this section; 

(3) Is pursuant to a plan provision that 

automatically incorporates section 

415(d) cost-of-living adjustments under 

§ 1.415(a)–1(d)(3)(v); or 

(4) Complies with one of the safe 

harbors described in § 1.415(d)–1(a)(5) 

or (6) (providing safe harbors for annual 

and other periodic adjustments to 

distributions). 

(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). 

(D) Repayment of a withdrawal of 

employee contributions as provided 

under section 411(a)(3)(D). 

(E) Repayments that would have been 

described in paragraph (b)(2)(ii)(C) or 

(b)(2)(ii)(D) of this section except that 

the plan does not restrict the timing of 

repayments to the maximum extent 

permitted by section 411(a). 

(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 regulations 

promulgated under section 411 to those 

contributions to determine the amount 

of a straight life annuity commencing at 

the annuity starting date, regardless of 

whether the requirements of sections 

411 and 417 apply to that plan. For 

purposes of applying such factors to a 

plan that is not subject to the 

requirements of section 411, the 

applicable effective date of section 

411(a)(2) (which is used under 

§ 1.411(c)–1(c)(3) to determine the 

beginning date from which statutorily 

specified interest must be credited to 

mandatory employee contributions) 

must be determined as if section 411 

applied to the plan, and in determining 

the annual benefit that is actuarially 

equivalent to these accumulated 

contributions, the plan must determine 

the interest rate that would have been 

required under section 417(e)(3) as if 

section 417 applied to the 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 


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16902 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

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 an eligible 

retirement plan, as defined in section 

402(c)(8)(B) (for example, a contribution 

received pursuant to a direct rollover 

under section 401(a)(31)(A)), 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(b) is determined by applying the 

rules of section 411(c) as described in 

paragraph (b)(2)(iii) of this section, 

regardless of the assumptions used to 

compute the annuity distribution under 

the plan and regardless of whether the 

plan is subject to the requirements of 

sections 411 and 417. 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). 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) Treatment of 

transferor plan if transferred benefits 

are aggregated with transferor plan. 

Except as provided in paragraph 

(b)(3)(ii) of this section, when there has 

been a transfer of benefits from one 

defined benefit plan to another plan, to 

the extent the benefits transferred to the 

transferee plan are otherwise 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 a limitation year, the transferred 

benefits are not treated as being 

provided 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). 

(B) Treatment of transferor plan if 

transferred benefits are not aggregated 

with transferor plan. Except as provided 

in paragraph (b)(3)(ii) of this section, 

when there has been a transfer of 

benefits from one defined benefit plan 

to another plan, to the extent the 

benefits transferred to the transferee 

plan are not otherwise 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 a 

limitation year, the transferred benefits 

are treated by the transferor plan as if 

such benefits were provided under 

annuities purchased to provide benefits 

under a plan that must be aggregated 

with the transferor plan and that 

terminated immediately prior to the 

transfer with sufficient assets to pay all 

benefit liabilities under the plan, in 

accordance with the rules of paragraph 

(b)(5)(i) of this section. This will occur, 

for example, in the case of a transfer of 

benefits between defined benefit plans 

maintained by employers that are not 

required to be aggregated under sections 

414(b) and (c) (as modified by section 

415(h)) or sections 414(m). 

(C) Treatment of transferee plan. 

Except as provided in paragraph 

(b)(3)(ii) of this section, where there has 

been a transfer of benefits from one 

defined benefit plan to another defined 

benefit plan, the transferee plan must 

take into account the transferred 

benefits in determining whether it 

satisfies the limitations of section 

415(b). 

(ii) Elective transfer of distributable 

benefit. Where, as described in 

§ 1.411(d)–4, Q&A–3(c) (permitting 

certain elective transfers of distributable 

benefits), a distributable benefit is 

transferred to a defined benefit plan 

from either a defined contribution plan 

or a defined benefit plan, the amount 

transferred is treated as a benefit paid 

from the transferor plan, and the annual 

benefit provided by the transferee 

defined benefit plan does not include 

the annual benefit attributable to the 

amount transferred (determined as if the 

transferred amount were a rollover 

contribution subject to the rules of 

paragraph (b)(2)(v) of this section). The 

rule in the preceding sentence applies 

regardless of whether the requirements 

of section 411 apply to the plan and, in 

the case of a transfer from a defined 

contribution plan that is not subject to 

the requirements of section 411 (such as 

a governmental plan) to a defined 

benefit plan, the rule applies even if the 

participant’s benefits are not 

distributable from the defined 

contribution plan at the time of the 

transfer. 

(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, the annual benefit does 

not include benefits provided under a 

qualified governmental excess benefit 

arrangement, as defined in section 

415(m)(3). Thus, the limitation of 

section 415(b) does not apply to benefits 

to the extent the benefits are provided 

under a qualified governmental excess 

benefit arrangement. 

(5) Treatment of benefits provided 

under a terminated plan—(i) 

Terminated plan with sufficient assets. 

If a defined benefit plan is terminated 

with sufficient assets for the payment of 

the benefit liabilities of all plan 

participants and a participant in the 

plan has not yet commenced benefits 

under the plan, for purposes of 

satisfying section 415(b) with respect to 

the participant, all other defined benefit 

plans maintained by the employer that 

maintained the terminated plan are 

required to take into account the 

benefits provided pursuant to the 

annuities purchased to provide benefits 

under the terminated plan at each 

possible annuity starting date. In such a 

case, see paragraph (b)(1)(iii) of this 

section for rules regarding the 

determination of a participant’s annual 

benefit if the participant commences 

receiving benefits under the terminated 

plan. 

(ii) Terminated plan with insufficient 

assets. If a defined benefit plan is 

terminated and there are not sufficient 

assets for the payment of the benefit 

liabilities of all plan participants, for 

purposes of satisfying section 415(b) 

with respect to a participant, all other 

defined benefit plans maintained by the 

employer that maintained the 

terminated plan are required to take into 

account the benefits that are actually 

provided to the participant under the 

terminated plan. For example, in the 

case of a plan that is subject to Title IV 

of the Employee Retirement Income 

Security Act of 1974 (88 Stat. 829), 

Public Law 93–406 (ERISA), and that 

terminates with insufficient assets for 

the payment of the benefit liabilities of 

all plan participants, all other defined 

benefit plans maintained by the 

employer that maintained the 


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terminating plan must take into account 

benefits that are paid by the Pension 

Benefit Guaranty Corporation. In such a 

case, see paragraph (b)(1)(iii) of this 

section for rules regarding the 

determination of a participant’s annual 

benefit if the participant commences 

receiving benefits under the terminated 

plan. 

(iii) Other guidance. The 

Commissioner may provide guidance 

regarding the rules applicable to 

terminated plans (and plans that are 

deemed to have been terminated 

pursuant to paragraph (b)(3)(i)(B) of this 

section) in revenue rulings, notices, and 

other guidance published in the Internal 

Revenue Bulletin. See § 601.601(d) of 

this chapter. 

(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. Paragraph (c)(2) of this section 

describes how to adjust a benefit paid in 

a form to which section 417(e)(3) does 

not apply. Paragraph (c)(3) of this 

section describes how to adjust a benefit 

paid in a form 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 provides 

an exception from the requirements of 

this paragraph (c) with respect to certain 

automatic benefit increase features. 

Paragraph (c)(6) 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)(2) of this 

chapter. 

(2) Benefits paid in a form to which 

section 417(e)(3) does not apply. For a 

benefit paid in a form 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 same 

annuity starting date that has the same 

actuarial present value as the form of 

benefit payable to the participant, 

computed using a 5 percent interest 

assumption and the applicable mortality 

table described in § 1.417(e)–1(d)(2) for 

that annuity starting date. 

(3) Benefits paid in a form to which 

section 417(e)(3) applies—(i) In general. 

Except as otherwise provided in this 

paragraph (c)(3), for a benefit paid in a 

form to which section 417(e)(3) applies, 

the actuarially equivalent straight life 

annuity benefit is the greatest 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; 

(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 

percent interest assumption and the 

applicable mortality table for the 

distribution under § 1.417(e)–1(d)(2); or 

(C) 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(e)–1(d)(3) 

and the applicable mortality table for 

the distribution under § 1.417(e)–

1(d)(2)), divided by 1.05. 

(ii) Special rule for distributions in 

plan years beginning in 2004 and 2005. 

For a distribution to which section 

417(e)(3) applies and which has an 

annuity starting date occurring in plan 

years beginning in 2004 or 2005, except 

as provided in section 101(d)(3) of the 

Pension Funding Equity Act of 2004, 

Public Law 108–218 (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 

percent 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. 

(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) Qualified joint and survivor 

annuities combined with other 

distributions. If benefits are paid partly 

in the form of a qualified joint and 

survivor annuity (QJSA) 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) Exception for certain automatic 

benefit increase features—(i) General 

rule. Notwithstanding paragraph 

(b)(1)(i)(B) of this section, no adjustment 

is required to a benefit that is paid in 

a form that is not a straight life annuity 

to take into account the inclusion in that 

form of an automatic benefit increase 

feature, as described in paragraph 

(c)(5)(ii) of this section, if: 

(A) The benefit is paid in form to 

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

(B) The plan satisfies the 

requirements of paragraph (c)(5)(iii) of 

this section. 

(ii) Definition of automatic benefit 

increase feature. An automatic benefit 

increase feature is included in a form of 

benefit if that form provides for 

automatic, periodic increases to the 

benefits paid in that form, such as a 

form of benefit that automatically 

increases the benefit paid under that 

form annually according to a specified 

percentage or objective index, or a form 

of benefit that automatically increases 

the benefit paid in that form to share 


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16904 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

favorable investment returns on plan 

assets. 

(iii) Requirements. A plan satisfies the 

requirements of this paragraph (c)(5)(iii) 

with respect to a form of benefit that 

includes an automatic benefit increase 

feature if the form of benefit without 

regard to the automatic benefit increase 

feature satisfies the requirements of 

section 415(b) and this section, and the 

plan provides that in no event will the 

amount payable to the participant under 

the form of benefit in any limitation 

year be greater than the section 415(b) 

limit applicable at the annuity starting 

date (which is the lesser of the ageadjusted section 415(b)(1)(A) dollar 

limit described in paragraph (a)(1)(i) of 

this section or the section 415(b)(1)(B) 

compensation limit described in 

paragraph (a)(1)(ii) of this section), as 

increased in subsequent years pursuant 

to section 415(d) and § 1.415(d)–1. If the 

form of benefit without regard to the 

automatic benefit increase feature is not 

a straight life annuity, then the 

preceding sentence is applied by 

reducing the section 415(b) limit 

applicable at the annuity starting date to 

an actuarially equivalent amount 

(determined using the assumptions 

specified in paragraph (c)(2)(ii) of this 

section) that takes into account the 

death benefits under the form of benefit 

(other than the survivor portion of a 

QJSA). 

(6) 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 percent 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) and § 1.417(e)–1(d)(3) for 

relevant time periods is 5.25 percent 

and that the mortality table that applies 

under section 417(e)(3) and § 1.417(e)–

1(d)(2) 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, all payments other than a 

payment of a single sum are made 

monthly, on the first day of each 

calendar month, and each plan’s normal 

retirement age is 65. The examples are 

as follows: 

Example 1. (i) Facts. 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 determined using the otherwise 

applicable actuarial assumptions of the plan 

and the present value determined using the 

applicable interest rate and the applicable 

mortality table for the distribution under 

section 417(e)(3). 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 under section 417(e)(3) and 

§ 1.417(e)–1(d). Participant M retires at age 

65 with a benefit under the plan formula (and 

before the application of section 415) of 

$152,619 and elects to receive a distribution 

in the form of a single sum. Under the plan 

and before the application of section 415, the 

amount of the single sum is $1,800,002 

(which is based on the 5 percent interest rate 

and applicable mortality table as of January 

1, 2003, since that present value is greater 

than the present value that would have been 

determined using the applicable interest rate 

(5.25 percent) and the applicable mortality 

table (the January 1, 2003, table) for the 

distribution under section 417(e)(3)). 

(ii) Conclusion. For purposes of this 

section, the annual benefit is the greatest of 

the annual amount of the actuarially 

equivalent straight life annuity commencing 

at the same age (determined using the plan’s 

actuarial factors), the annual amount of the 

actuarially equivalent straight life annuity 

commencing at the same age (determined 

using a 5.5 percent interest assumption and 

the applicable mortality table for the 

distribution under § 1.417(e)–1(d)(2)), 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 for the distribution under 

§§ 1.417(e)–1(d)(2) and (d)(3)) divided by 

1.05. Based on the factors used in the plan 

to determine the actuarially equivalent lump 

sum (in this case, an interest rate of 5 percent 

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. A single sum payment of 

$1,800,002 is actuarially equivalent to an 

immediate straight life annuity at age 65 of 

$159,105, using a 5.5 percent interest 

assumption and the applicable mortality 

table under § 1.417(e)–1(d)(2). Based on the 

applicable interest rate and the applicable 

mortality table for the distribution under 

§§ 1.417(e)–1(d)(2) and (d)(3), $1,800,002 

payable as a single sum is actuarially 

equivalent to an immediate straight life 

annuity at age 65 of $155,853. $148,432 is the 

result when this annual amount is divided by 

1.05. With respect to the single-sum 

distribution, M’s annual benefit for purposes 

of section 415(b) is equal to the greatest of 

the three resulting amounts ($152,619, 

$159,105, and $148,432), or $159,105. 

Example 2. (i) Facts. 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, the 

benefit payable in this form is $146,100. 

(ii) Conclusion. Since the form of benefit 

elected by M is a form of benefit to which 

section 417(e)(3) does not apply, the annual 

benefit for purposes of this section 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 percent 

interest rate and the applicable mortality 

table described in § 1.417(e)–1(d)(2) for that 

annuity starting date. 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) Facts. The facts are the same 

as in Example 1. Participant M retires at age 

62 with a benefit under the plan (before the 

application of section 415) of $100,000 (after 

application of the plan’s early retirement 

factors) 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) Conclusion. Because the form of benefit 

elected by M is a form of benefit to which 

section 417(e)(3) does not apply and 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 percent interest rate 

and the applicable mortality table described 

in § 1.417(e)–1(d)(2) for the annuity starting 

date. 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. The results are the same without 

regard to whether the Social Security 

supplement is a QSUPP (as defined in 

§ 1.401(a)(4)–12). 

Example 4. (i) Facts. Plan B is a defined 

benefit plan that provides a benefit equal to 

100 percent of a participant’s average 

compensation for the period of the 

participant’s high–3 years of service, 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 percent survivor annuity 

benefit that is a QJSA within the meaning of 

section 417 and that is reduced from the 

straight life annuity. 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 


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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 percent survivor annuity 

determined using the applicable interest rate 

and the applicable mortality table under 

section 417(e)(3) and § 1.417(e)–1(d). 

Participant O elects, with spousal consent, a 

single-sum distribution. 

(ii) Conclusion. 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 actuarially 

equivalent to a straight life annuity that is 

greater than 100 percent of a participant’s 

average compensation for the period of the 

participant’s high-3 years of service, the 

limitation of section 415(b)(1)(B) has been 

exceeded. 

Example 5. (i) Facts. Plan C is a defined 

benefit plan that provides an option to 

receive the benefit in the form of a joint and 

100 percent survivor annuity with a 10-year 

certain feature, where the survivor 

beneficiary is the participant’s spouse. 

(ii) Conclusion. Since this form of benefit 

is not subject to section 417(e)(3), for a 

participant at age 65, the annual benefit with 

respect to the joint and 100 percent survivor 

annuity with a 10-year certain feature is 

determined for purposes of this section 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 

percent 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 percent interest assumption and the 

applicable mortality table described in 

§ 1.417(e)–1(d)(2) for the 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 percent interest 

rate and the applicable mortality table 

described in § 1.417(e)–1(d)(2) for the 

annuity starting date. 

Example 6. (i) Facts. Plan E provides a 

benefit at age 65 of a straight life annuity 

equal to the lesser of 90 percent of the 

participant’s average compensation for the 

period of the participant’s high-3 years of 

service 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 percent 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 percent interest assumption and the 

section 417(e)(3)(A)(ii)(I) mortality table in 

effect on January 1, 2003, and the single sum 

calculated using the section 

417(e)(3)(A)(ii)(II) applicable interest rate and 

the section 417(e)(3)(A)(ii)(I) applicable 

mortality table for the distribution) to 50 

percent of the annual payments under the 

straight life annuity. Participant Q retires at 

age 65. Q’s average compensation for the 

period of Q’s high-3 years of service 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) Determination of annual benefit. Q’s 

annual benefit under Plan E for purposes of 

section 415(b) 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) Annual benefit attributable to QJSA 

portion. 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) Annual benefit attributable to single 

sum portion. The annual benefit attributable 

to the single sum portion of the distribution 

is determined as the greatest of the annual 

amount of the actuarially equivalent straight 

life annuity commencing at the same age 

(determined using the plan’s actuarial 

factors), the annual amount of the actuarially 

equivalent straight life annuity commencing 

at the same age (determined using a 5.5 

percent interest assumption and the 

applicable mortality table under § 1.417(e)–

1(d)(2) for the distribution), 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 under section 

417(e)(3) and §§ 1.417(e)–1(d)(2) and (d)(3) 

for the distribution) divided by 1.05. 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. The annual 

amount of the actuarially equivalent straight 

life annuity commencing at the same age 

determined using a 5.5 percent interest 

assumption and the applicable mortality 

table under § 1.417(e)–1(d)(2) for the 

distribution is $46,912. The actuarially 

equivalent straight life annuity commencing 

at the same age determined using the 

applicable interest rate and the applicable 

mortality table under section 417(e)(3) and 

§§ 1.417(e)–1(d)(2) and (d)(3) for the 

distribution is equal to $45,954. This amount 

divided by 1.05 is equal to $43,766. Thus, the 

annual benefit attributable to the single sum 

portion of the benefit is $46,912. 

(v) Conclusion. Q’s annual benefit under 

the optional form of benefit for purposes of 

section 415(b) 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 $91,912. Because Q’s 

average compensation for the period of Q’s 

high-3 years of service is $100,000, the 

distribution satisfies the compensation limit 

of section 415(b)(1)(B). 

Example 7. (i) Facts. 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 percent 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 

percent of the participant’s average 

compensation for the period of the 

participant’s high-3 years of service or 84 

percent of the age-adjusted section 

415(b)(1)(A) dollar limit (which is assumed 

to be $180,000 at age 65). Plan D does not 

incorporate the section 415(d) cost-of-living 

adjustments to the section 415(b) limits for 

limitation years following the limitation year 

in which a participant incurs a severance 

from employment. Participant P retires at age 

65, at which time P’s average compensation 

for the period of P’s high-3 years of service 

is $165,000. Under Plan D, P commences 

receiving benefits in the form of a life 

annuity of $138,600 with a fixed increase of 

2 percent per year. 

(ii) Conclusion. Because Plan D does not 

provide for a straight life annuity and the 

form of benefit is not subject to section 

417(e)(3), 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 percent per year, where 

actuarial equivalence is determined using a 

5 percent interest rate and the applicable 

mortality table for the distribution under 

section 417(e)(3) and § 1.417(e)–1(d)(2). In 

order to satisfy the requirements of section 

415 and this section, this annual benefit must 

not exceed 100 percent of the average 

compensation for the period of the 

participant’s high-3 years of service, or 

$165,000. Using a 5 percent interest rate and 

the section 417(e)(3) applicable mortality 

table for the distribution, 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 8. (i) Facts. The facts are the same 

as in Example 7, except that Plan D 

incorporates by reference the section 415(d) 

cost-of-living adjustments to the section 

415(b) limits as described in § 1.415(a)–

1(d)(3)(v) and Plan D provides that the 

benefit is limited to the applicable section 

415(b) limit. Under Plan D, P commences 

receiving benefits at age 65 in the form of a 

life annuity of $138,221 with a fixed increase 

of 2 percent per year. 


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(ii) Conclusion. Because Plan D does not 

provide for a straight life annuity and the 

form of benefit is not subject to section 

417(e)(3), 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 $138,221 with a fixed 

increase of 2 percent per year, where 

actuarial equivalence is determined using a 

5 percent interest rate and the applicable 

mortality table for P’s annuity starting date 

under section 417(e)(3) and § 1.417(e)–

1(d)(2). In order to satisfy the requirements 

of section 415(b) and this section, this annual 

benefit must not exceed 100 percent of P’s 

average compensation for the period of P’s 

high-3 years of service, or $165,000. Using a 

5 percent interest rate and the section 

417(e)(3) applicable mortality table for the 

distribution, the actuarially equivalent 

straight life annuity is $165,000, which does 

not exceed $165,000. Accordingly, the plan 

satisfies the compensation-based limitation 

of section 415(b)(1)(B). 

(iii) Section 415(d) adjustments. In 

addition to the fixed 2 percent per year 

automatic increase, P’s benefit will be 

increased in limitation years following the 

limitation year in which P retires in 

accordance with the plan provisions that 

incorporate by reference the section 415(d) 

cost-of-living adjustments to the section 

415(b) limits (or, if Plan D did not 

incorporate by reference the section 415(d) 

adjustments, P’s benefit may be increased 

pursuant to plan amendments that comply 

with the safe harbors provided in § 1.415(d)–

1(a)(5) or (6)), and such increases will not 

cause P’s benefit to violate the requirements 

of section 415(b). For example, if in a later 

limitation year the applicable section 415(b) 

limit is increased by 3 percent pursuant to 

section 415(d) and § 1.415(d)–1, P’s benefit 

payable under Plan D will be increased by 

both the fixed automatic 2 percent per year 

increase and by the 3 percent section 415(d) 

cost-of-living adjustment. The effect of the 

combined increases may result in P’s benefits 

for a year exceeding the then applicable 

dollar limit under section 415(b), but the 

plan will not violate section 415(b). 

Example 9. (i) Facts. The facts are the same 

as in Example 7, except that the plan 

provides that benefits are limited to the lesser 

of 100 percent of the participant’s average 

compensation for the period of the 

participant’s high-3 years of service or 100 

percent of the age-adjusted section 

415(b)(1)(A) dollar limit. Assume that P 

retires at age 65 with a benefit in the form 

of a life annuity of $165,000 per year with 

a fixed increase of 2 percent per year. 

Additionally, assume that Plan D 

incorporates by reference the section 415(d) 

cost-of-living adjustments to the section 

415(b) limits as described in § 1.415(a)–

1(d)(3)(v) and the plan provides pursuant to 

paragraph (c)(5) of this section that in no 

event will a benefit payable from the plan, as 

increased by the fixed increase of 2 percent 

per year, be greater than the section 415(b) 

limit applicable as of the annuity starting 

date for the benefit (increased pursuant to the 

rules of section 415(d) and § 1.415(d)–1). 

(ii) Conclusion. The benefit payable to P at 

age 65 is not required to be adjusted to take 

into account the fixed increase of 2 percent 

per year. This is because the benefit payable 

to P satisfies the requirements of section 

415(b) without regard to the fixed increase of 

2 percent per year, and pursuant to paragraph 

(c)(5) of this section, the plan provides that 

the benefit payable to P, as increased by the 

fixed increase of 2 percent per year, will 

never be greater than the section 415(b) limit 

applicable as of P’s annuity starting date 

(increased in subsequent limitation years 

pursuant to the rules of section 415(d) and 

§ 1.415(d)–1). 

(iii) Section 415(d) adjustments. In 

addition to the fixed 2 percent per year 

automatic increase, P’s benefit will be 

increased in limitation years following the 

limitation year in which P retires in 

accordance with the plan provisions that 

incorporate by reference the section 415(d) 

cost-of-living adjustments to the section 

415(b) limits (or, if Plan D did not 

incorporate by reference the section 415(d) 

adjustments, P’s benefit may be increased 

pursuant to plan amendments that comply 

with the safe harbors provided in § 1.415(d)–

1(a)(5) or (6)), and such increases will not 

cause P’s benefit to violate the requirements 

of section 415(b). However, pursuant to 

paragraph (c)(5)(iii) of this section, P’s benefit 

during any limitation year, as increased by 

the 2 percent per year automatic increase 

feature and any plan provisions that 

incorporate by reference the section 415(d) 

cost-of-living adjustments or any plan 

amendments that increase P’s benefits, 

cannot exceed the then applicable section 

415(b) limit (as increased pursuant to section 

415(d) and § 1.415(d)–1). 

Example 10. (i) Facts. Employer T 

maintains a defined benefit plan. Under the 

terms of the plan, all benefits in pay status 

(other than single sum payments) are 

adjusted upwards or downwards annually 

depending on an annual comparison of 

actual return on plan assets and an assumed 

interest rate of 4 percent. Thus, the plan does 

not offer a straight life annuity form of 

benefit, and the plan must determine for 

purposes of applying the section 415(b) 

limits the actuarially equivalent straight life 

annuity for benefits provided under the plan. 

(ii) Conclusion. Benefits under the plan are 

paid in a form to which section 417(e)(3) 

does not apply. In determining the 

actuarially equivalent straight life annuity of 

benefits that are subject to the annual 

investment performance adjustment, the plan 

must assume a 5 percent return on plan 

assets. See paragraph (c)(2) of this section. 

Therefore, in determining the actuarially 

equivalent straight life annuity, the plan 

must assume that the form of benefit payable 

under the plan will be an annuity that 

increases annually by a factor equal to 1.05 

divided by 1.04. This increasing annuity is 

then converted to an actuarially equivalent 

straight life annuity under paragraph (c)(2) of 

this section using a 5 percent interest rate 

and the applicable mortality table described 

in § 1.417(e)–1(d)(2) for the relevant annuity 

starting date. 

Example 11. (i) Facts. R is a participant in 

a defined benefit plan maintained by R’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) Conclusion. 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 is not 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). 

Example 12. (i) Facts. V is a participant in 

a defined benefit plan maintained by V’s 

employer. Under the terms of the plan, V 

must make contributions to the plan in a 

stated amount to accrue benefits derived 

from employer contributions. V’s 

contributions are mandatory employee 

contributions within the meaning of section 

411(c)(2)(C). Thus, the annual benefit 

attributable to these contributions is not 

taken into account for purposes of testing the 

annual benefit derived from employer 

contributions against the applicable 

limitation on benefits. V terminates 

employment and receives a distribution from 

the plan that includes V’s mandatory 

employee contributions. Subsequently, V 

resumes employment with the employer 

maintaining the plan. V recommences 

participation in the plan and repays the prior 

distribution from the plan (including the 

portion of the distribution that included V’s 

prior mandatory employee contributions to 

the plan) with reasonable interest. 

(ii) Conclusion. In determining V’s annual 

benefit under the plan for purposes of 

applying the limitations of section 415(b), no 

portion of V’s repayment of the prior 

distribution is treated as employee 

contributions. See paragraphs (b)(2)(ii)(C), (D) 

and (E) of this section. However, V’s annual 

benefit under the plan is determined by 

excluding the portion of the annual benefit 

attributable to V’s employee contributions to 

the plan made both prior to the first 

distribution and during V’s subsequent 

recommencement of plan participation. 

(d) Adjustment to section 415(b)(1)(A) 

dollar limit for commencement before 

age 62—(1) General rule—(i) 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16907 

Calculation using statutory factors. 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 

generally is determined as the actuarial 

equivalent of 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) (as adjusted 

pursuant to section 415(d) and 

§ 1.415(d)–1 for the limitation year), and 

where the actuarially equivalent straight 

life annuity is computed using a 5 

percent interest rate and the applicable 

mortality table under § 1.417(e)–1(d)(2) 

that is effective for that annuity starting 

date (and expressing the participant’s 

age based on completed calendar 

months as of the annuity starting date). 

However, if the plan has an immediately 

commencing straight life annuity 

payable both at age 62 and the age of 

benefit commencement, then the ageadjusted section 415(b)(1)(A) dollar 

limit is equal to the lesser of—

(A) The limit as otherwise determined 

under this paragraph (d)(1)(i); and 

(B) The amount determined under 

paragraph (d)(1)(ii) of this section. 

(ii) Calculation using plan factors. 

The amount determined under this 

paragraph (d)(1)(ii) is equal to 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 to 

the annual amount of the straight life 

annuity under the plan commencing at 

age 62, with both annual amounts 

determined without applying the rules 

of section 415. 

(2) Mortality adjustments—(i) In 

general. For purposes of determining 

the actuarially equivalent amount 

described in paragraph (d)(1)(i) of this 

section, to the extent that a forfeiture 

does not occur upon the participant’s 

death before the annuity starting date, 

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, 

unless the plan provides for such an 

adjustment. To the extent that a 

forfeiture occurs upon the participant’s 

death before the annuity starting date, 

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 qualified preretirement survivor 

annuity 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 

(QPSA) (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 after 

the annuity starting date and before age 

62 or after age 65 and before 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, Indian tribal government (as 

defined in section 7701(a)(40)), or any 

political subdivision of a state or Indian 

tribal 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, Indian tribal government, 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, 

Indian tribal government, 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 on or 

after age 60 for a participant if—

(i) The participant is a commercial 

airline pilot; 

(ii) The participant separates from 

service upon or 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) No decrease in age-adjusted 

section 415(b)(1)(A) dollar limit on 

account of age or service. 

Notwithstanding any other provision of 

this paragraph (d), the age-adjusted 

section 415(b)(1)(A) dollar limit 

applicable to a participant does not 

decrease on account of an increase in 

age or the performance of additional 

service. 

(7) 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 percent for 

each year that the early retirement age is less 

than age 65. Participant M retires at age 60 

with exactly 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 after 

the annuity starting date and before age 62 

or after age 65 and before 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 


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16908 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

straight life annuity payable at age 60 that is 

actuarially equivalent, using 5 percent 

interest and the applicable mortality table 

effective for that annuity starting date under 

section 417(e)(3)(A)(ii)(I) and § 1.417(e)–

1(d)(2), to the deferred annuity payable at age 

62 of $180,000 per year. In this case, the ageadjusted 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 percent 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 that participant M elects 

to retire at age 60, 6 months, and 21 days. 

(ii) Under paragraph (d)(1)(i) of this 

section, M is treated as age 60 and 6 months 

(or, age 60.5). Absent the rule provided in 

paragraph (d)(6) of this section, the ageadjusted section 415(b)(1)(A) dollar limit that 

applies for commencement of M’s benefit at 

age 60.5 is the lesser of the section 

415(b)(1)(A) dollar limit multiplied by the 

ratio of the annuity payable at age 60.5 to the 

annuity payable at age 62, or the straight life 

annuity payable at age 60.5 that is actuarially 

equivalent, using 5 percent interest and the 

applicable mortality table for that annuity 

starting date under section 417(e)(3)(A)(ii)(I) 

and § 1.417(e)–1(d)(2), to the deferred 

annuity payable at age 62 of $180,000 per 

year. The age-adjusted section 415(b)(1)(A) 

dollar limit at age 60.5 is $161,769 (the lesser 

of $167,727 ($180,000* $82,000/$88,000) and 

$161,769 (the straight life annuity at age 60.5 

that is actuarially equivalent to a deferred 

annuity of $180,000 commencing at age 62, 

determined using 5 percent interest and the 

applicable mortality table, without a 

mortality decrement for the period between 

60.5 and 62). 

Example 3. (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) Absent the rule provided in paragraph 

(d)(6) of this section, 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 percent 

interest and the applicable mortality table for 

that annuity starting date under section 

417(e)(3)(A)(ii)(I) and § 1.417(e)–1(d)(2), to 

the deferred annuity payable at age 62 of 

$180,000 per year. 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 would be $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 

percent interest and the applicable mortality 

table, without a mortality decrement for the 

period between 60 and 62)). 

(iii) However, at age 59 11/12 with 29 11/ 

12 years of service, the age-adjusted section 

415(b)(1)(A) dollar limit for M is $155,311 

(the lesser of $162,955 ($180,000* $79,667/ 

$88,000) and $155,311 (the straight life 

annuity at age 59 11/12 that is actuarially 

equivalent to a deferred annuity of $180,000 

commencing at age 62, determined using 5 

percent interest and the applicable mortality 

table, without a mortality decrement for the 

period between 59 and 62)). Thus, after 

applying the rule provided in paragraph 

(d)(6) of this section, the age-adjusted section 

415(b)(1)(A) dollar limit that applies for 

commencement of M’s benefit at age 60 is 

$155,311. 

Example 4. (i) The facts are the same as in 

Example 1, except that the plan provides 

that, if a participant has 30 or more years of 

service, then no reduction is made in early 

retirement benefits if the early retirement age 

is at least age 62 and, in the case of an early 

retirement age before age 62, the early 

retirement benefit is determined by reducing 

the accrued benefit by 4 percent for each year 

that the early retirement age is less than age 

62. 

(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 percent 

interest and the applicable mortality table for 

that annuity starting date under section 

417(e)(3)(A)(ii)(I) and § 1.417(e)–1(d)(2), to 

the deferred annuity payable at age 62 of 

$180,000 per year. 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 $156,229 (the lesser 

of $165,600 ($180,000* $92,000/$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 percent interest and the 

applicable mortality table, without a 

mortality decrement for the period between 

60 and 62)). 

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 percent of the periodic 

payments that would be made under the 

immediately commencing straight life 

annuity. Annual payments to M are 97 

percent of $80,000, or $77,600. Additionally, 

M’s average compensation for the period of 

M’s high-3 years of service is $120,000. As 

in Example 1, the age-adjusted section 

415(b)(1)(A) dollar limit at age 60 is 

$156,229. 

(ii) In the case of a form of benefit to which 

section 417(e)(3) does not apply, the annual 

benefit for purposes of this section 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 percent 

interest rate and the applicable mortality 

table for that annuity starting date under 

section 417(e)(3)(A)(ii)(I) and § 1.417(e)–

1(d)(2). In this case, the straight life annuity 

payable under the plan commencing at the 

same age is $80,000. The annual amount of 

the straight life annuity that is actuarially 

equivalent to the $77,600 benefit payable as 

a 10-year certain and life annuity is 

determined by applying the required 

standardized factors (a 5 percent interest 

assumption and the applicable mortality 

under section 417(e)(3)(A)(ii)(I) and 

§ 1.417(e)–1(d)(2), and 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. 

Because M’s annual benefit is less than the 

age-adjusted section 415(b)(1)(A) dollar limit 

and is less than the section 415(b)(1)(B) 

compensation limit, M’s benefit satisfies 

section 415. 

Example 6. (i) Participant O is a full-time 

civilian employee of the Harbor Police 

Division of the State of X Port Authority. The 

Harbor Police Division provides police 

protection services. O performs clerical 

services for the Harbor Police Division. 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 10 years of 

service working for the Harbor Police 

Division and 5 years of service as a member 

of the Armed Forces of the United States. 

(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 7. (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 the 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. 

(e) Adjustment to section 415(b)(1)(A) 

dollar limit for commencement after age 

65—(1) General rule—(i) Calculation 

using statutory factors. 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 

generally is determined as the actuarial 

equivalent of the annual amount of a 

straight life annuity commencing at the 

annuity starting date that has the same 

actuarial present value as a straight life 

annuity commencing at age 65, where 

annual payments under the straight life 

annuity commencing at age 65 are equal 

to the dollar limitation of section 


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415(b)(1)(A) (as adjusted pursuant to 

section 415(d) and § 1.415(d)–1 for the 

limitation year), and where the 

actuarially equivalent straight life 

annuity is computed using a 5 percent 

interest rate and the applicable 

mortality table under § 1.417(e)–1(d)(2) 

that is effective for that annuity starting 

date (and expressing the participant’s 

age based on completed calendar 

months as of the annuity starting date). 

However, if the plan has an immediately 

commencing straight life annuity 

payable as of the annuity starting date 

and an immediately commencing 

straight life annuity payable at age 65, 

then the age-adjusted section 

415(b)(1)(A) dollar limit is equal to the 

lesser of—

(A) The limit as otherwise determined 

under this paragraph (e)(1)(i); and 

(B) The amount determined under 

paragraph (e)(1)(ii) of this section. 

(ii) Calculation using plan factors. 

The amount determined under this 

paragraph (e)(1)(ii) is equal to 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 adjustment ratio 

described in paragrap. (e)(2)(i) of this 

section. 

(2) Adjustment ratio—(i) General rule. 

For purposes of applying the rule of 

paragraph (e)(1)(ii) of this section, the 

adjustment ratio is equal to the ratio of 

the annual amount of the adjusted 

immediately commencing straight life 

annuity under the plan described in 

paragraph (e)(2)(ii) of this section to the 

adjusted age 65 straight life annuity 

described in paragraph (e)(2)(iii) of this 

section. 

(ii) Adjusted immediately 

commencing straight life annuity. The 

adjusted immediately commencing 

straight life annuity that is used for 

purposes of paragraph (e)(2)(i) of this 

section is the annual amount of the 

immediately commencing straight life 

annuity payable to the participant, 

computed disregarding the participant’s 

accruals after age 65 but including 

actuarial adjustments even if those 

actuarial adjustments are applied to 

offset accruals. For this purpose, the 

annual amount of the immediately 

commencing straight life annuity is 

determined without applying the rules 

of section 415. 

(iii) Adjusted age 65 straight life 

annuity. The adjusted age 65 straight 

life annuity that is used for purposes of 

paragraph (e)(2)(i) of this section is 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 (with no actuarial 

increases for commencement after age 

65) as the participant receiving the 

distribution (determined disregarding 

the participant’s accruals after age 65 

and without applying the rules of 

section 415). 

(3) Mortality adjustments—(i) In 

general. For purposes of determining 

the actuarially equivalent amount 

described in paragraph (e)(1)(i) of this 

section, to the extent that a forfeiture 

does not occur upon the participant’s 

death before the annuity starting date, 

no adjustment is made to reflect the 

probability of the participant’s death 

between the participant’s attainment of 

age 65 and the annuity starting date. To 

the extent that a forfeiture occurs upon 

the participant’s death before the 

annuity starting date, an adjustment 

must be made to reflect the probability 

of the participant’s death between the 

participant’s attainment of age 65 and 

the annuity starting date. 

(ii) No forfeiture deemed to occur 

where QPSA payable. See paragraph 

(d)(2)(ii) of this section for a rule 

deeming no forfeiture to occur if the 

plan does not charge participants for 

providing a QPSA on the participant’s 

death. 

(4) Examples. The following examples 

illustrate the application of this 

paragraph (e): 

Example 1. (i) Plan A provides that 

monthly benefits payable upon 

commencement after normal retirement age 

(which is age 65) are increased by 0.5 percent 

for each month of delay in commencement 

after attainment of normal retirement age. 

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 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. The normal 

form of benefit under Plan A is a straight life 

annuity commencing at age 65. Plan A does 

not provide additional benefit accruals once 

a participant is credited with 30 years of 

service. Participant M was credited with 30 

years of service under Plan A when M 

attained age 65. M retires at age 70 on 

January 1, 2008, with a benefit (prior to the 

application of section 415) that is payable 

monthly in the form of a straight life annuity 

of $195,000, which reflects the actuarial 

increase of 30 percent applied to the accrued 

benefit of $150,000. It is assumed that all 

payments under Plan A, other than a 

payment of a single sum, are made monthly, 

on the first day of each calendar month. It is 

also assumed that the dollar limit in 2008 is 

$185,000. 

(ii) The age-adjusted section 415(b)(1)(A) 

dollar limit at age 70 is the lesser of the 

section 415(b)(1)(A) dollar limit multiplied 

by the ratio of the adjusted immediately 

commencing straight life annuity payable at 

age 70 (computed disregarding the rules of 

section 415 and accruals after age 65, but 

including actuarial adjustments) to the 

adjusted age 65 straight life annuity 

(computed disregarding the rules of section 

415 and any accruals after age 65), or the 

straight life annuity payable at age 70 that is 

actuarially equivalent, using 5 percent 

interest and the applicable mortality table for 

that annuity starting date under section 

417(e)(3)(A)(ii)(I) and § 1.417(e)–1(d)(2), to 

the straight life annuity payable at age 65, 

where annual payments under the straight 

life annuity payable at age 65 are equal to the 

dollar limitation of section 415(b)(1)(A). In 

this case, the age-adjusted section 

415(b)(1)(A) dollar limit at age 70 is $240,500 

(the lesser of $240,500 ($185,000* $195,000/ 

$150,000) and $271,444 (the straight life 

annuity at age 70 that is actuarially 

equivalent to an annuity of $185,000 

commencing at age 65, determined using 5 

percent interest and the applicable mortality 

table, without a mortality decrement for the 

period between 65 and 70)). 

Example 2. (i) The facts are the same as in 

Example 1, except that Plan A does not limit 

benefit accruals to 30 years of credited 

service, and thus M accrues benefits between 

ages 65 and 70. 

(ii) Since M’s accruals after attaining age 65 

are disregarded for purposes of determining 

the age-adjusted section 415(b)(1)(A) dollar 

limit applicable to M at age 70, the result is 

the same as in Example 1. 

Example 3. (i) The facts are the same as in 

Example 1, except that Plan A does not limit 

benefit accruals to 30 years of credited 

service. However, benefit accruals after an 

employee has reached normal retirement age 

(age 65), are offset by the actuarial increase 

that the plan provides for commencement of 

benefits after normal retirement age. 

(ii) The result is the same as in Example 

1, even if the actuarial increases for post-age 

65 benefit commencement provided under 

Plan A do or do not fully offset M’s benefit 

accruals after attaining age 65. This is 

because benefit accruals after age 65 are 

disregarded for purposes of determining the 

age-adjusted section 415(b)(1)(A) dollar limit 

applicable to M after age 65. 

(f) Total annual payments not in 

excess of $10,000—(1) In general. 

Pursuant to section 415(b)(4), the annual 

benefit (without regard to the age at 

which benefits commence) payable with 

respect to a participant under any 

defined benefit plan is not considered to 

exceed the limitations on benefits 

described in section 415(b)(1) and in 

paragraph (a)(1) of this section if—

(i) The benefits (other than benefits 

not taken into account in the 

computation of the annual benefit under 

the rules of paragraph (b) or (c) of this 

section) payable with respect to the 

participant under the plan and all other 

defined benefit plans of the employer do 

not in the aggregate exceed $10,000 (as 

adjusted under paragraph (g) of this 


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section) for the limitation year, or for 

any prior limitation year; and 

(ii) The employer (or a predecessor 

employer) has not at any time 

maintained a defined contribution plan 

in which the participant participated. 

(2) Computation of benefits for 

purposes of applying the $10,000 

amount. For purposes of paragraph 

(f)(1)(i) of this section, the benefits 

payable with respect to the participant 

under a plan for a limitation year reflect 

all amounts payable under the plan for 

the limitation year (other than benefits 

not taken into account in the 

computation of the annual benefit under 

the rules of paragraph (b) or (c) of this 

section), and are not adjusted for form 

of benefit or commencement date. 

(3) Special rule with respect to 

participants in multiemployer plans. 

The special $10,000 exception set forth 

in paragraph (f)(1) of this section applies 

to a participant in a multiemployer plan 

described in section 414(f) without 

regard to whether that participant ever 

participated in one or more other plans 

maintained by an employer who also 

maintains the multiemployer plan, 

provided that none of such other plans 

were maintained as a result of collective 

bargaining involving the same employee 

representative as the multiemployer 

plan. 

(4) Special rule with respect to 

employee contributions. 

Notwithstanding §§ 1.415(c)–

1(a)(2)(ii)(B) and 1.415(c)–1(b)(3), 

mandatory employee contributions 

under a defined benefit plan described 

in paragraph (b)(2)(iii) of this section are 

not considered a separate defined 

contribution plan maintained by the 

employer for purposes of paragraph 

(f)(1)(ii) of this section. Thus, the special 

dollar limitation provided for in this 

paragraph (f) applies to a contributory 

defined benefit plan. 

Similarly, for purposes of this 

paragraph (f), an individual medical 

account under section 401(h) or an 

account for postretirement medical 

benefits established pursuant to section 

419A(d)(1) is not considered a separate 

defined contribution plan maintained 

by the employer. 

(5) Examples. The application of this 

paragraph (f) may be illustrated by the 

following examples. For purposes of 

these examples, it is assumed that each 

participant has 10 years of participation 

in the plan and service with the 

employer. The examples are as follows: 

Example 1. (i) B is a participant in a 

defined benefit plan maintained by X 

Corporation, which provides for a benefit 

payable in the form of a straight life annuity 

beginning at age 65. B’s average 

compensation for the period of B’s high-3 

years of service is $6,000. The plan does not 

provide for mandatory employee 

contributions, and at no time has B been a 

participant in a defined contribution plan 

maintained by X. With respect to the current 

limitation year, B’s benefit under the plan 

(before the application of section 415) is 

$9,500. 

(ii) Because annual payments under B’s 

benefit do not exceed $10,000, and because 

B has at no time participated in a defined 

contribution plan maintained by X, the 

benefits payable under the plan are not 

considered to exceed the limitation on 

benefits otherwise applicable to B ($6,000). 

(iii) This result would remain the same 

even if, under the terms of the plan, B’s 

benefit of $9,500 were payable at age 60, or 

if the plan provided for mandatory employee 

contributions. 

Example 2. (i) The facts are the same as in 

Example 1, except that the plan provides for 

a benefit payable in the form of a life annuity 

with a 10-year certain feature with annual 

payments of $9,500. Assume that, after the 

adjustment described in paragraph (c) of this 

section, B’s actuarially equivalent straight life 

annuity (which is the annual benefit used for 

demonstrating compliance with section 415) 

for the current limitation year is $10,400. 

(ii) For purposes of applying the special 

rule provided in this paragraph for total 

benefits not in excess of $10,000, there is no 

adjustment required if the retirement benefit 

payable under the plan is not in the form of 

a straight life annuity. Therefore, because B’s 

retirement benefit does not exceed $10,000, 

B may receive the full $9,500 benefit without 

the otherwise applicable benefit limitations 

of this section being exceeded. 

Example 3. (i) The facts are the same as in 

Example 1, except that the plan provides for 

a benefit payable in the form of a single sum 

and the amount of the single sum that is the 

actuarial equivalent of the straight life 

annuity payable to B ($9,500 annually), 

determined in accordance with the rules of 

section 417(e)(3) and § 1.417(e)–1(d), is 

$95,000. 

(ii) Because the amount payable to B for 

the limitation year would exceed $10,000, 

the rule of this paragraph (f) does not provide 

an exception from the generally applicable 

limits of section 415(b)(1) for the single-sum 

distribution. Thus, the otherwise applicable 

limits apply to the single-sum distribution, 

and a single-sum distribution of $95,000 

would not satisfy the requirements of section 

415(b). Limiting the single-sum distribution 

to $60,000 (the present value of the annuity 

that complies with the compensation-based 

limitation of section 415(b)(1)(B)) in order to 

satisfy section 415 would be an 

impermissible forfeiture under the 

requirements of section 411(a). Accordingly, 

the plan should not provide for a single-sum 

distribution in these circumstances. 

(g) Special rule for participation or 

service of less than 10 years—(1) 

Proration of dollar limit based on years 

of participation—(i) In general. 

Pursuant to section 415(b)(5)(A), where 

a participant has less than 10 years of 

participation in the plan, the dollar 

limit described in paragraph (a)(1)(i) of 

this section (as adjusted pursuant to 

section 415(d), § 1.415(d)–1, and 

paragraphs (d) and (e) of this section) is 

reduced by multiplying the otherwise 

applicable limitation by a fraction—

(A) The numerator of which is the 

number of years of participation in the 

plan (or 1, if greater); and 

(B) The denominator of which is 10. 

(ii) Years of participation. The 

following rules apply for purposes of 

determining a participant’s years of 

participation for purposes of this 

paragraph (g)(1)—

(A) A participant is credited with a 

year of participation (computed to 

fractional parts of a year) for each 

accrual computation period for which 

the participant is credited with at least 

the number of hours of service (or 

period of service if the elapsed time 

method is used for benefit accrual 

purposes) required under the terms of 

the plan in order to accrue a benefit for 

the accrual computation period, and the 

participant is included as a plan 

participant under the eligibility 

provisions of the plan for at least one 

day of the accrual computation period. 

If these two conditions are met, the 

portion of a year of participation 

credited to the participant is equal to 

the amount of benefit accrual service 

credited to the participant for such 

accrual computation period. For 

example, if under the terms of a plan, 

a participant receives 1/10 of a year of 

benefit accrual service for an accrual 

computation period for each 200 hours 

of service, and the participant is 

credited with 1,000 hours of service for 

the period, the participant is credited 

with 1/2 a year of participation for 

purposes of section 415(b)(5)(A) and 

this paragraph (g)(1). 

(B) A participant who is permanently 

and totally disabled within the meaning 

of section 415(c)(3)(C)(i) for an accrual 

computation period is credited with a 

year of participation with respect to that 

period for purposes of section 

415(b)(5)(A) and this paragraph (g)(1). 

(C) For a participant to receive a year 

of participation (or part thereof) for an 

accrual computation period for 

purposes of section 415(b)(5)(A) and 

this paragraph (g)(1), the plan must be 

established no later than the last day of 

such accrual computation period. 

(D) No more than one year of 

participation may be credited for any 

12-month period for purposes of section 

415(b)(5)(A) and this paragraph (g)(1). 

(2) Proration of compensation limit 

and special rule for total annual 

payments less than $10,000 based on 

years of service—(i) In general. Pursuant 

to section 415(b)(5)(B), where a 

participant has less than 10 years of 


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service with the employer, the 

compensation limit described in 

paragraph (a)(1)(ii) of this section and 

the $10,000 amount under the special 

rule for small annual payments under 

paragraph (f) of this section are reduced 

by multiplying the otherwise applicable 

limitation by a fraction—

(A) The numerator of which is the 

number of years of service with the 

employer (or 1, if greater); and 

(B) The denominator of which is 10. 

(ii) Years of service—(A) In general. 

For purposes of applying this paragraph 

(g)(2), years of service must be 

determined on a reasonable and 

consistent basis. A plan is considered to 

be determining years of service on a 

reasonable and consistent basis for this 

purpose if, subject to the limits of 

paragraph (g)(2)(ii)(B) of this section, a 

participant is credited with a year of 

service (computed to fractional parts of 

a year) for each accrual computation 

period for which the participant is 

credited with at least the number of 

hours of service (or period of service if 

the elapsed time method is used for 

benefit accrual purposes) required 

under the terms of the plan in order to 

accrue a benefit for the accrual 

computation period. 

(B) Rules of application. No more 

than one year of service may be credited 

for any 12-month period for purposes of 

section 415(b)(5)(B). In addition, only 

the participant’s service with the 

employer or a predecessor employer (as 

defined in § 1.415(f)–1(c)) may be taken 

into account in determining the 

participant’s years of service for this 

purpose. Thus, if an employer does not 

maintain a former employer’s plan, a 

participant’s service with the former 

employer may be taken into account in 

determining the participant’s years of 

service for purposes of this paragraph 

(g)(2) only if the former employer is a 

predecessor employer with respect to 

the employer pursuant to § 1.415(f)–

1(c)(2) (which defines predecessor 

employer to include, under certain 

circumstances, a former entity that 

antedates the employer). 

(C) Period of disability. 

Notwithstanding the rules of paragraph 

(g)(2)(ii)(B) of this section, a plan is 

permitted to provide that a participant 

who is permanently and totally disabled 

within the meaning of section 

415(c)(3)(C)(i) for an accrual 

computation period is credited with 

service with respect to that period for 

purposes of section 415(b)(5)(B). 

(3) Exception for survivor and 

disability benefits under governmental 

plans. The requirements of this 

paragraph (g) (regarding participation or 

service of less than 10 years) do not 

apply to 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. 

(4) Examples. The provisions of this 

paragraph (g) may be illustrated by the 

following examples: 

Example 1. (i) C begins employment with 

Employer A on January 1, 2005, at the age of 

58. Employer A maintains only a 

noncontributory defined benefit plan which 

provides for a straight life annuity beginning 

at age 65 and uses the calendar year for the 

limitation and plan year. Employer A has 

never maintained a defined contribution 

plan. C becomes a participant in Employer 

A’s plan on January 1, 2006, and works 

through December 31, 2011, when C is age 

65. C begins to receive benefits under the 

plan in 2012. C’s average compensation for 

the period of C’s high-3 years of service is 

$40,000. Furthermore, under the terms of 

Employer A’s plan, for purposes of 

computing C’s nonforfeitable percentage in 

C’s accrued benefit derived from employer 

contributions, C has only 7 years of service 

with Employer A (2005–2011). 

(ii) Because C has only 7 years of service 

with Employer A at the time he begins to 

receive benefits under the plan, the 

maximum permissible annual benefit payable 

with respect to C is $28,000 ($40,000 

multiplied by 7/10). 

Example 2. (i) The facts are the same as in 

Example 1, except that C’s average 

compensation for the period of his high-3 

years of service is $8,000. 

(ii) Because C has only 7 years of service 

with Employer A at the time he begins to 

receive benefits, the maximum benefit 

payable with respect to C would be reduced 

to $5,600 ($8,000 multiplied by 7/10). 

However, the special rule for total benefits 

not in excess of $10,000, provided in 

paragraph (f) of this section, is applicable in 

this case. Accordingly, C may receive an 

annual benefit of $7,000 ($10,000 multiplied 

by 7/10) without the benefit limitations of 

this section being exceeded. 

Example 3. (i) Employer B maintains a 

defined benefit plan. Benefits under the plan 

are computed based on months of service 

rather than years of service. Accordingly, for 

purposes of applying the reduction based on 

years of service less than 10 to the limitations 

under section 415(b), the plan provides that 

the otherwise applicable limitation is 

multiplied by a fraction, the numerator of 

which is the number of completed months of 

service with the employer (but not less than 

12 months), and the denominator of which is 

120. The plan further provides that months 

of service are computed in the same manner 

for this purpose as for purposes of computing 

plan benefits. 

(ii) The manner in which the plan applies 

the reduction based on years of service less 

than 10 to the limitations under section 

415(b) is consistent with the requirements of 

this paragraph (g). 

Example 4. (i) G begins employment with 

Employer D on January 1, 2003, at the age of 

58. Employer D maintains a noncontributory 

defined benefit plan which provides for a 

straight life annuity beginning at age 65 and 

uses the calendar year for the limitation and 

plan year. G becomes a participant in 

Employer D’s plan on January 1, 2004, and 

works through December 31, 2009, when G 

is age 65. G performs sufficient service to be 

credited with a year of service under the plan 

for each year during 2003 through 2009 

(although G is not credited with a year of 

service for 2003 because G is not yet a plan 

participant). G begins to receive benefits 

under the plan during 2010. The plan’s 

accrual computation period is the plan year. 

The plan provides that, for purposes of 

applying the rules of section 415(b)(5)(B), a 

participant is credited with a year of service 

(computed to fractional parts of a year) for 

each plan year for which the participant is 

credited with sufficient service to accrue a 

benefit for the plan year. G’s average 

compensation for the period of G’s high-3 

years of service is $200,000. It is assumed for 

purposes of this example that the dollar 

limitation of section 415(b)(1)(A) for 

limitation years ending in 2010 is $195,000. 

(ii) G has 7 years of service and 6 years of 

participation in the plan at the time G begins 

to receive benefits under the plan. 

Accordingly, the limitation under section 

415(b)(1)(B) based on G’s average 

compensation for the period of G’s high-3 

years of service that applies pursuant to the 

adjustment required under section 

415(b)(5)(B) is $140,000 ($200,000 multiplied 

by 7/10), and the dollar limitation under 

section 415(b)(1)(A) that applies to G 

pursuant to the adjustment required under 

section 415(b)(5)(A) is $117,000 ($195,000 

multiplied by 6/10). 

(h) Retirement Protection Act of 1994 

transition rules. For special rules 

affecting the actuarial adjustment for 

form of benefit under paragraph (c) of 

this section and the adjustment to the 

dollar limit for early or late 

commencement under paragraphs (d) 

and (e) of this section for certain plans 

adopted and in effect before December 

8, 1994, see section 767(d)(3)(A) of the 

Uruguay Round Agreements Act of 

1994, Public Law 103–465 (108 Stat. 

4809) as amended by section 1449(a) of 

the Small Business Job Protection Act of 

1996, Public Law 104–188 (110 Stat. 

1755). The Commissioner may provide 

guidance regarding these special rules 

in revenue rulings, notices, and other 

guidance published in the Internal 

Revenue Bulletin. See § 601.601(d) of 

this chapter. 

■ Par. 10. Section 1.415(b)–2 is added 

and reserved. 

§ 1.415(b)–2 Multiple annuity starting dates. 

[Reserved]. 

■ Par. 11. Section 1.415(c)–1 is added to 

read as follows: 


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16912 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

§ 1.415(c)–1 Limitations for defined 

contribution plans. 

(a) General rules—(1) Maximum 

limitations. Under section 415(c) and 

this section, to satisfy the provisions of 

section 415(a) for any limitation year, 

except as provided by paragraph (a)(3) 

of this section, the annual additions (as 

defined in paragraph (b) of this section) 

credited to the account of a participant 

in a defined contribution plan for the 

limitation year must not exceed the 

lesser of—

(i) $40,000 (adjusted pursuant to 

section 415(d) and § 1.415(d)–1(b)); or 

(ii) 100 percent of the participant’s 

compensation (as defined in § 1.415(c)–

2) for the limitation year. 

(2) Defined contribution plan—(i) 

Definition. For purposes of section 415 

and regulations promulgated under 

section 415, the term defined 

contribution plan means a defined 

contribution plan within the meaning of 

section 414(i) (including the portion of 

a plan treated as a defined contribution 

plan under the rules of section 414(k)) 

that is—

(A) A plan described in section 401(a) 

which includes a trust which is exempt 

from tax under section 501(a); 

(B) An annuity plan described in 

section 403(a); or 

(C) A simplified employee pension 

described in section 408(k). 

(ii) Additional plans treated as 

defined contribution plans—(A) In 

general. Contributions to the types of 

arrangements described in paragraphs 

(a)(2)(ii)(B) through (D) of this section 

are treated as contributions to defined 

contribution plans for purposes of 

section 415 and regulations 

promulgated under section 415. 

(B) Employee contributions to a 

defined benefit plan. Mandatory 

employee contributions (as defined in 

section 411(c)(2)(C) and § 1.411(c)–

1(c)(4), regardless of whether the plan is 

subject to the requirements of section 

411) to a defined benefit plan are treated 

as contributions to a defined 

contribution plan. For this purpose, 

contributions that are picked up by the 

employer as described in section 

414(h)(2) are not considered employee 

contributions. 

(C) Individual medical benefit 

accounts under section 401(h). Pursuant 

to section 415(l)(1), contributions 

allocated to any individual medical 

benefit account which is part of a 

pension or annuity plan established 

pursuant to section 401(h) are treated as 

contributions to a defined contribution 

plan. 

(D) Post-retirement medical accounts 

for key employees. Pursuant to section 

419A(d)(2), amounts attributable to 

medical benefits allocated to an account 

established for a key employee (any 

employee who, at any time during the 

plan year or any preceding plan year, is 

or was a key employee as defined in 

section 416(i)) pursuant to section 

419A(d)(1) are treated as contributions 

to a defined contribution plan. 

(iii) Section 403(b) annuity contracts. 

Annual additions under an annuity 

contract described in section 403(b) are 

treated as annual additions under a 

defined contribution plan for purposes 

of this section. 

(3) Alternative contribution 

limitations—(i) Church plans. For 

alternative contribution limitations 

relating to church plans, see paragraph 

(d) of this section. 

(ii) Special rules for medical benefits. 

For additional rules relating to certain 

medical benefits, see paragraph (e) of 

this section. 

(iii) Employee stock ownership plans. 

For additional rules relating to 

employee stock ownership plans, see 

paragraph (f) of this section. 

(b) Annual additions—(1) In general—

(i) General definition. The term annual 

addition means, for purposes of this 

section, the sum, credited to a 

participant’s account for any limitation 

year, of—

(A) Employer contributions; 

(B) Employee contributions; and 

(C) Forfeitures. 

(ii) Certain excess amounts treated as 

annual additions. Contributions do not 

fail to be annual additions merely 

because they are excess contributions 

(as described in section 401(k)(8)(B)) or 

excess aggregate contributions (as 

described in section 401(m)(6)(B)), or 

merely because excess contributions or 

excess aggregate contributions are 

corrected through distribution. 

(iii) Direct transfers. The direct 

transfer of a benefit or employee 

contributions from a qualified plan to a 

defined contribution plan does not give 

rise to an annual addition. 

(iv) Reinvested employee stock 

ownership plan dividends. The 

reinvestment of dividends on employer 

securities under an employee stock 

ownership plan pursuant to section 

404(k)(2)(A)(iii)(II) does not give rise to 

an annual addition. 

(2) Employer contributions—(i) 

Amounts treated as an annual addition. 

For purposes of paragraph (b)(1)(i)(A) of 

this section, the term annual addition 

includes employer contributions 

credited to the participant’s account for 

the limitation year and other allocations 

described in paragraph (b)(4) of this 

section that are made during the 

limitation year. See paragraph (b)(6) of 

this section for timing rules applicable 

to annual additions with respect to 

employer contributions. 

(ii) Amounts not treated as annual 

additions—(A) Certain restorations of 

accrued benefits. The restoration of an 

employee’s accrued benefit by the 

employer in accordance with section 

411(a)(3)(D) or section 411(a)(7)(C) or 

resulting from the repayment of 

cashouts (as described in section 

415(k)(3)) under a governmental plan (as 

defined in section 414(d)) is not 

considered an annual addition for the 

limitation year in which the restoration 

occurs. This treatment of a restoration of 

an employee’s accrued benefit as not 

giving rise to an annual addition applies 

regardless of whether the plan restricts 

the timing of repayments to the 

maximum extent allowed by section 

411(a). 

(B) Catch-up contributions. A catchup contribution made in accordance 

with section 414(v) and § 1.414(v)–1 

does not give rise to an annual addition. 

(C) Restorative payments. 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 the Employee Retirement Income 

Security Act of 1974 (88 Stat. 829), 

Public Law 93–406 (ERISA) or under 

other applicable federal or state law, 

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 (other than a 

breach of fiduciary duty arising from 

failure to remit contributions to the 

plan). This includes payments to a plan 

made pursuant to a Department of Labor 

order, the Department of Labor’s 

Voluntary Fiduciary Correction 

Program, or a court-approved 

settlement, to restore losses to a 

qualified defined contribution plan on 

account of the breach of fiduciary duty 

(other than a breach of fiduciary duty 

arising from failure to remit 

contributions to the plan). 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 not restorative 

payments and generally constitute 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16913 

contributions that give rise to annual 

additions under paragraph (b)(4) of this 

section. 

(D) Excess deferrals. Excess deferrals 

that are distributed in accordance with 

§ 1.402(g)–1(e)(2) or (3) do not give rise 

to annual additions. 

(3) Employee contributions. For 

purposes of paragraph (b)(1)(i)(B) of this 

section, the term annual addition 

includes mandatory employee 

contributions (as defined in section 

411(c)(2)(C) and regulations 

promulgated under section 411) as well 

as voluntary employee contributions. 

The term annual addition does not 

include—

(i) Rollover contributions (as 

described in sections 401(a)(31), 

402(c)(1), 403(a)(4), 403(b)(8), 408(d)(3), 

and 457(e)(16)); 

(ii) Repayments of loans made to a 

participant from the plan; 

(iii) Repayments of amounts described 

in section 411(a)(7)(B) (in accordance 

with section 411(a)(7)(C)) and section 

411(a)(3)(D) or repayment of 

contributions to a governmental plan (as 

defined in section 414(d)) as described 

in section 415(k)(3); 

(iv) Repayments that would have been 

described in paragraph (b)(3)(iii) of this 

section except that the plan does not 

restrict the timing of repayments to the 

maximum extent permitted by section 

411(a); or 

(v) Employee contributions to a 

qualified cost of living arrangement 

within the meaning of section 

415(k)(2)(B). 

(4) Transactions with plan. The 

Commissioner may in an appropriate 

case, considering all of the facts and 

circumstances, treat transactions 

between the plan and the employer, 

transactions between the plan and the 

employee, or certain allocations to 

participants’ accounts as giving rise to 

annual additions. Further, where an 

employee or employer transfers assets to 

a plan in exchange for consideration 

that is less than the fair market value of 

the assets transferred to the plan, there 

is an annual addition in the amount of 

the difference between the value of the 

assets transferred and the consideration. 

A transaction described in this 

paragraph (b)(4) may constitute a 

prohibited transaction with the meaning 

of section 4975(c)(1). 

(5) Contributions other than cash. For 

purposes of this paragraph (b), a 

contribution by the employer or 

employee of property rather than cash is 

considered to be a contribution in an 

amount equal to the fair market value of 

the property on the date the 

contribution is made. For this purpose, 

the fair market value is the price at 

which the property would change hands 

between a willing buyer and a willing 

seller, neither being under any 

compulsion to buy or to sell and both 

having reasonable knowledge of 

relevant facts. In addition, a 

contribution described in this paragraph 

(b)(5) may constitute a prohibited 

transaction within the meaning of 

section 4975(c)(1). 

(6) Timing rules—(i) In general—(A) 

Date of allocation. For purposes of this 

paragraph (b), an annual addition is 

credited to the account of a participant 

for a particular limitation year if it is 

allocated to the participant’s account 

under the terms of the plan as of any 

date within that limitation year. 

Similarly, an annual addition that is 

made pursuant to a corrective 

amendment that complies with the 

requirements of § 1.401(a)(4)–11(g) is 

credited to the account of a participant 

for a particular limitation year if it is 

allocated to the participant’s account 

under the terms of the corrective 

amendment as of any date within that 

limitation year. However, if the 

allocation of an annual addition is 

dependent upon the satisfaction of a 

condition (such as continued 

employment or the occurrence of an 

event) that has not been satisfied by the 

date as of which the annual addition is 

allocated under the terms of the plan, 

then the annual addition is considered 

allocated for purposes of this paragraph 

(b) as of the date the condition is 

satisfied. 

(B) Date of employer contributions. 

For purposes of this paragraph (b), 

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. If, however, 

contributions are made by an employer 

exempt from Federal income tax 

(including a governmental employer), 

the contributions must be made to the 

plan no later than the 15th day of the 

tenth calendar month following the end 

of the calendar year or fiscal year (as 

applicable, depending on the basis on 

which the employer keeps its books) 

with or within which the particular 

limitation year ends. If contributions are 

made to a plan after the end of the 

period during which contributions can 

be made and treated as credited to a 

participant’s account for a particular 

limitation year, allocations attributable 

to those contributions are treated as 

credited to the participant’s account for 

the limitation year during which those 

contributions are made. 

(C) Date of employee contributions. 

For purposes of this paragraph (b), 

employee contributions, whether 

voluntary or mandatory, 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 close 

of that limitation year. 

(D) Date for forfeitures. A forfeiture is 

treated as an annual addition for the 

limitation year that contains the date as 

of which it is allocated to a participant’s 

account as a forfeiture. 

(E) Treatment of elective contributions 

as plan assets. 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. 

(ii) Special timing rules—(A) 

Corrective contributions. For purposes 

of this section, if, in a particular 

limitation year, an employer allocates 

an amount to a participant’s account 

because of an erroneous forfeiture in a 

prior limitation year, or because of an 

erroneous failure to allocate amounts in 

a prior limitation year, the corrective 

allocation will not be considered an 

annual addition with respect to the 

participant for that particular limitation 

year, but will be considered an annual 

addition for the prior limitation year to 

which it relates. An example of a 

situation in which an employer 

contribution might occur under the 

circumstances described in the 

preceding sentence is a retroactive 

crediting of service for an employee 

under 29 CFR 2530.200b–2(a)(3) in 

accordance with an award of back pay. 

For purposes of this paragraph (b)(6)(ii), 

if the amount so contributed in the 

particular limitation year takes into 

account actual investment gains 

attributable to the period subsequent to 

the year to which the contribution 

relates, the portion of the total 

contribution that consists of such gains 

is not considered as an annual addition 

for any limitation year. 

(B) Contributions for accumulated 

funding deficiencies and previously 

waived contributions—(1) Accumulated 

funding deficiency. In the case of a 

defined contribution plan to which the 

rules of section 412 apply, a 

contribution made to reduce an 

accumulated funding deficiency will be 

treated as if it were timely made for 

purposes of determining the limitation 

year in which the annual additions 

arising from the contribution are made, 


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16914 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

but only if the contribution is allocated 

to those participants who would have 

received an annual addition if the 

contribution had been timely made. 

(2) Previously waived contributions. 

In the case of a defined contribution 

plan to which the rules of section 412 

apply and for which there has been a 

waiver of the minimum funding 

standard in a prior limitation year in 

accordance with section 412(d), that 

portion of an employer contribution in 

a subsequent limitation year which, if 

not for the waiver, would have 

otherwise been required in the prior 

limitation year under section 412(a) will 

be treated as if it were timely made 

(without regard to the funding waiver) 

for purposes of determining the 

limitation year in which the annual 

additions arising from the contribution 

are made, but only if the contribution is 

allocated to those participants who 

would have received an annual addition 

if the contribution had been timely 

made (without regard to the funding 

waiver). 

(3) Interest. For purposes of 

determining the amount of the annual 

addition under paragraphs 

(b)(6)(ii)(B)(1) and (2) of this section, a 

reasonable amount of interest paid by 

the employer is disregarded. However, 

any interest paid by the employer that 

is in excess of a reasonable amount, as 

determined by the Commissioner, is 

taken into account as an annual 

addition for the limitation year during 

which the contribution is made. 

(C) Simplified employee pensions. For 

purposes of this paragraph (b), amounts 

contributed to a simplified employee 

pension described in section 408(k) are 

treated as allocated to the individual’s 

account as of the last day of the 

limitation year ending with or within 

the taxable year for which the 

contribution is made. 

(D) Treatment of certain contributions 

made pursuant to veterans’ 

reemployment rights. If, in a particular 

limitation year, an employer contributes 

an amount to an employee’s account 

with respect to a prior limitation year 

and such contribution is required by 

reason of such employee’s rights under 

chapter 43 of title 38, United States 

Code, resulting from qualified military 

service, as specified in section 414(u)(1), 

then such contribution is not considered 

an annual addition with respect to the 

employee for that particular limitation 

year in which the contribution is made, 

but, in accordance with section 

414(u)(1)(B), is considered an annual 

addition for the limitation year to which 

the contribution relates. 

(c) Examples. The following examples 

illustrate the rules of paragraphs (a) and 

(b) of this section: 

Example 1. (i) P is a participant in a 

qualified profit-sharing plan maintained by 

his employer, ABC Corporation. The 

limitation year for the plan is the calendar 

year. P’s compensation (as defined in 

§ 1.415(c)–2) for the current limitation year is 

$30,000. 

(ii) Because the compensation limitation 

described in section 415(c)(1)(B) applicable 

to P for the current limitation year is lower 

than the dollar limitation described in 

section 415(c)(1)(A), the maximum annual 

addition which can be allocated to P’s 

account for the current limitation year is 

$30,000 (100 percent of $30,000). 

Example 2. (i) The facts are the same as in 

Example 1, except that P’s compensation for 

the current limitation year is $140,000. 

(ii) The maximum amount of annual 

additions that may be allocated to P’s 

account in the current limitation year is the 

lesser of $140,000 (100 percent of P’s 

compensation) or the dollar limitation of 

section 415(c)(1)(A) as in effect as of January 

1 of the calendar year in which the current 

limitation year ends. If, for example, the 

dollar limitation of section 415(c)(1)(A) in 

effect as of January 1 of the calendar year in 

which the current limitation year ends is 

$45,000, then the maximum annual addition 

that can be allocated to P’s account for the 

current limitation year is $45,000. 

Example 3. (i) Employer N maintains a 

qualified profit-sharing plan that uses the 

calendar year as its plan year and its 

limitation year. N’s taxable year is a fiscal 

year beginning June 1 and ending May 31. 

Under the terms of the profit-sharing plan 

maintained by N, employer contributions are 

made to the plan two months after the close 

of N’s taxable year and are allocated as of the 

last day of the plan year ending within the 

taxable year (and are not dependent on the 

satisfaction of a condition). Thus, employer 

contributions for the 2008 calendar year 

limitation year are made on July 31, 2009 (the 

date that is two months after the close of N’s 

taxable year ending May 31, 2009) and are 

allocated as of December 31, 2008. 

(ii) Because the employer contributions are 

actually made to the plan no later than 30 

days after the end of the period described in 

section 404(a)(6) with respect to N’s taxable 

year ending May 31, 2009, the contributions 

will be considered annual additions for the 

2008 calendar year limitation year. 

Example 4. (i) The facts are the same as in 

Example 3, except that the plan year for the 

profit-sharing plan maintained by N is the 

12-month period beginning on February 1 

and ending on January 31. The limitation 

year continues to be the calendar year. Under 

the terms of the plan, an employer 

contribution which is made to the plan on 

July 31, 2009, is allocated to participants’

accounts as of January 31, 2009. 

(ii) Because the last day of the plan year 

is in the 2009 calendar year limitation year, 

and because, under the terms of the plan, 

employer contributions are allocated to 

participants’ accounts as of the last day of the 

plan year, the contributions are considered 

annual additions for the 2009 calendar year 

limitation year. 

Example 5. (i) XYZ Corporation maintains 

a profit-sharing plan to which a participant 

may make voluntary employee contributions 

for any year not to exceed 10 percent of the 

participant’s compensation for the year. The 

plan permits a participant to make retroactive 

make-up contributions for any year for which 

the participant contributed less than 10 

percent of compensation. XYZ uses the 

calendar year as the plan year and the 

limitation year. Under the terms of the plan, 

voluntary employee contributions are 

credited to a participant’s account for a 

particular limitation year if such 

contributions are allocated to the 

participant’s account as of any date within 

that limitation year. Participant A’s 

compensation is as follows—

Limitation year Compensation 

2008 ...................................... $30,000 

2009 ...................................... $32,000 

2010 ...................................... $34,000 

2011 ...................................... $36,000 

(ii) Participant A makes no voluntary 

employee contributions during limitation 

years 2008, 2009, and 2010. On October 1, 

2011, participant A makes a voluntary 

employee contribution of $13,200 (10 percent 

of A’s aggregate compensation for limitation 

years 2008, 2009, 2010, and 2011 of 

$132,000). Under the terms of the plan, 

$3,000 of this 2011 contribution is allocated 

to A’s account as of limitation year 2008; 

$3,200 is allocated to A’s account of 

limitation year 2009; $3,400 is allocated to 

A’s account as of limitation year 2010, and 

$3,600 is allocated to A’s account as of 

limitation year 2011. 

(iii) Under the rule set forth in paragraph 

(b)(6)(i)(C) of this section, employee 

contributions will not be considered credited 

to a participant’s account for a particular 

limitation year for section 415 purposes 

unless the contributions are actually made to 

the plan no later than 30 days after the close 

of that limitation year. Thus, A’s voluntary 

employee contribution of $13,200 made on 

October 1, 2011, would be considered as 

credited to A’s account only for the 2011 

calendar year limitation year, 

notwithstanding the plan provisions. 

(d) Special rules relating to church 

plans—(1) Alternative contribution 

limitation—(i) In general. Pursuant to 

section 415(c)(7)(A), notwithstanding 

the general rule of paragraph (a)(1) of 

this section, additions for a section 

403(b) annuity contract for a year with 

respect to a participant who is an 

employee of a church or a convention or 

association of churches, including an 

organization described in section 

414(e)(3)(B)(ii), when expressed as an 

annual addition to such participant’s 

account, are treated as not exceeding the 

limitation of paragraph (a)(1) of this 

section if such annual additions for the 

year are not in excess of $10,000. 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16915 

(ii) $40,000 aggregate limitation. With 

respect to any participant, the total 

amount of annual additions that are in 

excess of the limitation of paragraph 

(a)(1) of this section but, pursuant to the 

rule of paragraph (d)(1)(i) of this section, 

are treated as not exceeding that 

limitation (taking into account the rule 

of paragraph (d)(3) of this section) 

cannot exceed $40,000. Thus, the 

aggregate of annual additions for all 

limitation years that would exceed the 

limitation of this section but for this 

paragraph (d)(1) is limited to $40,000. 

(2) Years of service taken into account 

for duly ordained, commissioned, or 

licensed ministers or lay employees. For 

purposes of this paragraph (d)—

(i) All years of service by an 

individual as an employee of a church, 

or a convention or association of 

churches, including an organization 

described in section 414(e)(3)(B)(ii), are 

considered as years of service for one 

employer; and 

(ii) All amounts contributed for 

annuity contracts by each such church 

(or convention or association of 

churches) during such years for the 

employee are considered to have been 

contributed by one employer. 

(3) Foreign missionaries. Pursuant to 

section 415(c)(7)(C), in the case of any 

individual described in paragraph (d)(1) 

of this section performing any services 

for the church outside the United States 

during the limitation year, additions for 

an annuity contract under section 403(b) 

for any year are not treated as exceeding 

the limitation of paragraph (a)(1) of this 

section if such annual additions for the 

year do not exceed $3,000. The 

preceding sentence shall not apply with 

respect to any taxable year to any 

individual whose adjusted gross income 

for such taxable year (determined 

separately and without regard to 

community property law) exceeds 

$17,000. 

(4) Church, convention or association 

of churches. For purposes of this 

paragraph (d), the terms ‘‘church’’ and 

‘‘convention or association of churches’’

have the same meaning as when used in 

section 414(e). 

(5) Examples. The following examples 

illustrate the rules of this paragraph (d): 

Example 1. (i) E is an employee of ABC 

Church earning $7,000 during each calendar 

year. E participates in a section 403(b) 

annuity contract maintained by ABC Church 

beginning in the year 2008. E’s taxable year 

is the calendar year, and the limitation year 

for the plan coincides with the calendar year. 

ABC Church contributes $10,000 to be 

allocated to E’s account under the plan for 

the year 2008. 

(ii) Under paragraph (d)(1) of this section, 

this allocation is treated as not violating the 

limits established in paragraph (a)(1) of this 

section because it does not exceed $10,000. 

Moreover, since an annual addition of 

$10,000 would otherwise exceed the 

limitation of paragraph (a)(1) of this section 

by $3,000, $3,000 is counted toward the 

aggregate limitation specified in paragraph 

(d)(1)(ii) of this section for year 2008. 

Accordingly, ABC Church may make such 

allocations for 13 years (for example, for 

years 2008 through 2020) without exceeding 

the aggregate limitation of $40,000 specified 

in paragraph (d) of this section. For the 

fourteenth year, ABC Church could allocate 

only $8,000 to E’s account (the sum of the 

$7,000 limitation computed under paragraph 

(a)(1)(ii) of this section and the remaining 

$1,000 of the $40,000 aggregate limitation 

under paragraph (d)(1)(ii) of this section on 

annual additions in excess of the limits 

under paragraph (a)(1) of this section). 

Example 2. (i) F is an employee of XYZ 

Church and F’s taxable year is the calendar 

year. F earns $2,000 during each calendar 

year for services he provides to XYZ Church, 

all of which are performed outside the 

United States during each calendar year. F 

participates in a section 403(b) annuity 

contract maintained by ABC Church 

beginning in the year 2008. The limitation 

year for the plan coincides with the calendar 

year. ABC Church contributes $10,000 to be 

allocated to F’s account under the plan for 

the year 2008. F’s adjusted gross income for 

each taxable year (determined separately and 

without regard to community property law) 

does not exceed $17,000. 

(ii) Under paragraph (d)(1) of this section, 

this allocation is treated as not violating the 

limits established in paragraph (a)(1) of this 

section because it does not exceed $10,000. 

Moreover, since an annual addition of 

$10,000 would otherwise exceed the 

limitation of paragraph (a)(1) of this section 

by $7,000 (the excess of $10,000 over the 

greater of the $2,000 compensation limitation 

under section 415(c)(1)(B) or the $3,000 

section 415(c)(7)(C) amount), XYZ Church 

may make such allocations for 5 years (for 

example, for years 2008 through 2012) 

without exceeding the aggregate limitation of 

$40,000 specified in paragraph (d) of this 

section. In year 2013, XYZ church may 

contribute $8,000 to be allocated to F’s 

account under the plan (the sum of the 

$3,000 limitation computed under paragraph 

(d)(3) of this section and the remaining 

$5,000 of the $40,000 aggregate limitation 

under paragraph (d)(1)(ii) of this section on 

annual additions in excess of the limits 

under paragraph (a)(1) of this section). For 

years after 2013, pursuant to paragraph (d)(3) 

of this section, XYZ Church could allocate 

$3,000 per year to F’s account. 

(e) Special rules for medical benefits. 

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

this section (100 percent of the 

participant’s compensation for the 

limitation year) does not apply to—

(1) An individual medical benefit 

account (as defined in section 415(l)); or 

(2) A post-retirement medical benefits 

account for a key employee (as defined 

in section 419A(d)(1)). 

(f) Special rules for employee stock 

ownership plans—(1) In general. Special 

rules apply to employee stock 

ownership plans, as provided in 

paragraphs (f)(2) through (f)(4) of this 

section. 

(2) Determination of annual additions 

for leveraged employee stock ownership 

plans—(i) In general. Except as 

provided in this paragraph (f) of this 

section, in the case of an employee stock 

ownership plan to which an exempt 

loan as described in § 54.4975–7(b) of 

this chapter has been made, the amount 

of employer contributions that is 

considered an annual addition for the 

limitation year is calculated with 

respect to employer contributions of 

both principal and interest used to 

repay that exempt loan for the limitation 

year. 

(ii) Employer stock that has decreased 

in value. A plan may provide that, in 

lieu of computing annual additions in 

accordance with paragraph (f)(2)(i) of 

this section, annual additions with 

respect to a loan repayment described in 

paragraph (f)(2)(i) of this section are 

determined as the fair market value of 

shares released from the suspense 

account on account of the repayment 

and allocated to participants for the 

limitation year if that amount is less 

than the amount determined in 

accordance with paragraph (f)(2)(i) of 

this section. 

(3) Exclusions from annual additions 

for certain employee stock ownership 

plans that allocate to a broad range of 

participants—(i) General rule. Pursuant 

to section 415(c)(6), in the case of an 

employee stock ownership plan (as 

described in section 4975(e)(7)) that 

meets the requirements of paragraph 

(f)(3)(ii) of this section for a limitation 

year, the limitations imposed by this 

section do not apply to—

(A) Forfeitures of employer securities 

(within the meaning of section 409(l)) 

under such an employee stock 

ownership plan if such securities were 

acquired with the proceeds of a loan (as 

described in section 404(a)(9)(A)); or 

(B) Employer contributions to such an 

employee stock ownership plan which 

are deductible under section 

404(a)(9)(B) and charged against the 

participant’s account. 

(ii) Employee stock ownership plans 

to which the special exclusion applies. 

An employee stock ownership plan 

meets the requirements of this 

paragraph (f)(3)(ii) for a limitation year 

if no more than one-third of the 

employer contributions for the 

limitation year that are deductible under 

section 404(a)(9) are allocated to highly 

compensated employees (within the 

meaning of section 414(q)). 


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(4) Gratuitous transfers under section 

664(g)(1). The amount of any qualified 

gratuitous transfer (as defined in section 

664(g)(1)) allocated to a participant for 

any limitation year is not taken into 

account in determining whether any 

other annual addition exceeds the 

limitations imposed by this section, but 

only if the amount of the qualified 

gratuitous transfer does not exceed the 

limitations imposed by section 415. 

■ Par. 12. Section 1.415(c)–2 is added to 

read as follows: 

§ 1.415(c)–2 Compensation. 

(a) General definition. Except as 

otherwise provided in this section, 

compensation from the employer within 

the meaning of section 415(c)(3), which 

is used for purposes of section 415 and 

regulations promulgated under section 

415, means all items of remuneration 

described in paragraph (b) of this 

section, but excludes the items of 

remuneration described in paragraph (c) 

of this section. Paragraph (d) of this 

section provides safe harbor definitions 

of compensation that are permitted to be 

provided in a plan in lieu of the 

generally applicable definition of 

compensation. Paragraph (e) of this 

section provides timing rules relating to 

compensation. Paragraph (f) of this 

section provides rules regarding the 

application of the rules of section 

401(a)(17) to the definition of 

compensation for purposes of section 

415. Paragraph (g) of this section 

provides special rules relating to the 

determination of compensation, 

including rules for determining 

compensation for a section 403(b) 

annuity contract, rules for determining 

the compensation of employees of 

controlled groups or affiliated service 

groups, rules for disabled employees, 

rules relating to foreign compensation, 

rules regarding deemed section 125 

compensation, rules for employees in 

qualified military service, and rules 

relating to back pay. 

(b) Items includible as compensation. 

For purposes of applying the limitations 

of section 415, except as otherwise 

provided in this section, the term 

compensation means remuneration for 

services of the following types—

(1) The employee’s wages, salaries, 

fees for professional services, and other 

amounts received (without regard to 

whether or not an amount is paid in 

cash) for personal services actually 

rendered in the course of employment 

with the employer maintaining the plan, 

to the extent that the amounts are 

includible in gross income (or to the 

extent amounts would have been 

received and includible in gross income 

but for an election under section 125(a), 

132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), 

or 457(b)). These amounts include, but 

are not limited to, commissions paid to 

salespersons, compensation for services 

on the basis of a percentage of profits, 

commissions on insurance premiums, 

tips, bonuses, fringe benefits, and 

reimbursements or other expense 

allowances under a nonaccountable 

plan as described in § 1.62–2(c). 

(2) In the case of an employee who is 

an employee within the meaning of 

section 401(c)(1) and regulations 

promulgated under section 401(c)(1), 

the employee’s earned income (as 

described in section 401(c)(2) and 

regulations promulgated under section 

401(c)(2)), plus amounts deferred at the 

election of the employee that would be 

includible in gross income but for the 

rules of section 402(e)(3), 402(h)(1)(B), 

402(k), or 457(b). 

(3) Amounts described in section 

104(a)(3), 105(a), or 105(h), but only to 

the extent that these amounts are 

includible in the gross income of the 

employee. 

(4) Amounts paid or reimbursed by 

the employer for moving expenses 

incurred by an employee, but only to 

the extent that at the time of the 

payment it is reasonable to believe that 

these amounts are not deductible by the 

employee under section 217. 

(5) The value of a nonstatutory option 

(which is an option other than a 

statutory option as defined in § 1.421–

1(b)) granted to an employee by the 

employer, but only to the extent that the 

value of the option is includible in the 

gross income of the employee for the 

taxable year in which granted. 

(6) The amount includible in the gross 

income of an employee upon making 

the election described in section 83(b). 

(7) Amounts that are includible in the 

gross income of an employee under the 

rules of section 409A or section 

457(f)(1)(A) or because the amounts are 

constructively received by the 

employee. 

(c) Items not includible as 

compensation. The term compensation 

does not include—

(1) Contributions (other than elective 

contributions described in section 

402(e)(3), section 408(k)(6), section 

408(p)(2)(A)(i), or section 457(b)) made 

by the employer to a plan of deferred 

compensation (including a simplified 

employee pension described in section 

408(k) or a simple retirement account 

described in section 408(p), and 

whether or not qualified) to the extent 

that the contributions are not includible 

in the gross income of the employee for 

the taxable year in which contributed. 

In addition, any distributions from a 

plan of deferred compensation (whether 

or not qualified) are not considered as 

compensation for section 415 purposes, 

regardless of whether such amounts are 

includible in the gross income of the 

employee when distributed. However, if 

the plan so provides, any amounts 

received by an employee pursuant to a 

nonqualified unfunded deferred 

compensation plan are permitted to be 

considered as compensation for section 

415 purposes in the year the amounts 

are actually received, but only to the 

extent such amounts are includible in 

the employee’s gross income. 

(2) Amounts realized from the 

exercise of a nonstatutory option (which 

is an option other than a statutory 

option as defined in § 1.421–1(b)), or 

when restricted stock or other property 

held by an employee either becomes 

freely transferable or is no longer subject 

to a substantial risk of forfeiture (see 

section 83 and regulations promulgated 

under section 83). 

(3) Amounts realized from the sale, 

exchange, or other disposition of stock 

acquired under a statutory stock option 

(as defined in § 1.421–1(b)). 

(4) Other amounts that receive special 

tax benefits, such as premiums for 

group-term life insurance (but only to 

the extent that the premiums are not 

includible in the gross income of the 

employee and are not salary reduction 

amounts that are described in section 

125). 

(5) Other items of remuneration that 

are similar to any of the items listed in 

paragraphs (c)(1) through (c)(4) of this 

section. 

(d) Safe harbor rules with respect to 

plan’s definition of compensation—(1) 

In general. Paragraphs (d)(2) through (4) 

of this section contain safe harbor 

definitions of compensation that are 

automatically considered to satisfy 

section 415(c)(3) if specified in the plan. 

The Commissioner may, in revenue 

rulings, notices, and other guidance of 

general applicability published in the 

Internal Revenue Bulletin (see 

§ 601.601(d)(2) of this chapter), provide 

additional definitions of compensation 

that are treated as satisfying section 

415(c)(3). 

(2) Simplified compensation. The safe 

harbor definition of compensation 

under this paragraph (d)(2) includes 

only those items specified in paragraph 

(b)(1) or (2) of this section and excludes 

all those items listed in paragraph (c) of 

this section. 

(3) Section 3401(a) wages. The safe 

harbor definition of compensation 

under this paragraph (d)(3) includes 

wages within the meaning of section 

3401(a) (for purposes of income tax 

withholding at the source), plus 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16917 

amounts that would be included in 

wages but for an election under section 

125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 

402(k), or 457(b). However, any rules 

that limit the remuneration included in 

wages based on the nature or location of 

the employment or the services 

performed (such as the exception for 

agricultural labor in section 3401(a)(2)) 

are disregarded for this purpose. 

(4) Information required to be 

reported under sections 6041, 6051 and 

6052. The safe harbor definition of 

compensation under this paragraph 

(d)(4) includes amounts that are 

compensation under the safe harbor 

definition of paragraph (d)(3) of this 

section, plus all other payments of 

compensation to an employee by his 

employer (in the course of the 

employer’s trade or business) for which 

the employer is required to furnish the 

employee a written statement under 

sections 6041(d), 6051(a)(3), and 6052. 

See §§ 1.6041–1(a), 1.6041–2(a)(1), 

1.6052–1, and 1.6052–2, and also see 

§ 31.6051–1(a)(1)(i)(C) of this chapter. 

This safe harbor definition of 

compensation may be modified to 

exclude amounts paid or reimbursed by 

the employer for moving expenses 

incurred by an employee, but only to 

the extent that, at the time of the 

payment, it is reasonable to believe that 

these amounts are deductible by the 

employee under section 217. 

(e) Timing rules—(1) In general—(i) 

Payment during the limitation year. 

Except as otherwise provided in this 

paragraph (e), in order to be taken into 

account for a limitation year, 

compensation within the meaning of 

section 415(c)(3) must be actually paid 

or made available to an employee (or, if 

earlier, includible in the gross income of 

the employee) within the limitation 

year. For this purpose, compensation is 

treated as paid on a date if it is actually 

paid on that date or it would have been 

paid on that date but for an election 

under section 125, 132(f)(4), 401(k), 

403(b), 408(k), 408(p)(2)(A)(i), or 457(b). 

(ii) Payment prior to severance from 

employment. Except as otherwise 

provided in this paragraph (e), in order 

to be taken into account for a limitation 

year, compensation within the meaning 

of section 415(c)(3) must be paid or 

treated as paid to the employee (in 

accordance with the rules of paragraph 

(e)(1)(i) of this section) prior to the 

employee’s severance from employment 

with the employer maintaining the plan. 

See § 1.415(a)–1(f)(5) for the definition 

of severance from employment. 

(2) Certain minor timing differences. 

Notwithstanding the provisions of 

paragraph (e)(1)(i) of this section, a plan 

may provide that compensation for a 

limitation year includes amounts earned 

during that limitation year but not paid 

during that limitation year solely 

because of the timing of pay periods and 

pay dates if—

(i) These amounts are paid during the 

first few weeks of the next limitation 

year; 

(ii) The amounts are included on a 

uniform and consistent basis with 

respect to all similarly situated 

employees; and 

(iii) No compensation is included in 

more than one limitation year. 

(3) Compensation paid after 

severance from employment—(i) In 

general. Any compensation described in 

paragraph (e)(3)(ii) of this section does 

not fail to be compensation (within the 

meaning of section 415(c)(3)) pursuant 

to the rule of paragraph (e)(1)(ii) of this 

section merely because it is paid after 

the employee’s severance from 

employment with the employer 

maintaining the plan, provided the 

compensation is paid by the later of 

21⁄2 months after severance from 

employment with the employer 

maintaining the plan or the end of the 

limitation year that includes the date of 

severance from employment with the 

employer maintaining the plan. In 

addition, the plan may provide that 

amounts described in paragraph 

(e)(3)(iii) of this section are included in 

compensation (within the meaning of 

section 415(c)(3)) if—

(A) Those amounts are paid by the 

later of 21⁄2 months after severance from 

employment with the employer 

maintaining the plan or the end of the 

limitation year that includes the date of 

severance from employment with the 

employer maintaining the plan; and 

(B) Those amounts would have been 

included in the definition of 

compensation if they were paid prior to 

the employee’s severance from 

employment with the employer 

maintaining the plan. 

(ii) Regular pay after severance from 

employment. An amount is described in 

this paragraph (e)(3)(ii) if—

(A) The payment is regular 

compensation for services during the 

employee’s regular working hours, or 

compensation for services outside the 

employee’s regular working hours (such 

as overtime or shift differential), 

commissions, bonuses, or other similar 

payments; and 

(B) The payment would have been 

paid to the employee prior to a 

severance from employment if the 

employee had continued in employment 

with the employer. 

(iii) Leave cashouts and deferred 

compensation. An amount is described 

in this paragraph (e)(3)(iii) if the amount 

is either—

(A) Payment for unused 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; or 

(B) Received by an employee pursuant 

to a nonqualified unfunded deferred 

compensation plan, but only if the 

payment would have been paid to the 

employee at the same time if the 

employee had continued in employment 

with the employer and only to the 

extent that the payment is includible in 

the employee’s gross income. 

(iv) Other post-severance payments. 

Any payment that is not described in 

paragraph (e)(3)(ii) or (iii) of this section 

is not considered compensation under 

paragraph (e)(3)(i) of this section if paid 

after severance from employment with 

the employer maintaining the plan, even 

if it is paid within the time period 

described in paragraph (e)(3)(i) of this 

section. Thus, compensation does not 

include severance pay, or parachute 

payments within the meaning of section 

280G(b)(2), if they are paid after 

severance from employment with the 

employer maintaining the plan, and 

does not include post-severance 

payments under a nonqualified 

unfunded deferred compensation plan 

unless the payments would have been 

paid at that time without regard to the 

severance from employment. 

(4) Salary continuation payments for 

military service and disabled 

participants. The rule of paragraph 

(e)(1)(ii) of this section 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, but 

only if the plan so provides. In addition, 

the rule of paragraph (e)(1)(ii) of this 

section does not apply to compensation 

paid to a participant who is 

permanently and totally disabled (as 

defined in section 22(e)(3)) if the 

conditions set forth in paragraph 

(g)(4)(ii)(A) of this section are satisfied 

(applied by substituting a continuation 

of compensation for the continuation of 

contributions), but only if the plan so 

provides. 

(5) Special rule for governmental 

plans. For purposes of applying the 

rules of paragraph (e)(3) of this section, 

a governmental plan (as defined in 

section 414(d)) may provide for the 

substitution of the calendar year in 


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16918 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

which the severance from employment 

with the employer maintaining the plan 

occurs for the limitation year in which 

the severance from employment with 

the employer maintaining the plan 

occurs. 

(6) Examples. The provisions of this 

paragraph (e) are illustrated by the 

following examples: 

Example 1. (i) Facts. Participant A was a 

common law employee of Employer X, 

performing services as a script writer for 

Employer X from January 1, 2005 to 

December 31, 2005. Pursuant to a collective 

bargaining agreement, Employer X, Employer 

Y and Employer Z maintain and contribute 

to Plan T, a multiemployer plan (as defined 

in section 414(f)) in which Participant A 

participates. Under the collective bargaining 

agreement, Participant A is entitled to 

residual payments whenever television 

shows that Participant A wrote are re-used 

commercially (These residual payments 

constitute compensation described in 

paragraph (b) of this section and do not 

constitute compensation described in 

paragraph (c) of this section.). In the year 

2008, Participant A receives residual 

payments from Employer X for television 

programs using the scripts that Participant A 

wrote in the year 2005 that were rebroadcast 

in the year 2008. In the years 2006, 2007, and 

2008, Participant A was a common law 

employee of Employer Y, and did not 

perform any services for Employer X. 

(ii) Conclusion. The residual payments 

received from Employer X by Participant A 

in the year 2008 are compensation for 

purposes of section 415(c)(3). The payments 

are not treated as made after severance from 

employment because Plan T is a 

multiemployer plan (as defined in section 

414(f)) and Participant A continues to be 

employed by an employer maintaining Plan 

T. 

Example 2. (i) Facts. The facts are the same 

as in Example 1, except that Participant A: 

ceased employment with Employer Y in the 

year 2006; subsequently moved away from 

the area in which A formerly worked; 

performs no services as an employee for any 

employer; and commenced receiving 

distributions under Plan T in March, 2006. 

(ii) Conclusion. Based on the facts and 

circumstances, A has ceased employment 

with any employer maintaining Plan T. 

Pursuant to paragraph (e)(1)(ii) of this 

section, compensation must be paid prior to 

an employee’s severance from employment 

with the employer maintaining the plan. 

Accordingly, the residual payments received 

by Participant A in the year 2008 are not 

compensation for purposes of section 

415(c)(3). 

(f) Interaction with section 401(a)(17). 

Because a plan may not base allocations 

(in the case of a defined contribution 

plan) or benefits (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 year that is used for 

purposes of applying the limitations of 

section 415 is not permitted to reflect 

compensation for a year that is in excess 

of the limitation under section 

401(a)(17) that applies to that year. See 

§§ 1.401(a)(17)–1(a)(3)(i) and 

1.401(a)(17)–1(b)(3)(ii) for rules 

regarding the effective date of increases 

in the section 401(a)(17) compensation 

limitation for a plan year and for a 12- 

month period other than the plan year. 

(g) Special rules—(1) Compensation 

for section 403(b) annuity contract. In 

the case of an annuity contract 

described in section 403(b), the term 

participant’s compensation means the 

participant’s includible compensation 

determined under section 403(b)(3). 

Accordingly, the rules for determining a 

participant’s compensation pursuant to 

section 415(c)(3) (other than section 

415(c)(3)(E)) and this section do not 

apply to a section 403(b) annuity 

contract. 

(2) Employees of controlled groups of 

corporations, etc. In the case of an 

employee of two or more corporations 

which are members of a controlled 

group of corporations (as defined in 

section 414(b) as modified by section 

415(h)), the term compensation for such 

employee includes compensation from 

all employers that are members of the 

group, regardless of whether the 

employee’s particular employer has a 

qualified plan. This special rule is also 

applicable to an employee of two or 

more trades or businesses (whether or 

not incorporated) that are under 

common control (as defined in section 

414(c) as modified by section 415(h)), to 

an employee of two or more members of 

an affiliated service group as defined in 

section 414(m), and to an employee of 

two or more members of any group of 

employers who must be aggregated and 

treated as one employer pursuant to 

section 414(o). 

(3) Aggregation of section 403(b) 

annuity with qualified plan of 

controlled employer. If a section 403(b) 

annuity contract is aggregated with a 

qualified plan of a controlled employer 

in accordance with § 1.415(f)–1(f)(2), 

then, in applying the limitations of 

section 415(c) in connection with the 

aggregation of the section 403(b) annuity 

with a qualified plan, the total 

compensation from both employers is 

permitted to be taken into account. 

(4) Permanent and total disability of 

defined contribution plan participant—

(i) In general. Pursuant to section 

415(c)(3)(C), if the conditions set forth 

in paragraph (g)(4)(ii) of this section are 

satisfied, then, in the case of a 

participant in any defined contribution 

plan who is permanently and totally 

disabled (as defined in section 22(e)(3)), 

the participant’s compensation means 

the compensation the participant would 

have received for the year if the 

participant was paid at the rate of 

compensation paid immediately before 

becoming permanently and totally 

disabled, if such compensation is 

greater than the participant’s 

compensation determined without 

regard to this paragraph (g)(4). 

(ii) Conditions for deemed disability 

compensation. The rule of paragraph 

(g)(4)(i) of this section applies only if 

the following conditions are satisfied—

(A) Either the participant is not a 

highly compensated employee (as 

defined in section 414(q)) immediately 

before becoming disabled, or the plan 

provides for the continuation of 

contributions on behalf of all 

participants who are permanently and 

totally disabled for a fixed or 

determinable period; 

(B) The plan provides that the rule of 

this paragraph (g)(4) (treating certain 

amounts as compensation for a disabled 

participant) applies with respect to the 

participant; and 

(C) Contributions made with respect 

to amounts treated as compensation 

under this paragraph (g)(4) are 

nonforfeitable when made. 

(5) Foreign compensation, etc.—(i) In 

general. Amounts paid to an individual 

as compensation for services do not fail 

to be treated as compensation under 

paragraphs (b)(1) and (2) of this section 

(and are not excluded from the 

definition of compensation pursuant to 

paragraph (c)(4) of this section) merely 

because those amounts are not 

includible in the individual’s gross 

income on account of the location of the 

services. Similarly, compensation for 

services do not fail to be treated as 

compensation under paragraphs (b)(1) 

and (2) of this section (and are not 

excluded from the definition of 

compensation pursuant to paragraph 

(c)(4) of this section) merely because 

those amounts are paid by an employer 

with respect to which all compensation 

paid to the participant by such 

employer is excluded from gross 

income. Thus, for example, the 

determination of whether an amount is 

treated as compensation under 

paragraph (b)(1) or (2) of this section is 

made without regard to the exclusions 

from gross income under sections 872, 

893, 894, 911, 931, and 933. 

(ii) Exclusion of non-participant 

compensation by the plan. With respect 

to a nonresident alien who is not a 

participant in a plan, the plan may 

provide that the compensation 

described in paragraph (g)(5)(i) of this 

section is not treated as compensation 

for purposes of paragraphs (b)(1) and 

(b)(2) of this section to the extent the 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16919 

compensation is excludable from gross 

income and is not effectively connected 

with the conduct of a trade or business 

within the United States, but only if the 

plan applies this rule uniformly to all 

such employees. For purposes of this 

paragraph (g)(5)(ii), nonresident alien 

has the same meaning as in section 

7701(b)(1)(B). 

(6) Deemed section 125 

compensation—(i) General rule. A plan 

is permitted to provide that deemed 

section 125 compensation (as defined in 

paragraph (g)(6)(ii) of this section) is 

compensation within the meaning of 

section 415(c)(3), but only if the plan 

applies this rule uniformly to all 

employees with respect to whom 

amounts subject to section 125 are 

included in compensation. 

(ii) Definition of deemed section 125 

compensation. Deemed section 125 

compensation is an amount that is 

excludable from the income of the 

participant under section 106 that is not 

available to the participant in cash in 

lieu of group health coverage under a 

section 125 arrangement solely because 

that participant is not able to certify that 

the participant has other health 

coverage. Under this definition, 

amounts are deemed section 125 

compensation only if the employer does 

not otherwise request or collect 

information regarding the participant’s 

other health coverage as part of the 

enrollment process for the health plan. 

(7) Employees in qualified military 

service. See section 414(u)(7) for special 

rules regarding compensation of 

employees who are in qualified military 

service within the meaning of section 

414(u)(5). 

(8) Back pay. Payments awarded by 

an administrative agency or court or 

pursuant to a bona fide agreement by an 

employer to compensate an employee 

for lost wages are compensation within 

the meaning of section 415(c)(3) for the 

limitation year to which the back pay 

relates, but only to the extent such 

payments represent wages and 

compensation that would otherwise be 

included in compensation under this 

section. 

Par. 13. Section 1.415(d)–1 is added 

to read as follows: 

§ 1.415(d)–1 Cost of living adjustments. 

(a) Defined benefit plans—(1) Dollar 

limitation—(i) Determination of 

adjusted limit. Under section 

415(d)(1)(A), the dollar limitation 

described in section 415(b)(1)(A) 

applicable to defined benefit plans is 

adjusted annually to take into account 

increases in the cost of living. The 

adjustment of the dollar limitation is 

made by multiplying the adjustment 

factor for the year, as described in 

paragraph (a)(1)(ii)(A) of this section, by 

$160,000, and rounding the result in 

accordance with paragraph (a)(1)(iii) of 

this section. The adjusted dollar 

limitation is prescribed by the 

Commissioner and published in the 

Internal Revenue Bulletin. See 

§ 601.601(d)(2) of this chapter. 

(ii) Determination of adjustment 

factor—(A) Adjustment factor. The 

adjustment factor for a calendar year is 

equal to a fraction, the numerator of 

which is the value of the applicable 

index for the calendar quarter ending 

September 30 of the preceding calendar 

year, and the denominator of which is 

the value of such index for the base 

period. The applicable index is 

determined consistent with the 

procedures used to adjust benefit 

amounts under section 215(i)(2)(A) of 

the Social Security Act, Public Law 92–

336 (86 Stat. 406), as amended. If, 

however, the value of that fraction is 

less than one for a calendar year, then 

the adjustment factor for the calendar 

year is equal to one. 

(B) Base period. For the purpose of 

adjusting the dollar limitation pursuant 

to paragraph (a)(1)(ii)(A) of this section, 

the base period is the calendar quarter 

beginning July 1, 2001. 

(iii) Rounding. Any increase in the 

$160,000 amount specified in section 

415(b)(1)(A) which is not a multiple of 

$5,000 is rounded to the next lowest 

multiple of $5,000. 

(2) Average compensation for high-3 

years of service limitation—(i) 

Determination of adjusted limit. Under 

section 415(d)(1)(B), with regard to 

participants who have had a severance 

from employment with the employer 

maintaining the plan, the compensation 

limitation described in section 

415(b)(1)(B) is permitted to be adjusted 

annually to take into account increases 

in the cost of living. For any limitation 

year beginning after the severance 

occurs, the adjustment of the 

compensation limitation is made by 

multiplying the annual adjustment 

factor (as defined in paragraph (a)(2)(ii) 

of this section) by the compensation 

limitation applicable to the participant 

in the prior limitation year. The annual 

adjustment factor is prescribed by the 

Commissioner and published in the 

Internal Revenue Bulletin. See 

§ 601.601(d)(2) of this chapter. 

(ii) Annual adjustment factor. The 

annual adjustment factor for a calendar 

year is equal to a fraction, the numerator 

of which is the value of the applicable 

index for the calendar quarter ending 

September 30 of the preceding calendar 

year, and the denominator of which is 

the value of such index for the calendar 

quarter ending September 30 of the 

calendar year prior to that preceding 

calendar year. The applicable index is 

determined consistent with the 

procedures used to adjust benefit 

amounts under section 215(i)(2)(A) of 

the Social Security Act. If the value of 

the fraction described in the first 

sentence of this paragraph (a)(2)(ii) is 

less than one for a calendar year, then 

the adjustment factor for the calendar 

year is equal to one. In such a case, the 

annual adjustment factor for future 

calendar years will be determined in 

accordance with revenue rulings, 

notices, or other published guidance 

prescribed by the Commissioner and 

published in the Internal Revenue 

Bulletin. See § 601.601(d)(2) of this 

chapter. 

(iii) Special rule for rehired 

employees. If, after having a severance 

from employment with the employer 

maintaining the plan, an employee is 

rehired by the employer maintaining the 

plan, the employee’s compensation 

limit under section 415(b)(1)(B) is the 

greater of—

(A) 100 percent of the participant’s 

average compensation for the period of 

the participant’s high-3 years of service, 

as determined prior to the employee’s 

severance from employment with the 

employer maintaining the plan, as 

adjusted pursuant to paragraph (a)(2)(i) 

of this section (if the plan so provides); 

or 

(B) 100 percent of the participant’s 

average compensation for the period of 

the participant’s high-3 years of service, 

with the period of the participant’s 

high-3 years of service determined 

pursuant to § 1.415(b)–1(a)(5)(iii). 

(3) Effective date of adjustment. The 

adjusted dollar limitation applicable to 

defined benefit plans and the adjusted 

compensation limit applicable to a 

participant are effective as of January 1 

of each calendar year and apply with 

respect to limitation years ending with 

or within that calendar year. However, 

benefit payments (and, in the case of 

plans that are subject to the 

requirements of section 411, accrued 

benefits for a limitation year) cannot 

exceed the currently applicable dollar 

limitation or compensation limitation 

(as in effect before the January 1 

adjustment) prior to January 1. Thus, 

where there is an increase in the 

limitation under section 415(b)(1), any 

increase in a participant’s benefits 

associated with the limitation increase 

is permitted to occur as of a date no 

earlier than January 1 of the calendar 

year for which the increase in the 

limitation is effective, and can only be 

applied for payments due on or after 


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16920 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

January 1 of such calendar year. For 

example, assume that a participant in a 

defined benefit plan is currently 

receiving a benefit in the form of a 

straight life annuity, payable monthly, 

in an amount equal to the section 

415(b)(1)(A) dollar limit, and the 

defined benefit plan has a limitation 

year that runs from July 1 to June 30. If 

the plan is amended to reflect the 

section 415(d) increase to the section 

415(b)(1)(A) dollar limit that is effective 

as of January 1, 2009, the associated 

increase in the participant’s monthly 

benefit payments is only effective for 

payments due on or after January 1, 

2009, and the participant’s benefit 

cannot be increased to reflect the 

section 415(d) increase that is effective 

January 1, 2009, with respect to any 

monthly payment due prior to January 

1, 2009. 

(4) Application of adjusted figure—(i) 

In general. If the dollar limitation of 

section 415(b)(1)(A) or the 

compensation limitation of section 

415(b)(1)(B) is adjusted pursuant to 

section 415(d) for a limitation year, the 

adjustment is applied as provided in 

this paragraph (a)(4). 

(ii) Application of adjusted 

limitations to benefits that have not 

commenced. An adjustment to the 

dollar limitation of section 415(b)(1)(A) 

is permitted to be applied to a 

participant who has not commenced 

benefits before the date on which the 

adjustment is effective. Annual 

adjustments to the compensation limit 

of section 415(b)(1)(B) as described in 

paragraph (a)(2) of this section are 

permitted to be made for all limitation 

years that begin after the participant’s 

severance from employment, and apply 

to distributions that commence after the 

effective dates of such adjustments. 

However, no adjustment to the 

compensation limit of section 

415(b)(1)(B) is made for any limitation 

year that begins on or before the date of 

the participant’s severance from 

employment with the employer 

maintaining the plan. 

(iii) Application of adjusted dollar 

limitation to remaining payments under 

benefits that have commenced. With 

respect to a distribution of accrued 

benefits that commenced before the date 

on which an adjustment to the section 

415(b)(1)(A) dollar limitation is 

effective, a plan is permitted to apply 

the adjusted limitations to that 

distribution, but only to the extent that 

benefits have not been paid. Thus, for 

example, a plan cannot provide that the 

adjusted dollar limitation applies to a 

participant who has previously received 

the entire plan benefit in a single-sum 

distribution. However, a plan can 

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. 

(iv) Manner of adjustment for benefits 

that have commenced. If a plan is 

amended to increase benefits payable 

under the plan in accordance with 

paragraphs (a)(5) or (a)(6) of this section 

(or the plan is treated as applying 

paragraph (a)(5) of this section because 

the plan incorporates the section 415(d) 

cost-of-living adjustments automatically 

by reference pursuant to § 1.415(a)–

1(d)(3)(v)), or if benefits payable under 

the plan are increased pursuant to a 

form of benefit that is described in 

§ 1.415(b)–1(c)(5), then the distribution 

as increased will be treated as 

continuing to satisfy the requirements of 

section 415(b). If benefits payable under 

a plan are increased in a manner other 

than as described in the preceding 

sentence, the plan must satisfy the 

requirements of § 1.415(b)–1(b)(1)(iii), 

treating the commencement of the 

additional benefit as the commencement 

of a new distribution that gives rise to 

a new annuity starting date. 

(5) Safe harbor for annual 

adjustments to distributions. An 

amendment to a plan to incorporate 

adjustments to the section 415(b) limits 

that increases a distribution that has 

previously commenced is described in 

this paragraph (a)(5) if—

(i) The employee has received one or 

more distributions that satisfy the 

requirements of section 415(b) before 

the date the adjustment to the 

applicable limits is effective (as 

determined under paragraph (a)(3) of 

this section); 

(ii) The increased distribution is 

solely as a result of the amendment of 

the plan to reflect the adjustment to the 

applicable limits pursuant to section 

415(d); and 

(iii) The amounts payable to the 

employee on and after the effective date 

of the adjustment (as determined under 

paragraph (a)(3) of this section) are not 

greater than the amounts that would 

otherwise be payable without regard to 

the adjustment, multiplied by a fraction 

determined for the limitation year, the 

numerator of which is the limitation 

under section 415(b) (which is 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 with 

respect to the distribution taking into 

account the section 415(d) adjustment, 

and the denominator of which is the 

limitation under section 415(b) in effect 

for the distribution immediately before 

the adjustment. 

(6) Safe harbor for periodic 

adjustments to distributions—(i) 

General rule. An amendment to a plan 

that increases a distribution that has 

previously commenced is made using 

the safe harbor methodology of this 

paragraph (a)(6) if—

(A) The employee has received one or 

more distributions that satisfy the 

requirements of section 415(b) before 

the date on which the increase is 

effective; and 

(B) The amounts payable to the 

employee on and after the effective date 

of the increase are not greater than the 

amounts that would otherwise be 

payable without regard to the increase, 

multiplied by the cumulative 

adjustment fraction. 

(ii) Cumulative adjustment fraction. 

The cumulative adjustment fraction for 

purposes of this paragraph (a)(6) is 

equal to the product of all of the 

fractions described in paragraph 

(a)(5)(iii) of this section that would have 

applied after benefits commence if the 

plan had been amended each year to 

incorporate the section 415(d) 

adjustments to the applicable section 

415(b) limits and had otherwise 

satisfied the safe harbor methodology 

described in paragraph (a)(5) of this 

section. For purposes of the preceding 

sentence, if for the limitation year for 

which the increase to the section 

415(b)(1)(A) dollar limitation pursuant 

to section 611(a)(1)(A) of the Economic 

Growth and Tax Relief Reconciliation 

Act of 2001 (115 Stat. 38), Public Law 

107–16 (EGTRRA), is first effective 

(generally, the first limitation year 

beginning after December 31, 2001), the 

section 415(b)(1)(A) dollar limit 

applicable to a participant is less than 

the section 415(b)(1)(B) compensation 

limit for the participant, then the 

fraction described in paragraph 

(a)(5)(iii) of this section for that 

limitation year is 1.0. 

(7) Examples. The following examples 

illustrate the application of this 

paragraph (a): 

Example 1. (i) X is a participant in a 

qualified defined benefit plan maintained by 

X’s employer. The plan has a calendar year 

limitation year. Under the terms of the plan, 

X is entitled to a benefit consisting of a 

straight life annuity equal to 100 percent of 

X’s average compensation for the period of 

X’s high-3 years of service. X’s average 

compensation for the period of X’s high-3 

years of service is $50,000. X incurs a 

severance from employment with the 

employer maintaining the plan on October 3, 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16921 

2007, at age 65 with a nonforfeitable right to 

the accrued benefit after more than 10 years 

of participation in the plan. X begins to 

receive annual benefit payments (payable 

monthly) of $50,000, commencing on 

November 1, 2007. The dollar limitation for 

the 2007 limitation year (as adjusted 

pursuant to section 415(d)) is $180,000. 

Assume that the dollar limitation for the 

2008 limitation year (as adjusted pursuant to 

section 415(d)) is $185,000 and the annual 

adjustment factor for adjusting the 

compensation limitation of section 

415(b)(1)(B) for the 2008 limitation year is 

1.0334. Effective January 1, 2008, the plan is 

amended to incorporate these adjustments to 

the dollar and compensation limitations, and 

accordingly, X’s annual benefit payment is 

increased, effective for payments due on or 

after January 1, 2008. Prior to the plan 

amendment incorporating the application of 

the adjusted dollar and compensation 

limitations, X has received one or more 

distributions that satisfy the requirements of 

section 415(b). In addition, the adjustment to 

X’s annual benefit payments is solely on 

account of the plan amendment 

incorporating the adjusted limitations. 

(ii) For the limitation year beginning 

January 1, 2008, the dollar limit applicable to 

X under section 415(b)(1)(A) is $185,000, and 

the compensation limit applicable to X under 

section 415(b)(1)(B) is $51,670 ($50,000 

multiplied by the annual adjustment factor of 

1.0334). Accordingly, the adjustment to X’s 

benefit satisfies the safe harbor for cost-ofliving adjustments under paragraph (a)(5) of 

this section if, after the adjustment, X’s 

benefit payable in the 2008 limitation year is 

no greater than $50,000 multiplied by 

$51,670 (X’s section 415(b) limitation for 

2008)/$50,000 (X’s section 415(b) limitation 

for 2007). 

Example 2. (i) The facts are the same as in 

Example 1, except that X’s average 

compensation for the period of X’s high-3 

consecutive years of service is $200,000. 

Consequently, X’s annual benefit payments 

commencing on November 1, 2007, are 

limited to $180,000. 

(ii) For the limitation year beginning 

January 1, 2008, the dollar limit applicable to 

X under section 415(b)(1)(A) is $185,000, and 

the compensation limit applicable to X under 

section 415(b)(1)(B) is $206,680 ($200,000 

multiplied by the annual adjustment factor of 

1.0334). Accordingly, the adjustment to X’s 

benefit satisfies the safe harbor for cost-ofliving adjustments under paragraph (a)(5) of 

this section if, after the adjustment, X’s 

benefit payable in 2008 is no greater than 

$180,000 multiplied by $185,000 (X’s section 

415(b) limitation for 2008)/$180,000 (X’s 

section 415(b) limitation for 2007). 

Example 3. (i) X is a participant in Plan T, 

a qualified defined benefit plan maintained 

by X’s employer. In the year 2008, X receives 

a single-sum distribution of X’s entire 

accrued benefit under the plan. At the time 

that X receives the single-sum distribution, 

X’s accrued benefit under Plan T is limited 

by the section 415(b)(1)(A) age-adjusted 

dollar limit. X accrues no further benefits 

under Plan T after X receives the single-sum 

distribution. In the 2009 limitation year, 

pursuant to section 415(d) and § 1.415(d)–1, 

the section 415(b)(1)(A) dollar limit is 

increased. 

(ii) In the 2009 limitation year, Plan T may 

not provide additional benefits to X on 

account of the increase in the section 

415(b)(1)(A) dollar limit pursuant to section 

415(d) and § 1.415(d)–1. 

Example 4. (i) X is a participant in Plan T, 

a qualified defined benefit plan maintained 

by X’s employer, Employer S. Plan T has a 

calendar limitation year. In 2008, X incurs a 

severance from employment with Employer S 

and X commences receiving distributions 

from Plan T in the form of a single life 

annuity in an annual amount of $30,000. At 

the time that X commences receiving 

distributions from Plan T, X’s accrued benefit 

under Plan T is limited by the section 

415(b)(1)(B) compensation limit. In 2009, the 

annual adjustment factor described in 

paragraph (a)(2) of this section (which is the 

factor for adjusting the compensation limit 

described in section 415(b)(1)(B)) is 1.03. 

Employer S amends Plan T, effective as of 

January 1, 2009, to increase the annual 

benefit of all participants who, prior to 

January 1, 2009, incurred a severance from 

employment with Employer S and who have 

commenced receiving benefits from Plan T 

by a factor of 1.015. Assume that for 

limitation years prior to 2009, X’s 

distributions from Plan T satisfy the 

requirements of section 415(b). 

(ii) The increase in X’s annual benefit 

pursuant to the amendment effective January 

1, 2009, is within the safe harbor described 

in paragraph (a)(6) of this section. This is 

because the amount payable to X under Plan 

T for the 2009 limitation year and limitation 

years thereafter (as increased by the 

amendment effective January 1, 2009) is not 

greater than the product of the amount 

payable to X under Plan T for such limitation 

years (as determined without regard to the 

amendment increasing X’s benefit effective 

January 1, 2009) and the cumulative 

adjustment fraction (which, in X’s case, is 

1.03). Thus, X’s annual benefit, as increased 

by the amendment, is not determined 

pursuant to the rules of § 1.415(b)–1(b)(1)(iii). 

Example 5. (i) Participant P participated in 

Plan A, maintained by Employer M, for more 

than 10 years. Plan A uses a calendar year 

limitation year and Plan A automatically 

adjusts a participant’s section 415(b)(1)(B) 

compensation limit for limitation years after 

the limitation year in which the participant 

incurs a severance from employment as 

described in § 1.415(a)–1(d)(3)(v). Prior to 

separating from employment with M in 2010, 

P’s average compensation for P’s period of 

high-3 years while a participant in Plan A is 

$50,000, based on P’s compensation for 2007, 

2008, and 2009, which was $50,000 for each 

year. P’s compensation for year 2010 was 

$45,000. In year 2012, P is rehired by M and 

resumes participation in Plan A. P’s 

compensation in year 2012 is $45,000, and is 

$70,000 in year 2013. Assume that the annual 

adjustment factor described in § 1.415(d)–

1(a)(2)(ii) for the limitation years 2011 

through 2013 is 1.03 for each year. Thus, 

disregarding P’s rehire by M, P’s average 

compensation for P’s period of high-3 years 

while a participant in Plan A for the 2013 

limitation year would be equal to $54,636 (or 

1.03 * 1.03 * 1.03 * $50,000). See § 1.415(b)–

1(a)(5)(iii). 

(ii) Under § 1.415(d)–1(a)(2)(iii), P’s 

average compensation for P’s period of high3 years while a participant in Plan A for the 

2013 limitation year is $54,636. 

(b) Defined contribution plans—(1) In 

general. Under section 415(d)(1)(C), the 

dollar limitation described in section 

415(c)(1)(A) is adjusted annually to take into 

account increases in the cost of living. The 

adjusted dollar limitation is prescribed by the 

Commissioner and published in the Internal 

Revenue Bulletin. See § 601.601(d)(2) of this 

chapter. 

(2) Determination of adjusted limit—(i) 

Base period. The base period taken into 

account for purposes of adjusting the dollar 

limitation pursuant to paragraph (b)(2)(ii) of 

this section is the calendar quarter beginning 

July 1, 2001. 

(ii) Method of adjustment—(A) In general. 

The dollar limitation is adjusted with respect 

to a calendar year based on the increase in 

the applicable index for the calendar quarter 

ending September 30 of the preceding 

calendar year over such index for the base 

period. Adjustment procedures similar to the 

procedures used to adjust benefit amounts 

under section 215(i)(2)(A) of the Social 

Security Act will be used. 

(B) Rounding. Any increase in the $40,000 

amount specified in section 415(c)(1)(A) 

which is not a multiple of $1,000 shall be 

rounded to the next lowest multiple of 

$1,000. 

(iii) Effective date of adjustment. The 

adjusted dollar limitation applicable to 

defined contribution plans is effective as of 

January 1 of each calendar year and applies 

with respect to limitation years ending with 

or within that calendar year. Annual 

additions for a limitation year cannot exceed 

the currently applicable dollar limitation (as 

in effect before the January 1 adjustment) 

prior to January 1. However, after a January 

1 adjustment is made, annual additions for 

the entire limitation year are permitted to 

reflect the dollar limitation as adjusted on 

January 1. 

(c) Application of rounding rules to other 

cost-of-living adjustments. Pursuant to 

section 415(d)(4)(A), the $5,000 rounding 

methodology of paragraph (a)(1)(iii) of this 

section is used for purposes of any provision 

of chapter 1 of subtitle A of the Internal 

Revenue Code that provides for adjustments 

in accordance with section 415(d), except to 

the extent provided by that provision. Thus, 

the $5,000 rounding methodology of 

paragraph (a)(1)(iii) of this section is used for 

purposes of—

(1) Determining the level of compensation 

specified in section 414(q)(1)(B) that is used 

to determine whether an employee is a 

highly compensated employee; 

(2) Calculating the amounts used pursuant 

to section 409(o)(1)(C) to determine the 

maximum period over which distributions 

from an employee stock ownership plan may 

be made without participant consent; and 

(3) Determining the levels of compensation 

specified in § 1.61–21(f)(5)(i) and (iii) used in 

determining whether an employee is a 

control employee of a nongovernmental 

employer for purposes of the commuting 

valuation rule of § 1.61–21(f). 


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16922 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

(d) Implementation of cost-of-living 

adjustments. A plan is permitted to be 

amended to reflect any of the adjustments 

described in this section at any time after 

those limitations become applicable. 

Alternatively, a plan is permitted to 

incorporate by reference any of the 

adjustments described in this section in 

accordance with the rules of § 1.415(a)–

1(d)(3)(v). Because the accrued benefit of a 

participant can reflect increases in the 

applicable limitations only after those 

increases become effective, a pattern of 

repeated plan amendments increasing annual 

benefits to reflect the increases in the section 

415(b) limitations pursuant to section 415(d) 

does not result in any protection under 

section 411(d)(6) for future increases to 

reflect increases in the section 415(b) 

limitations pursuant to § 1.411(d)–4, Q&A–

1(c)(1). Thus, a plan does not violate the 

requirements of section 411(d)(6) merely 

because the plan has been amended annually 

for a number of years to increase annual 

benefits to reflect the increases in the section 

415(b) limitations pursuant to section 415(d) 

and subsequently is not amended to reflect 

later increases in the section 415(b) 

limitations. 

Par. 14. Section 1.415(f)–1 is added to 

read as follows: 

§ 1.415(f)–1 Aggregating plans. 

(a) In general. Except as provided in 

paragraph (g) of this section (regarding 

multiemployer plans), and taking into 

account the rules of paragraph (b)(2) 

(regarding the break-up of affiliated 

employers and affiliated service groups), 

paragraph (c) (regarding predecessor 

employers), and paragraph (d)(1) 

(regarding nonduplication rules) of this 

section, section 415(f) and this section 

require that for purposes of applying the 

limitations of sections 415(b) and (c) 

applicable to a participant for a 

particular limitation year—

(1) All defined benefit plans (without 

regard to whether a plan has been 

terminated) ever maintained by the 

employer (or a predecessor employer 

within the meaning of paragraphs (c)(1) 

and (c)(2) of this section) under which 

the participant has accrued a benefit are 

treated as one defined benefit plan; 

(2) All defined contribution plans 

(without regard to whether a plan has 

been terminated) ever maintained by the 

employer (or a predecessor employer 

within the meaning of paragraphs (c)(1) 

and (c)(2) of this section) under which 

the participant receives annual 

additions are treated as one defined 

contribution plan; and 

(3) All section 403(b) annuity 

contracts purchased by an employer 

(including plans purchased through 

salary reduction contributions) for the 

participant are treated as one section 

403(b) annuity contract. 

(b) Affiliated employers, affiliated 

service groups, and leased employees—

(1) General rule. See § 1.415(a)–1(f)(1) 

and (2) for rules regarding aggregation of 

employers in the case of affiliated 

employers and affiliated service groups. 

See § 1.415(a)–1(f)(3) for rules regarding 

the treatment of leased employees. 

(2) Special rule in the case of the 

break-up of an affiliated employer or an 

affiliated service group—(i) In general. 

A formerly affiliated plan of an 

employer is taken into account for 

purposes of applying paragraph (a) of 

this section to the employer, but the 

formerly affiliated plan is treated as if it 

had terminated immediately prior to the 

cessation of affiliation with sufficient 

assets to pay benefit liabilities under the 

plan, and had purchased annuities to 

provide plan benefits. See § 1.415(b)–

1(b)(5)(i) for rules determining annual 

benefits under a terminated defined 

benefit plan under which annuities are 

purchased to provide plan benefits. 

(ii) Definitions. For purposes of this 

paragraph (b)(2), a formerly affiliated 

plan of an employer is a plan that, 

immediately prior to the cessation of 

affiliation, was actually maintained by 

one or more of the entities that 

constitute the employer (as determined 

under the employer affiliation rules 

described in § 1.415(a)–1(f)(1) and (2)), 

and immediately after the cessation of 

affiliation, is not actually maintained by 

any of the entities that constitute the 

employer (as determined under the 

employer affiliation rules described in 

§ 1.415(a)–1(f)(1) and (2)). For purposes 

of this paragraph (b)(2), a cessation of 

affiliation means the event that causes 

an entity to no longer be aggregated with 

one or more other entities as a single 

employer under the employer affiliation 

rules described in § 1.415(a)–1(f)(1) and 

(2) (such as the sale of a subsidiary 

outside a controlled group), or that 

causes a plan to not actually be 

maintained by any of the entities that 

constitute the employer under the 

employer affiliation rules of § 1.415(a)–

1(f)(1) and (2) (such as a transfer of plan 

sponsorship outside of a controlled 

group). 

(c) Predecessor employer—(1) Where 

plan is maintained by successor. For 

purposes of section 415 and regulations 

promulgated under 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 (for example, the 

employer assumed sponsorship of the 

former employer’s plan, or the 

employer’s plan received a transfer of 

benefits from the former employer’s 

plan), but only if that benefit is 

provided under the plan maintained by 

the employer. In such a case, in 

applying the limitations of section 415 

to a participant in a plan maintained by 

the employer, paragraph (a) of this 

section requires the plan to take into 

account benefits provided to the 

participant under plans that are 

maintained by the predecessor employer 

and that are not maintained by the 

employer. For this purpose, the formerly 

affiliated plan rules in paragraph (b)(2) 

of this section apply as if the employer 

and predecessor employer constituted a 

single employer under the rules 

described in § 1.415(a)–1(f)(1) and (2) 

immediately prior to the cessation of 

affiliation (and as if they constituted 

two, unrelated employers under the 

rules described in § 1.415(a)–1(f)(1) and 

(2) immediately after the cessation of 

affiliation) and cessation of affiliation 

was the event that gives rise to the 

predecessor employer relationship, such 

as a transfer of benefits or plan 

sponsorship. 

(2) Where plan is not maintained by 

successor. 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. 

(d) Special rules—(1) Nonduplication. 

In applying the limitations of section 

415 to a plan maintained by an 

employer, if the plan is aggregated with 

another plan pursuant to the aggregation 

rules of paragraph (a) of this section, a 

participant’s benefits are not counted 

more than once in determining the 

participant’s aggregate annual benefit or 

annual additions. For example, if a 

defined benefit plan is treated as if it 

terminated immediately prior to a 

cessation of affiliation under paragraph 

(b)(2) of this section, the plans 

maintained by the employer (as 

determined after the cessation of 

affiliation) that actually maintains the 

plan do not double count the annual 

benefit provided under the plan by 

aggregating under paragraph (a) of this 

section both the participant’s annual 

benefit provided under the plan and the 

participant’s annual benefit under the 

plan as a formerly affiliated plan (which 

is a plan that the employers formerly 

affiliated with the employer must take 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16923 

into account as a terminated plan under 

the rules of paragraph (b)(2) of this 

section). Instead, the plans maintained 

by the employer include the annual 

benefit provided to the participant 

under the actual plan that the employer 

maintains. Similarly, if a defined benefit 

plan maintained by an employer (the 

transferee plan) receives a transfer of 

benefits from a defined benefit plan 

maintained by a predecessor employer 

(the transferor plan) and the transfer is 

described in § 1.415(b)–1(b)(3)(i)(B) 

(which requires the transferred benefits 

to be treated by the transferor plan as if 

the benefits were provided under a plan 

that must be aggregated with the 

transferor plan that terminated 

immediately prior to the transfer), the 

transferee plan does not double count 

the transferred benefits under paragraph 

(a) of this section by taking into account 

both the actual benefit provided under 

the transferee plan and the benefit 

provided under the deemed terminated 

plan that the predecessor employer is 

treated as maintaining (and that 

otherwise would have to be taken into 

account by the transferee plan under the 

predecessor employer aggregation rules 

of paragraph (a) of this section). Instead, 

the transferee plan takes into account 

the transferred benefits that are actually 

provided under transferee plan (see 

§ 1.415(b)–1(b)(3)(i)(C)) and, pursuant to 

paragraph (c)(1) of this section, any 

nontransferred benefits provided under 

plans maintained by the predecessor 

employer with respect to a participant 

whose benefits have been transferred to 

the transferee plan. 

(2) Determination of years of 

participation for multiple plans. If two 

or more defined benefit plans are 

aggregated under section 415(f) and this 

section for a particular limitation year, 

in applying the reduction for 

participation of less than ten years (as 

described in section 415(b)(5)(A)) to the 

dollar limitation under section 

415(b)(1)(A), time periods that are 

counted as years of participation under 

any of the plans are counted in 

computing the limitation of the 

aggregated plans under this section. 

(3) Determination of years of service 

for multiple plans. If two or more 

defined benefit plans are aggregated 

under section 415(f) and this section for 

a particular limitation year, in applying 

the reduction for service of less than ten 

years (as described in section 

415(b)(5)(B)) to the compensation 

limitation under section 415(b)(1)(B), 

time periods that are counted as years 

of service under any of the plans are 

counted in computing the limitation of 

the aggregated plans under this section. 

(e) Previously unaggregated plans—

(1) In general. This paragraph (e) 

provides rules for those situations in 

which two or more existing plans, 

which previously were not required to 

be aggregated pursuant to section 415(f) 

and this section, are aggregated during 

a particular limitation year and, as a 

result, the limitations of section 415(b) 

or (c) are exceeded for that limitation 

year. Paragraph (e)(2) of this section 

provides rules for defined contribution 

plans that are first required to be 

aggregated pursuant to section 415(f) 

and this section in a plan year. 

Paragraph (e)(3) of this section provides 

rules for defined benefit plans that are 

first required to be aggregated pursuant 

to section 415(f) and this section, and 

for defined benefit plans under which a 

participant’s benefit is frozen following 

aggregation. 

(2) Defined contribution plans. Two 

or more defined contribution plans that 

are not required to be aggregated 

pursuant to section 415(f) and this 

section as of the first day of a limitation 

year do not fail to satisfy the 

requirements of section 415 with respect 

to a participant for the limitation year 

merely because they are aggregated later 

in that limitation year, provided that no 

annual additions are credited to the 

participant’s account after the date on 

which the plans are required to be 

aggregated. 

(3) Defined benefit plans—(i) First 

year of aggregation. Two or more 

defined benefit plans that are not 

required to be aggregated pursuant to 

section 415(f) and this section as of the 

first day of a limitation year do not fail 

to satisfy the requirements of section 

415 for the limitation year merely 

because they are aggregated later in that 

limitation year, provided that no plan 

amendments increasing benefits with 

respect to the participant under either 

plan are made after the occurrence of 

the event causing the plan to be 

aggregated. 

(ii) All years of aggregation in which 

accrued benefits are frozen. Two or 

more defined benefit plans that are 

required to be aggregated pursuant to 

section 415(f) and this section during a 

limitation year subsequent to the 

limitation year during which the plans 

were first aggregated do not fail to 

satisfy the requirements of section 415 

with respect to a participant for the 

limitation year merely because they are 

aggregated if there have been no 

increases in the participant’s accrued 

benefit derived from employer 

contributions (including increases as a 

result of increased compensation or 

service) under any of the plans within 

the period during which the plans have 

been aggregated. 

(f) Section 403(b) annuity contracts—

(1) In general. In the case of a section 

403(b) annuity contract, except as 

provided in paragraph (f)(2) of this 

section, the participant on whose behalf 

the annuity contract is purchased is 

considered for purposes of section 415 

to have exclusive control of the annuity 

contract. Accordingly, except as 

provided in paragraph (f)(2) of this 

section, the participant, and not the 

participant’s employer who purchased 

the section 403(b) annuity contract, is 

deemed to maintain the annuity 

contract, and such a section 403(b) 

annuity contract is not aggregated with 

a qualified plan that is maintained by 

the participant’s employer. 

(2) Special rules under which the 

employer is deemed to maintain the 

annuity contract—(i) In general. Where 

a participant on whose behalf a section 

403(b) annuity contract is purchased is 

in control of any employer for a 

limitation year as defined in paragraph 

(f)(2)(ii) of this section (regardless of 

whether the employer controlled by the 

participant is the employer maintaining 

the section 403(b) annuity contract), 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. 

Accordingly, where a participant on 

whose behalf a section 403(b) annuity 

contract is purchased is in control of 

any employer for a limitation year, the 

section 403(b) annuity contract is 

aggregated with all other defined 

contribution plans maintained by that 

employer. In addition, in such a case, 

the section 403(b) annuity contract is 

aggregated with all other defined 

contribution plans maintained by the 

employee or any other employer that is 

controlled by the employee. Thus, for 

example, if a doctor is employed by a 

non-profit hospital to which section 

501(c)(3) applies and which provides 

him with a section 403(b) annuity 

contract, and the doctor also maintains 

a private practice as a shareholder 

owning more than 50 percent of a 

professional corporation, then any 

qualified defined contribution plan of 

the professional corporation must be 

aggregated with the section 403(b) 

annuity contract for purposes of 

applying the limitations of section 

415(c) and § 1.415(c)–1. For purposes of 

this paragraph (f)(2), it is immaterial 

whether the section 403(b) annuity 

contract is purchased as a result of a 

salary reduction agreement between the 

employer and the participant. 


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16924 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

(ii) Determination of when a 

participant is in control of an employer. 

For purposes of paragraph (f)(2)(i) of 

this section, a participant is in control 

of an employer for a limitation year if, 

pursuant to § 1.415(a)–1(f)(1) and (2), a 

plan maintained by that employer 

would have to be aggregated with a plan 

maintained by an employer that is 100 

percent owned by the participant. Thus, 

for example, if a participant owns 60 

percent of the common stock of a 

corporation, the participant is 

considered to be in control of that 

employer for purposes of applying 

paragraph (f)(2)(i) of this section. 

(3) Aggregation of section 403(b) 

annuity with qualified plan of 

controlled employer. If a section 403(b) 

annuity contract is aggregated with a 

qualified plan of a controlled employer 

in accordance with paragraph (f)(2) of 

this section, the plans must satisfy the 

limitations of section 415(c) both 

separately and on an aggregate basis. In 

applying separately the limitations of 

section 415 to the qualified plan and to 

the section 403(b) annuity contract, 

compensation from the controlled 

employer may not be aggregated with 

compensation from the employer 

purchasing the section 403(b) annuity 

contract (that is, without regard to 

§ 1.415(c)–2(g)(3)). 

(g) Multiemployer plans—(1) 

Multiemployer plan aggregated with 

another multiemployer plan. Pursuant 

to section 415(f)(3)(B), multiemployer 

plans, as defined in section 414(f), are 

not aggregated with other 

multiemployer plans for purposes of 

applying the limits of section 415. 

(2) Multiemployer plan aggregated 

with other plan—(i) Aggregation only for 

benefits provided by the employer. 

Notwithstanding the rule of § 1.415(a)–

1(e), a multiemployer plan, as defined 

in section 414(f), is permitted to provide 

that only the benefits under that 

multiemployer plan that are provided 

by an employer are aggregated with 

benefits under plans maintained by that 

employer that are not multiemployer 

plans. If the multiemployer plan so 

provides, then, where an employer 

maintains both a plan which is not a 

multiemployer plan and a 

multiemployer plan, only the benefits 

under the multiemployer plan that are 

provided by the employer are aggregated 

with benefits under the employer’s 

plans other than multiemployer plans 

(in lieu of including benefits provided 

by all employers under the 

multiemployer plan pursuant to the 

generally applicable rule of § 1.415(a)–

1(e)). 

(ii) Exception from aggregation for 

purposes of applying section 

415(b)(1)(B) compensation limit. 

Pursuant to section 415(f)(3)(A), a 

multiemployer plan, as defined in 

section 414(f), is not aggregated with 

any other plan that is not a 

multiemployer plan for purposes of 

applying the compensation limit of 

section 415(b)(1)(B) and § 1.415(b)–

1(a)(1)(ii). 

(h) Special rules for aggregating 

certain plans, etc. If a plan, annuity 

contract or arrangement is subject to a 

special limitation in addition to, or 

instead of, the regular limitations 

described in section 415(b) or (c), and is 

aggregated under this section with a 

plan which is subject only to the regular 

section 415(b) or (c) limitations, the 

following rules apply: 

(1) Each plan, annuity contract or 

arrangement which is subject to a 

special limitation must meet its own 

applicable limitation and each plan 

subject to the regular limitations of 

section 415 must meet its applicable 

limitation. 

(2) The limitation for the aggregated 

plans is the larger of the applicable 

limitations for the separate plans. 

(i) [Reserved.] 

(j) Examples. The following examples 

illustrate the rules of this section. 

Except to the extent otherwise stated in 

an example, each entity is not and has 

never been affiliated with another entity 

under the employer affiliation rules of 

§ 1.415(a)–1(f)(1) and (2), each entity has 

never maintained a qualified plan (other 

than the plans specifically mentioned in 

the example), and the limitation year for 

each qualified plan is the calendar year. 

Example 1. (i) Facts. M was formerly an 

employee of ABC Corporation and is 

currently an employee of XYZ Corporation. 

ABC maintains a qualified defined benefit 

plan (Plan ABC) and a qualified defined 

contribution plan in which M participates 

and XYZ maintains a qualified defined 

benefit plan (Plan XYZ) and a qualified 

defined contribution plan in which M 

participates. ABC Corporation owns 60 

percent of XYZ Corporation. 

(ii) Treatment as a single employer. ABC 

Corporation and XYZ Corporation are 

members of a controlled group of 

corporations within the meaning of section 

414(b) as modified by section 415(h). Because 

ABC Corporation and XYZ Corporation are 

members of a controlled group of 

corporations within the meaning of section 

414(b) as modified by section 415(h), M is 

treated as being employed by a single 

employer under § 1.415(a)–1(f)(1). 

(iii) Plan aggregation. Under paragraph 

(a)(1) of this section, the sum of M’s annual 

benefit under Plan ABC and M’s annual 

benefit under Plan XYZ is not permitted to 

exceed the limitations of section 415(b) and 

§ 1.415(b)–1; and, under paragraph (a)(2) of 

this section, the sum of the annual additions 

to M’s account under the defined 

contribution plans maintained by ABC and 

XYZ may not exceed the limitations of 

section 415(c) and § 1.415(c)–1. For purposes 

of determining the limitations of section 

415(b) and § 1.415(b)–1 for the aggregated 

plans, a year of service for either employer 

is considered as a year of service for purposes 

of § 1.415(b)–1(g)(2) (phase-in rules for the 

compensation limit) and a year of 

participation under either plan is considered 

as a year of participation for purposes of 

§ 1.415(b)–1(g)(1) (phase-in rules for the 

dollar limit). 

Example 2. (i) Facts. The facts are the same 

as in Example 1, except that ABC 

Corporation and XYZ Corporation do not 

maintain defined contribution plans. In 

addition, Participant O was formerly an 

employee of ABC Corporation and is 

currently an employee of XYZ Corporation. 

Participant O has an accrued benefit under 

the ABC Plan, but Participant O has no 

accrued benefit under the XYZ Plan. 

Effective January 1, 2010, ABC Corporation 

sells all of its shares of stock of XYZ 

Corporation to an unaffiliated entity, LMN 

Corporation (the 2010 stock sale). After the 

2010 stock sale, XYZ Corporation continues 

to maintain Plan XYZ. LMN Corporation 

maintains a qualified defined benefit plan 

(Plan LMN). After the 2010 stock sale, M 

begins to accrue benefits under Plan LMN, 

but O does not participate in Plan LMN. 

(ii) Affiliated employer status of the 

corporations. Immediately after the 2010 

stock sale, ABC Corporation and XYZ 

Corporation are no longer members of a 

controlled group of corporations under 

section 414(b) (as modified by section 414(h)) 

and accordingly are no longer treated as a 

single employer under the employer 

affiliation rules of § 1.415(a)–1(f)(1). 

Immediately after the 2010 stock sale, LMN 

Corporation and XYZ Corporation are 

members of a controlled group of 

corporations under section 414(b) (as 

modified by section 414(h)) and accordingly 

are treated as a single employer under the 

employer affiliation rules of § 1.415(a)–

1(f)(1). 

(iii) Treatment of plans maintained by ABC 

Corporation after the 2010 stock sale. Under 

§ 1.415(a)–1(f)(1), any plan maintained by 

any member of a controlled group of 

corporations is deemed maintained by all 

members of the controlled group, and 

paragraph (a)(1) of this section requires that, 

for purposes of applying the limitations of 

section 415(b), all defined benefit plans ever 

maintained by an employer (as determined 

under the affiliation rules of § 1.415(a)–1(f)(1) 

and (2)) are treated as one defined benefit 

plan. Therefore, defined benefit plans 

maintained by ABC Corporation must take 

into account the annual benefit of a 

participant provided under Plan XYZ in 

applying the limitations of section 415(b) to 

the participant because Plan XYZ is a plan 

that had once been maintained by ABC 

Corporation. However, beginning with the 

2010 limitation year, the aggregation of the 

annual benefit accrued by a participant under 

Plan XYZ for purposes of testing defined 

benefit plans maintained by ABC Corporation 

is limited to the annual benefit accrued by 

the participant under Plan XYZ immediately 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16925 

prior to the 2010 stock sale. This is because 

paragraph (b)(2)(i) of this section provides 

that a formerly affiliated plan of an employer 

is treated as if it had terminated immediately 

prior to the cessation of affiliation with 

sufficient assets to pay benefit liabilities 

under the plan, and had purchased annuities 

to provide plan benefits. The 2010 stock sale 

is a cessation of affiliation under paragraph 

(b)(2)(ii) of this section because this event 

caused XYZ Corporation to no longer be 

affiliated with ABC Corporation under the 

employer affiliation rules of § 1.415(a)–1(f)(1) 

and (2). Immediately after the 2010 stock 

sale, Plan XYZ is a formerly affiliated plan 

with respect to ABC Corporation under 

paragraph (b)(2)(ii) of this section because 

immediately prior to the cessation of 

affiliation, Plan XYZ was actually maintained 

by XYZ Corporation (which together with 

ABC Corporation constituted a single 

employer under the employer affiliation rules 

of § 1.415(a)–1(f)(1) and (2)), and 

immediately after the cessation of affiliation, 

Plan XYZ is not actually maintained by ABC 

Corporation or any other entity affiliated 

with it. 

(iv) Application of rules to Participants M 

and O with respect to plans maintained by 

ABC Corporation after the 2010 stock sale. In 

applying the limitations of section 415(b) to 

Participant M for the 2010 limitation year 

and later limitation years, Plan ABC must 

take into account the annual benefit provided 

under Plan ABC to Participant M and the 

annual benefit provided under Plan XYZ to 

Participant M, but treating Plan XYZ as if it 

had terminated immediately prior to the 2010 

stock sale with sufficient assets to pay benefit 

liabilities under the plan, and had purchased 

annuities to provide plan benefits. The 

aggregation of Plan XYZ with Plan ABC is 

irrelevant for purposes of Participant O 

because Participant O does not have any 

accrued benefit under Plan XYZ (as 

determined prior to the 2010 stock sale). 

(v) Treatment of plans maintained by LMN 

Corporation and XYZ Corporation after the 

2010 stock sale. Under § 1.415(a)–1(f)(1) and 

paragraph (a)(1) of this section, when 

applying the limitations of section 415(b) to 

a participant under Plans LMN and XYZ for 

the 2010 limitation year and later years, the 

annual benefit provided to the participant 

under Plans LMN, XYZ and ABC must be 

aggregated. Benefits under Plan ABC must be 

included in this aggregation because XYZ 

Corporation is deemed to have once 

maintained Plan ABC pursuant to § 1.415(a)–

1(f)(1), and since LMN Corporation and XYZ 

Corporation constitute a single employer 

under § 1.415(a)–1(f)(1), paragraph (a)(1) of 

this section requires the aggregation of all 

defined benefit plans ever maintained by 

LMN Corporation and XYZ Corporation. 

However, in performing this aggregation, a 

participant’s annual benefit under Plan ABC 

is limited to the annual benefit accrued by 

the participant immediately prior to the 2010 

stock sale. This is because, pursuant to 

paragraph (b)(2)(i) of this section, Plan ABC 

is a formerly affiliated plan of LMN 

Corporation and XYZ Corporation. 

(vi) Application of rules to Participants M 

and O with respect to plans maintained by 

LMN Corporation and XYZ Corporation after 

the 2010 stock sale. In applying the 

limitation of section 415(b) to Participant M 

for the 2010 limitation year and later 

limitation years, Plan LMN and Plan XYZ 

must take into account the annual benefit 

provided under Plans LMN and XYZ to 

Participant M and the annual benefit 

provided under Plan ABC to Participant M as 

if Plan ABC had terminated immediately 

prior to the 2010 stock sale with sufficient 

assets to pay benefit liabilities under the 

plan, and had purchased annuities to provide 

plan benefits. Participant O does not have an 

accrued benefit under Plan LMN or Plan 

XYZ, so the aggregation of Plan ABC with 

Plans LMN and XYZ is currently irrelevant 

with respect to Participant O. However, if 

Participant O were to ever participate in 

Plans LMN or XYZ after the 2010 stock sale, 

Participant O’s annual benefit under Plan 

ABC (determined as if Plan ABC terminated 

immediately prior to the 2010 stock sale) 

would have to be aggregated with any annual 

benefit that Participant O accrues under Plan 

LMN or Plan XYZ. 

(vii) Application of nonduplication rule. In 

applying paragraph (a)(1) of this section to 

plans maintained by ABC Corporation after 

2010 stock sale, plans maintained by ABC 

Corporation do not take into account the 

deemed termination of Plan ABC since ABC 

Corporation maintains Plan ABC after the 

cessation of affiliation. Similarly, in applying 

paragraph (a)(1) of this section to plans 

maintained by LMN Corporation and XYZ 

Corporation after the 2010 stock sale, plans 

maintained by LMN Corporation and XYZ 

Corporation do not take into account the 

deemed termination of Plan XYZ since XYZ 

Corporation maintains Plan XYZ after the 

cessation of affiliation. See paragraph (d)(1) 

of this section. 

Example 3. (i) Facts. The facts are the same 

as in Example 2, except that on January 1, 

2009, Plan ABC transfers Participant M’s 

benefit to Plan XYZ. 

(ii) Treatment of plans maintained by ABC 

Corporation. Pursuant to § 1.415(b)–

1(b)(3)(i)(A), M’s benefit that is transferred 

from Plan ABC to Plan XYZ is not treated as 

being provided under Plan ABC for the 

limitation year in which the transfer occurs 

(2009). This is because M’s transferred 

benefit is otherwise required to be taken into 

account by Plan ABC for the 2009 limitation 

year since Plan XYZ must be aggregated with 

Plan ABC pursuant to paragraph (a)(1) of this 

section. This result does not change for the 

2010 limitation year and later limitation 

years, where pursuant to paragraph (b)(2)(i) 

of this section, Plan XYZ becomes a formerly 

affiliated plan with respect to ABC 

Corporation due to the 2010 stock sale. 

Under paragraph (b)(2)(i) of this section, Plan 

XYZ (the formerly affiliated plan) is treated 

from the perspective of plans maintained by 

ABC Corporation (Plan ABC) as if Plan XYZ 

terminated immediately prior to the 2010 

stock sale with sufficient assets to pay benefit 

liabilities under the plan, and had purchased 

annuities to provide plan benefits. However, 

the pre-2010 stock sale benefits of Plan XYZ 

include the January 1, 2009, transfer of 

Participant M’s benefit. Thus, in the 2010 

limitation year, M’s transferred benefit is still 

otherwise required to be taken into account 

by Plan ABC on account of the aggregation 

of Plan XYZ with Plan ABC pursuant to 

paragraph (a)(1) of this section, and therefore 

the transferred benefit is not treated as being 

provided by Plan ABC. 

(iii) Treatment of plans maintained by 

LMN Corporation and XYZ Corporation. 

Pursuant to § 1.415(b)–1(b)(3)(i)(C), 

Participant M’s benefit that is transferred to 

Plan XYZ from Plan ABC must be treated as 

provided under Plan XYZ for purposes of 

applying the limitations of section 415 to 

Plan XYZ with respect to Participant M for 

the limitation year in which the transfer 

occurs and later years. This result does not 

change on account of the 2010 stock sale. 

When applying the limitation of section 415 

to Plans LMN and XYZ for the 2010 

limitation year and later years, Plans LMN 

and XYZ must aggregate the annual benefit 

provided to a participant under each plan 

along with the participant’s benefit under 

Plan ABC pursuant to § 1.415(a)–1(f)(1) and 

paragraph (a)(1) of this section. However, 

under paragraph (b)(2)(i) of this section, for 

the 2010 limitation year and later years, this 

aggregation of M’s Plan ABC benefit only 

includes the annual benefit attributable to a 

participant’s accrued benefit under Plan ABC 

immediately prior to the 2010 stock sale, 

which (due to the 2009 transfer) is zero. 

Example 4. (i) Facts. The facts are the same 

as in Example 2, except that on January 1, 

2011, Plan ABC transfers Participant M’s 

benefit to Plan XYZ. 

(ii) Treatment of plans maintained by ABC 

Corporation for the 2011 limitation year and 

later years. Pursuant to § 1.415(b)–

1(b)(3)(i)(B), M’s benefit that is transferred 

from Plan ABC to Plan XYZ during the 2011 

limitation year is treated by Plan ABC for the 

2011 limitation year and later years as if the 

transferred benefit were provided under a 

plan that must be aggregated with Plan ABC 

that terminated immediately prior to the 

transfer with sufficient assets to pay benefit 

liabilities under the plan, and had purchased 

annuities to provide plan benefits. This is 

because M’s transferred benefit is not 

otherwise required to be taken into account 

by Plan ABC for the 2011 limitation year and 

later years pursuant to paragraphs (a)(1) and 

(b)(2)(i) of this section. While Plan ABC must 

take into account Participant M’s annual 

benefit under Plan XYZ under paragraph 

(a)(1) of this section, Participant M’s annual 

benefit for this purpose is limited under 

paragraph (b)(2)(i) of this section to M’s 

accrued benefit under Plan XYZ immediately 

prior to the 2010 stock sale, and Participant 

M’s pre-2010 stock sale accrued benefit 

under Plan XYZ excludes the 2011 transfer. 

(iii) Treatment of plans maintained by 

LMN Corporation and XYZ Corporation for 

the 2011 limitation year and later years. 

Pursuant to § 1.415(b)–1(b)(3)(i)(C), 

Participant M’s benefit that is transferred to 

Plan XYZ from Plan ABC must be treated as 

provided under Plan XYZ for purposes of 

applying the limitations of section 415 to 

Plan XYZ with respect to Participant M for 

the limitation year in which the transfer 

occurs and later years. In applying the 

limitations of section 415(b) to Plans LMN 

and XYZ with respect to Participant M for 

the 2010 limitation year and later years, the 


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16926 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

annual benefit of Participant M under Plans 

ABC, LMN, and XYZ must be aggregated 

pursuant to § 1.415(a)–1(f)(1) and paragraph 

(a)(1) of this section, but for this purpose, 

Participant M’s benefit under Plan ABC is 

treated as if it were provided under a plan 

that terminated immediately prior to the 

cessation of affiliation of ABC Corporation 

and XYZ Corporation with sufficient assets to 

pay benefit liabilities under the plan, and 

had purchased an annuity to provide 

Participant M’s benefits. (See paragraph 

(b)(2)(i) of this section and Example 2.) In 

applying the limitations of section 415(b) to 

Plans LMN and XYZ with respect to 

Participant M for the 2011 limitation year 

and later years, the annual benefit of 

Participant M under Plans ABC, LMN, and 

XYZ still must be aggregated pursuant to 

§ 1.415(a)–1(f)(1) and paragraph (a)(1) of this 

section. However, beginning with the 2011 

limitation year, ABC Corporation is a 

predecessor employer with respect to LMN 

Corporation and XYZ Corporation with 

respect to Participant M on account of the 

transfer of benefits from Plan ABC to Plan 

XYZ, pursuant to paragraph (c)(1) of this 

section. Therefore, Plans LMN and XYZ must 

take into account benefits that Participant M 

accrued under Plan ABC after the January 1, 

2010, cessation of affiliation of ABC 

Corporation and XYZ Corporation that were 

not transferred to Plan XYZ on January 1, 

2011, pursuant to paragraphs (c)(1) and (d)(1) 

of this section. Since all of Participant M’s 

benefit in Plan ABC is transferred to Plan 

XYZ on January 1, 2011, Participant M’s 

annual benefit from Plan ABC for purposes 

of aggregating Plan ABC with Plans LMN and 

XYZ is zero. 

Example 5. (i) Facts. The facts are the same 

as in Example 2, except that instead of the 

2010 stock sale, XYZ Corporation sells some 

of its operating assets to LMN Corporation 

(and, under the facts and circumstances, the 

sale does not result in XYZ Corporation 

constituting a predecessor employer of LMN 

Corporation under the rules of paragraph 

(c)(2) of this section), and in connection with 

the asset sale, LMN Corporation assumes 

sponsorship of Plan XYZ in place of XYZ 

Corporation, effective January 1, 2010. 

(ii) Treatment of plans maintained by ABC 

Corporation and XYZ Corporation. Pursuant 

to paragraph (a)(1) of this section, all defined 

benefit plans ever maintained by ABC 

Corporation and XYZ Corporation must be 

aggregated as a single defined benefit plan for 

purposes of applying the limitations of 

section 415(b). However, for purposes of 

determining the annual benefit under Plan 

XYZ for the 2010 limitation year and later 

years, the aggregation of a participant’s 

benefit under Plan XYZ is limited to the 

participant’s annual benefit accrued 

immediately prior to the January 1, 2010, 

transfer of sponsorship of Plan XYZ. This is 

because paragraph (b)(2)(i) of this section 

provides that a formerly affiliated plan of an 

employer is treated as if it were a plan that 

terminated immediately prior to the cessation 

of affiliation with sufficient assets to pay 

benefit liabilities under the plan, and had 

purchased annuities to provide plan benefits. 

The January 1, 2010, transfer of sponsorship 

of Plan XYZ is a cessation of affiliation under 

paragraph (b)(2)(ii) of this section because 

this event causes Plan XYZ to no longer 

actually be maintained by either ABC 

Corporation or XYZ Corporation. Effective 

immediately after the January 1, 2010, 

transfer of sponsorship, Plan XYZ is a 

formerly affiliated plan with respect to ABC 

Corporation and XYZ Corporation under 

paragraph (b)(2)(ii) of this section because 

immediately prior to the cessation of 

affiliation, Plan XYZ was actually maintained 

by XYZ Corporation, and immediately after 

the cessation of affiliation, Plan XYZ is not 

actually maintained by either XYZ 

Corporation or ABC Corporation. Therefore, 

in applying the limitation of section 415(b) 

to Participant M for the 2010 limitation year 

and later limitation years, Plan ABC must 

take into account the annual benefit provided 

under Plan ABC to Participant M and the 

annual benefit provided under Plan XYZ to 

Participant M as if Plan XYZ had terminated 

immediately prior to the 2010 stock sale with 

sufficient assets to pay benefit liabilities 

under the plan, and had purchased annuities 

to provide plan benefits. The aggregation of 

Plan XYZ with Plan ABC is irrelevant for 

purposes of Participant O because Participant 

O does not have any accrued benefit under 

Plan XYZ (as determined prior to the 2010 

transfer of sponsorship). 

(iii) Treatment of plans maintained by 

LMN Corporation. Under paragraph (a)(1) of 

this section, all defined benefit plans ever 

maintained by LMN Corporation or a 

predecessor employer must be aggregated as 

a single plan for purposes of applying the 

limitations of section 415(b). ABC 

Corporation and XYZ Corporation constitute 

a predecessor employer pursuant to 

paragraph (c)(1) of this section with respect 

to the participants who participate in Plan 

XYZ on the date of the transfer of 

sponsorship of Plan XYZ (the transferred 

participants) from XYZ Corporation to LMN 

Corporation, such as Participant M. This is 

because, effective with the January 1, 2010, 

transfer of sponsorship, LMN Corporation 

maintains a plan (Plan XYZ) under which the 

participants accrued a benefit while 

performing services for XYZ Corporation 

(which is in turn affiliated with ABC 

Corporation under § 1.415(a)–1(f)(1)) and 

such benefits are provided under a plan 

maintained by LMN Corporation. Therefore, 

for the 2010 limitation year and later years, 

the annual benefit under Plan ABC of the 

transferred participants (such as Participant 

M) must be aggregated with the annual 

benefit provided to such participants under 

Plans XYZ and LMN for purposes of 

determining whether Plan LMN or Plan XYZ 

satisfies the limitations of section 415(b). 

However, the aggregation of the transferred 

participants’ Plan ABC annual benefits is 

limited to the annual benefit accrued under 

Plan ABC immediately prior to January 1, 

2010, transfer of sponsorship. This is 

because, pursuant to paragraph (c)(1) of this 

section, Plan ABC is treated from the 

perspective of plans maintained by LMN 

Corporation as if Plan ABC had terminated 

immediately prior to the transfer of 

sponsorship of Plan ABC to LMN 

Corporation with sufficient assets to pay 

benefit liabilities under the plan, and had 

purchased annuities to provide plan benefits. 

ABC Corporation and XYZ Corporation do 

not constitute a predecessor employer with 

respect to Participant O. Thus, if Participant 

O is a participant in Plan LMN or becomes 

a participant in Plan XYZ after the 2010 

transfer of sponsorship, neither plan 

aggregates Participant O’s Plan ABC benefits 

for purposes of satisfying section 415(b). In 

applying paragraph (a)(1) of this section to a 

participant, plans maintained by LMN 

Corporation do not double count the 

participant’s annual benefit. See paragraph 

(d)(1) of this section. Thus, such plans do not 

aggregate the annual benefit provided under 

Plan XYZ with the annual benefit from the 

deemed termination of Plan XYZ that LMN 

Corporation’s predecessor employer (which 

is ABC and XYZ Corporations) must take into 

account in applying paragraph (a)(1) of this 

section, and instead consider the annual 

benefit actually provided under Plan XYZ. 

Example 6. (i) Facts. N is employed by a 

hospital which purchases an annuity contract 

described in section 403(b) on N’s behalf for 

the current limitation year. N is in control of 

the hospital within the meaning of section 

414(b) or (c), as modified by section 415(h). 

The hospital also maintains a qualified 

defined contribution plan during the current 

limitation year in which N participates. 

(ii) Conclusion. Under section 415(k)(4), 

the hospital, as well as N, is considered to 

maintain the annuity contract. Accordingly, 

for N the sum of the annual additions under 

the qualified defined contribution plan and 

the annuity contract must satisfy the 

limitations of section 415(c) and § 1.415(c)–

1. 

Example 7. (i) Facts. The facts are the same 

as in Example 6, except that instead of being 

in control of the hospital, N is the 100 

percent owner of a professional corporation 

P, which maintains a qualified defined 

contribution plan in which N participates. 

(ii) Conclusion. Under section 415(k)(4), 

the professional corporation, as well as N, is 

considered to maintain the annuity contract. 

Accordingly, the sum of the annual additions 

under the qualified defined contribution plan 

maintained by professional corporation P and 

the annuity contract must satisfy the 

limitations of section 415(c) and § 1.415(c)–

1. See § 1.415(g)–1(b)(3)(iv)(C)(2) for an 

example of the treatment of a contribution to 

a section 403(b) annuity contract that exceeds 

the limits of section 415(c) by reason of the 

aggregation required by this section. 

Example 8. (i) Facts. J is an employee of 

two corporations, N and M, each of which 

has employed J for more than 10 years. N and 

M are not required to be aggregated pursuant 

to section 415(f) and this section. Each 

corporation has a qualified defined benefit 

plan in which J has participated for more 

than 10 years. Each plan provides a benefit 

which is equal to 75 percent of a participant’s 

average compensation for the period of the 

participant’s high-3 years of service and is 

payable in the form of a straight life annuity 

beginning at age 65. J’s average compensation 

for the period of his high-3 years of service 

from each corporation is $160,000. In July 

2008, N Corporation becomes a wholly 

owned subsidiary of M Corporation. 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16927 

(ii) Plan aggregation analysis. As a result 

of the acquisition of N Corporation by M 

Corporation, J is treated as being employed 

by a single employer under section 414(b). 

Therefore, because section 415(f)(1)(A) 

requires that all defined benefit plans of an 

employer be treated as one defined benefit 

plan, the two plans must be aggregated for 

purposes of applying the limitations of 

section 415. However, under paragraph 

(e)(3)(i) of this section, since the plans were 

not aggregated as of the first day of the 2008 

limitation year (January 1, 2008), they will 

not be considered aggregated until the 

limitation year beginning January 1, 2009, 

provided that no plan amendment increasing 

benefits with respect to participant J is made 

after the acquisition of N by M. 

(iii) Application to Participant J. J has a 

total benefit under the two plans of $240,000, 

which, as a result of the plan aggregation, is 

in excess of the section 415(b) limit. 

However, under paragraph (e)(3)(ii) of this 

section, the limitations of section 415(b) and 

§ 1.415(b)–1 applicable to J may be exceeded 

in this situation without plan disqualification 

so long as J’s accrued benefit derived from 

employer contributions is not increased (that 

is, J’s accrued benefit does not increase on 

account of increased compensation, service, 

participation, or other accruals) during the 

period within which the limitations are being 

exceeded. 

Example 9. (i) Facts. A, age 30, owns all 

of the stock of X Corporation and also owns 

10 percent of the stock of Z Corporation. F, 

A’s father, directly owns 75 percent of the 

stock of Z Corporation. Both corporations 

have qualified defined contribution plans in 

which A participates. A’s compensation 

(within the meaning of § 1.415(c)–2) for 2008 

is $20,000 from Z Corporation and $150,000 

from X Corporation. During the period 

January 1, 2008 through June 30, 2008, 

annual additions of $20,000 are credited to 

A’s account under the plan of Z Corporation, 

while annual additions of $40,000 are 

credited to A’s account under the plan of X 

Corporation. In both instances, the amount of 

annual additions represent the maximum 

allowable under section 415(c) and 

§ 1.415(c)–1. On July 15, 2008, F dies, and A 

inherits all of F’s stock in Z in 2008. 

(ii) Conclusion. As of July 15, 2008, A is 

considered to be in control of X and Z 

Corporations, and the two plans must be 

aggregated for purposes of applying the 

limitations of section 415. However, even 

though A’s total annual additions for 2008 

are $60,000, the limitations of section 415(c) 

and § 1.415(c)–1 are not violated for 2008, 

provided no annual additions are credited to 

A’s accounts after July 15, 2008 (the date that 

A is first in control of Z) for the remainder 

of the 2008 limitation year. 

Example 10. (i) Facts. P is a key employee 

of employer XYZ who participates in a 

qualified defined contribution plan (Plan X). 

P is also provided post-retirement medical 

benefits, and XYZ has taken into account a 

reserve for those benefits under section 

419A(c)(2). In the 2008 limitation year, P’s 

compensation is $30,000 and P’s annual 

additions under Plan X are $5,000. Pursuant 

to section 419A(d), a separate account is 

maintained for P, and that account is credited 

with an allocation of $32,000 for the 2008 

limitation year. It is assumed that the section 

415(c)(1)(A) dollar limit for 2008 is $46,000. 

(ii) Separate testing analysis. Under 

paragraph (h)(1) of this section, Plan X and 

the individual medical account must 

separately satisfy the requirements of section 

415(c), taking into account any special limit 

applicable to that arrangement. In this case, 

the contributions to Plan X separately satisfy 

the limitations of section 415(c). While the 

individual medical account is treated as a 

defined contribution plan subject to the rules 

of section 415(c), it is not subject to the 100 

percent of compensation limit of section 

415(c)(1)(B), so the contributions to that 

account satisfy the limitations of section 

415(c). 

(iii) Aggregation analysis. The sum of the 

annual additions under Plan X and the 

amounts contributed to the separate account 

on P’s behalf must satisfy the requirements 

of section 415(c). Under paragraph (h)(2) of 

this section, the limit applicable to the 

aggregated plan is equal to the greater of the 

limits applicable to the separate plans. In this 

case, the limit applicable to the medical 

account is $46,000 (which is greater than the 

limit of $30,000 applicable to the qualified 

plan), so the limit that applies to the 

aggregated plan is $46,000, and the 

aggregated plan satisfies the requirements of 

section 415. 

■ Par. 15. Section 1.415(g)–1 is added to 

read as follows: 

§ 1.415(g)–1 Disqualification of plans and 

trusts. 

(a) Disqualification of plans—(1) In 

general. Under section 415(g) and this 

section, with respect to a particular 

limitation year, a plan (and the trust 

forming part of the plan) is disqualified 

in accordance with the rules provided 

in paragraph (b) of this section, if the 

conditions described in paragraph (a)(2) 

or (a)(3) of this section apply. For 

purposes of this paragraph (a), the 

determination of whether a plan or a 

group of aggregated plans exceeds the 

limitations imposed by section 415 for 

a particular limitation year is, except as 

otherwise provided, made by taking into 

account the aggregation of plan rules 

provided in section 415(f) and 

§ 1.414(f)–1. 

(2) Defined contribution plans. A plan 

is disqualified in accordance with the 

rules provided in paragraph (b) of this 

section if annual additions (as defined 

in § 1.415(c)–1(b)) with respect to the 

account of any participant in a defined 

contribution plan maintained by the 

employer exceed the limitations of 

section 415(c) and § 1.415(c)–1. 

(3) Defined benefit plans. A plan is 

disqualified in accordance with the 

rules provided in paragraph (b) of this 

section if the annual benefit (as defined 

in § 1.415(b)–1(b)(1)) of a participant in 

a defined benefit plan maintained by the 

employer exceeds the limitations of 

section 415(b) and § 1.415(b)–1. 

(b) Rules for disqualification of plans 

and trusts—(1) In general. If any plan 

(including a trust which forms part of 

such plan) is disqualified for a 

particular limitation year under the 

rules set forth in this paragraph (b), then 

the disqualification is effective as of the 

first day of the first plan year containing 

any portion of the particular limitation 

year. 

(2) Single plan. In the case of a single 

qualified defined benefit plan 

(determined without regard to section 

415(f) and § 1.415(f)–1) maintained by 

the employer that provides an annual 

benefit (as defined in § 1.415(b)–1(b)(1)) 

in excess of the limitations of section 

415(b) and § 1.415(b)–1 for any 

particular limitation year, such plan is 

disqualified in that limitation year. 

Similarly, if the employer only 

maintains a single defined contribution 

plan (determined without regard to 

section 415(f) and § 1.415(f)–1) under 

which annual additions (as defined in 

§ 1.415(c)–1(b)) allocated to the account 

of any participant exceed the limitations 

of section 415(c) and § 1.415(c)–1 for 

any particular limitation year, such plan 

is also disqualified in that limitation 

year. 

(3) Multiple plans—(i) In general. If 

the limitations of section 415(b) and 

§ 1.415(b)–1, or section 415(c) and 

§ 1.415(c)–1, are exceeded for a 

particular limitation year with respect to 

any participant solely because of the 

application of the aggregation rules of 

section 415(f)(1) and § 1.415(f)–1 (taking 

into account the rules of § 1.415(a)–1(f)), 

then one or more of the plans is 

disqualified in accordance with the 

ordering rules set forth in paragraph 

(b)(3)(ii) of this section, applied in 

accordance with the rules of application 

set forth in paragraph (b)(3)(iii) of this 

section, subject to the special rules set 

forth in paragraph (b)(3)(iv) of this 

section, until, without regard to annual 

benefits or annual additions under the 

disqualified plan or plans, the 

remaining plans satisfy the applicable 

limitations of section 415. 

(ii) Ordering rules—(A) 

Disqualification of ongoing plans other 

than multiemployer plans. If there are 

two or more plans that have not been 

terminated at any time including the 

last day of the particular limitation year, 

and if one or more of those plans is a 

multiemployer plan described in section 

414(f), then one or more of the plans (as 

needed to satisfy the limitations of 

section 415) that has not been 

terminated and is not a multiemployer 

plan is disqualified in that limitation 

year. For purposes of the preceding 


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16928 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 

sentence, the determination of whether 

a plan is a multiemployer plan 

described in section 414(f) is made as of 

the last day of the particular limitation 

year. 

(B) Disqualification of ongoing 

multiemployer plans. If, after the 

application of paragraph (b)(3)(ii)(A) of 

this section, there are two or more plans 

and one or more of the plans has been 

terminated at any time including the 

last day of the particular limitation year, 

then one or more of the plans (as needed 

to satisfy the applicable limitations of 

section 415) that has not been so 

terminated (regardless of whether the 

plan is a multiemployer plan described 

in section 414(f)) is disqualified in that 

limitation year. 

(iii) Rules of application—(A) 

Employer elects which plan is 

disqualified. If there are two or more 

plans of an employer within a group of 

plans one or more of which is to be 

disqualified pursuant to paragraph 

(b)(3)(ii)(A) or (B) of this section, then 

the employer may elect, in a manner 

determined by the Commissioner, 

which plan or plans are disqualified. If 

those two or more plans are involved 

because of the application of § 1.415(a)–

1(f), the employers involved may elect, 

in a manner determined by the 

Commissioner, which plan or plans are 

disqualified. However, the election 

described in the preceding sentence is 

not effective unless made by all of those 

employers. 

(B) Commissioner determines which 

plan is disqualified. If the election 

described in paragraph (b)(3)(iii)(A) of 

this section is not made with respect to 

the two plans described in paragraph 

(b)(3)(iii)(A) of this section, then the 

Commissioner, taking into account all of 

the facts and circumstances, has the 

discretion to determine the plan that is 

disqualified in the particular limitation 

year. In making this determination, 

some of the factors that will be taken 

into account include, but are not limited 

to, the number of participants in each 

plan, the amount of benefits provided 

on an overall basis by each plan, and the 

extent to which benefits are distributed 

or retained in each plan. 

(iv) Special rules—(A) Simplified 

employee pensions. If there are two or 

more plans one or more of which is to 

be disqualified pursuant to paragraph 

(b)(3)(ii)(A) or (B) of this section, and if 

one of the plans is a simplified 

employee pension (as defined in section 

408(k)), then the simplified employee 

pension is not disqualified until all of 

the other plans have been disqualified. 

However, if one of the plans has been 

terminated, then the simplified 

employee pension is disqualified before 

the terminated plan. For purposes of 

this paragraph (b)(3)(iv)(A), the 

disqualification of a simplified 

employee pension means that the 

simplified employee pension is no 

longer described under section 408(k). 

(B) Aggregating medical accounts 

with defined contribution plans. In the 

event that aggregating a medical account 

described in § 1.415(c)–1(a)(2)(ii)(C) or 

(D) and a defined contribution plan 

other than such a medical account 

causes the limitations of section 415(c) 

and § 1.415(c)–1 applicable to a 

participant to be exceeded for a 

particular limitation year, the defined 

contribution plan other than the 

medical account is disqualified for the 

limitation year. 

(C) Aggregating section 403(b) annuity 

contract and qualified defined 

contribution plan—(1) In general. In the 

event that aggregating a section 403(b) 

annuity contract and a qualified defined 

contribution plan under the provisions 

of section 415(f)(1)(B) causes the 

limitations of section 415(c) and 

§ 1.415(c)–1 applicable to a participant 

under the aggregated defined 

contribution plans to be exceeded for a 

particular limitation year, the excess of 

the contributions to the annuity contract 

plus the annual additions to the 

qualified plan over such limitations is 

attributed to the annuity contract and 

therefore includable in the gross income 

of the participant for the taxable year 

with or within which that limitation 

year ends. See § 1.415(a)–1(b)(2) for 

rules regarding the treatment of a 

contribution to a section 403(b) annuity 

contract that exceeds the limitations of 

section 415. 

(2) Example. The following example 

illustrates the application of this 

paragraph (b)(3)(iv)(C). It is assumed for 

purposes of this example that the dollar 

limitation under section 415(c)(1)(A) 

that applies for all relevant limitation 

years is $45,000. The example is as 

follows: 

Example. (i) N is employed by a hospital 

which purchases an annuity contract 

described in section 403(b) on N’s behalf for 

the current limitation year. N is also the 100 

percent owner of a professional corporation 

P that maintains a qualified defined 

contribution plan during the current 

limitation year in which N participates. (The 

facts of this example are the same as in 

§ 1.415(f)–1(j) Example 7.) N’s compensation 

(within the meaning of § 1.415(c)–2) from the 

hospital for the current limitation year is 

$150,000. For the current limitation year, the 

hospital contributes $30,000 for the section 

403(b) annuity contract on N’s behalf, which 

is within the limitations applicable to N 

under the annuity contract (specifically, the 

limit under the annuity contract is $45,000)). 

Professional corporation P also contributes 

$20,000 to the qualified defined contribution 

plan on N’s behalf for the current limitation 

year (which represents the only annual 

additions allocated to N’s account under the 

plan for such year), which is within the 

$45,000 limitation of section 415(c)(1) 

applicable to N under the plan. 

(ii) Under section 415(k)(4), the 

professional corporation, as well as N, is 

considered to maintain the annuity contract. 

Accordingly, the sum of the annual additions 

under the qualified defined contribution plan 

maintained by professional corporation P and 

the annuity contract must satisfy the 

limitations of section 415(c) and § 1.415(c)–

1. 

(iii) Because the total aggregate 

contributions ($50,000) exceed the section 

415(c) limitation applicable to N ($45,000), 

$5,000 of the $30,000 contributed to the 

section 403(b) annuity contract is considered 

an excess contribution and therefore 

currently includable in N’s gross income. The 

contract continues to be a section 403(b) 

annuity contract only if, for the current 

limitation year and all years thereafter, the 

issuer of the contract maintains separate 

accounts for each portion attributable to such 

excess contributions. See §§ 1.415(a)–1(b)(2). 

(c) Plan year for certain annuity 

contracts and individual retirement 

plans. For purposes of this section, 

unless the plan under which the 

annuity contract or individual 

retirement plan is provided specifies 

that a different twelve-month period is 

considered to be the plan year—

(1) An annuity contract described in 

section 403(b) is considered to have a 

plan year coinciding with the taxable 

year of the individual on whose behalf 

the contract has been purchased; and 

(2) A simplified employee pension 

described in section 408(k) is 

considered to have a plan year 

coinciding with the year under the plan 

that is used pursuant to section 

408(k)(7)(C). 

■ Par. 16. Section 1.415(j)–1 is added to 

read as follows: 

§ 1.415(j)–1 Limitation year. 

(a) In general. Unless the terms of a 

plan provide otherwise, the limitation 

year, with respect to any qualified plan 

maintained by the employer, is the 

calendar year. 

(b) Alternative limitation year 

election. The terms of a plan may 

provide for the use of any other 

consecutive twelve month period as the 

limitation year. This includes a fiscal 

year with an annual period varying from 

52 to 53 weeks, so long as the fiscal year 

satisfies the requirements of section 

441(f). A plan may only provide for one 

limitation year regardless of the number 

or identity of the employers maintaining 

the plan. 

(c) Multiple limitation years—(1) In 

general. Where an employer maintains 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16929 

more than one qualified plan, those 

plans may provide for different 

limitation years. The rule described in 

this paragraph (c) also applies to a 

controlled group of employers (within 

the meaning of section 414(b) or (c), as 

modified by section 415(h)). If the plans 

of an employer (or a controlled group of 

employers whose plans are aggregated) 

have different limitation years, section 

415 is applied in accordance with the 

rule of paragraphs (c)(2) and (3) of this 

section. 

(2) Testing rule for defined 

contribution plans. If a participant is 

credited with annual additions in only 

one defined contribution plan, in 

determining whether the requirements 

of section 415(c) are satisfied, only the 

limitation year applicable to that plan is 

considered. However, if a participant is 

credited with annual additions in more 

than one defined contribution plan, 

each such plan satisfies the 

requirements of section 415(c) only if 

the limitations of section 415(c) are 

satisfied with respect to amounts that 

are annual additions for the limitation 

year with respect to the participant 

under the plan, plus amounts credited 

to the participant’s account under all 

other plans required to be aggregated 

with the plan pursuant to section 415(f) 

and § 1.415(f)–1 that would have been 

considered annual additions for the 

limitation year under the plan if they 

had been credited under the plan rather 

than an aggregated plan. 

(3) Testing rule for defined benefit 

plans. If a participant has participated 

in only one defined benefit plan, in 

determining whether the requirements 

of section 415(b) are satisfied, only the 

limitation year applicable to that plan is 

considered. However, if a participant 

has participated in more than one 

defined benefit plan, a plan satisfies the 

requirements of section 415(b) only if 

the annual benefit under all plans 

required to be aggregated pursuant to 

section 415(f) and § 1.415(f)–1 for the 

limitation year of that plan with respect 

to the participant satisfy the applicable 

limitations of section 415(b). 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). 

(d) Change of limitation year—(1) In 

general. Once established, the limitation 

year may be changed only by amending 

the plan. Any change in the limitation 

year must be a change to a 12-month 

period commencing with any day 

within the current limitation year. For 

purposes of this section, the limitations 

of section 415 are to be applied in the 

normal manner to the new limitation 

year. 

(2) Application to short limitation 

period. Where there is a change of 

limitation year, the limitations of 

section 415 are to be separately applied 

to a limitation period which begins with 

the first day of the current limitation 

year and which ends on the day before 

the first day of the first limitation year 

for which the change is effective. In the 

case of a defined contribution plan, the 

dollar limitation with respect to this 

limitation period is determined by 

multiplying the applicable dollar 

limitation for the calendar year in which 

the limitation period ends by a fraction, 

the numerator of which is the number 

of months (including any fractional 

parts of a month) in the limitation 

period, and the denominator of which is 

12. In the case of a defined benefit plan, 

no adjustment is made to the section 

415(b) limitations to reflect a short 

limitation period. 

(3) Deemed change of limitation year. 

If a defined contribution plan is 

terminated effective as of a date other 

than the last day of the plan’s limitation 

year, the plan is treated for purposes of 

this section as if the plan was amended 

to change its limitation year. Thus, the 

rules of this paragraph (d) apply to the 

terminating plan’s final limitation year. 

(e) Limitation year for individuals on 

whose behalf section 403(b) annuity 

contracts have been purchased. The 

limitation year of an individual on 

whose behalf a section 403(b) annuity 

contract has been purchased by an 

employer is determined in the following 

manner. 

(1) If the individual is not in control 

of any employer (within the meaning of 

§ 1.415(f)–1(f)(2)(ii)), the limitation year 

is the calendar year. However, the 

individual may elect to change the 

limitation year to another twelve-month 

period. To do this, the individual must 

attach a statement to his or her income 

tax return filed for the taxable year in 

which the change is made. Any change 

in the limitation year must comply with 

the rules set forth in paragraph (d) of 

this section. 

(2) If the individual is in control of an 

employer (within the meaning of 

§ 1.415(f)–1(f)(2)(ii)), the limitation year 

is the limitation year of that employer. 

(f) Limitation year for individuals on 

whose behalf individual retirement 

plans are maintained. The limitation 

year of an individual on whose behalf 

an individual retirement plan (within 

the meaning of section 7701(a)(37)) is 

maintained is determined in the manner 

described in paragraph (e) of this 

section. 

(g) Examples. The following examples 

illustrate the application of this section: 

Example 1. (i) Participant M is employed 

by both Employer A and Employer B, each 

of which maintains a qualified defined 

contribution plan. M participates in both of 

these plans. The limitation year for Employer 

A’s plan is January 1 through December 31, 

and the limitation year for Employer B’s plan 

is April 1 through March 31. Employer A and 

Employer B are both corporations, and 

Corporation X owns 100 percent of the stock 

of Employer A and Employer B. 

(ii) The two plans in which M participates 

are required under section 415(f) to be 

aggregated for purposes of applying the 

limitations of section 415(c) to annual 

additions made with respect to M. Thus, for 

example, for the limitation year of Employer 

A’s plan that begins January 1, 2008, annual 

additions with respect to M that are subject 

to the limitations of section 415(c) include 

both amounts that are annual additions with 

respect to M under Employer A’s plan for the 

period beginning January 1, 2008, and ending 

December 31, 2008, and amounts contributed 

to Employer B’s plan with respect to M that 

would have been considered annual 

additions for the period beginning January 1, 

2008, and ending December 31, 2008, under 

Employer A’s plan if those amounts had 

instead been contributed to Employer A’s 

plan. 

Example 2. In 2008, an employer with a 

qualified defined contribution plan using the 

calendar year as the limitation year elects to 

change the limitation year to a period 

beginning July 1 and ending June 30. Because 

of this change, the plan must satisfy the 

limitations of section 415(c) for the limitation 

period beginning January 1, 2008, and ending 

June 30, 2008. In applying the limitations of 

section 415(c) to this limitation period, the 

amount of compensation taken into account 

may only include compensation for this 

period. Furthermore, the dollar limitation for 

this period is the otherwise applicable dollar 

limitation for calendar year 2008, multiplied 

by 6/12. 

■ Par. 17. Section 1.416–1 is amended 

by revising Q&A T–21 to read as 

follows: § 1.416–1 Questions and 

answers on top heavy plans. 

* * * * * 

T–21. Q. For purposes of testing 

whether an individual has 

compensation of more than $150,000, 

what definition of compensation must 

be used? 

A. The definition of compensation to 

be used is the definition in § 1.415(c)–

2, however, compensation must be 

determined for a plan year, not a 

limitation year. Alternatively, 

compensation that would be stated on 

an employee’s Form W–2, ‘‘Wage and 

Tax Statement,’’ for the calendar year 

that ends with or within the plan year 

may be used, although amounts that 

would have been stated on the 

employee’s Form W–2 but for an 

election under section 125, 132(f)(4), 


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401(k), 403(b), 408(k), 408(p)(2)(A)(i), or 

457(b) must be included. A plan must 

use the same definition of compensation 

for all top-heavy plan purposes for 

which the definition in this Q and A 

must be used. 

* * * * * 

■ Par. 18. Section 1.457–4 is amended 

by revising paragraph (d) to read as 

follows: 

§ 1.457–4 Annual deferrals, deferral 

limitations, and deferral agreements under 

eligible plans. 

* * * * * 

(d) Deferrals after severance from 

employment, including sick, vacation, 

and back pay under an eligible plan—

(1) In general. An eligible plan may 

provide that a participant who has not 

had a severance from employment may 

elect to defer accumulated sick pay, 

accumulated vacation pay, and back pay 

under an eligible plan if the 

requirements of section 457(b) are 

satisfied. For example, the plan must 

provide, in accordance with paragraph 

(b) of this section, that these amounts 

may be deferred for any calendar month 

only if an agreement providing for the 

deferral is entered into before the 

beginning of the month in which the 

amounts would otherwise be paid or 

made available and the participant is an 

employee on the date the amounts 

would otherwise be paid or made 

available. For purposes of section 457, 

compensation that would otherwise be 

paid for a payroll period that begins 

before severance from employment is 

treated as an amount that would 

otherwise be paid or made available 

before an employee has a severance 

from employment. In addition, deferrals 

may be made for former employees with 

respect to compensation described in 

§ 1.415(c)–2(e)(3)(i) (relating to certain 

compensation paid by the later of 21⁄2

months after severance from 

employment or the end of the limitation 

year that includes the date of severance 

from employment). For this purpose, the 

calendar year is substituted for the 

limitation year. In addition, 

compensation described in § 1.415(c)–

2(e)(4), (g)(4), or (g)(7) (relating to 

compensation paid to participants who 

are permanently and totally disabled or 

compensation relating to qualified 

military service under section 414(u)), 

provided those amounts represent 

compensation described in § 1.415(c)–

2(e)(3)(i). 

(2) Examples. The provisions of this 

paragraph (d) are illustrated by the 

following examples: 

Example 1. (i) Facts. Participant G, who is 

age 62 in year 2007, is an employee who 

participates in an eligible plan providing a 

normal retirement age of 65 and a bona fide 

sick leave and vacation pay program of the 

eligible employer. Under the terms of G’s 

employer’s eligible plan and the sick leave 

and vacation pay program, G is permitted to 

make a one-time election to contribute 

amounts representing accumulated sick pay 

to the eligible plan. G has a severance from 

employment on January 12, 2008, at which 

time G’s accumulated sick and vacation pay 

that is payable on March 15, 2008, totals 

$12,000. G elects, on February 4, 2008, to 

have the $12,000 of accumulated sick and 

vacation pay contributed to the eligible plan. 

(ii) Conclusion. Under the terms of the 

eligible plan and the sick and vacation pay 

program, G may elect before March 1, 2008, 

to defer the accumulated sick and vacation 

pay because the agreement providing for the 

deferral is entered into before the beginning 

of the month in which the amount is 

currently available and the amount is bona 

fide accumulated sick and vacation pay, as 

described in § 1.415(c)–2(e)(3)(ii), and that is 

payable by the later of 21⁄2 months after 

severance from employment or the end of the 

calendar year that includes the date of 

severance from employment by G. Thus, 

under this section and § 1.415(c)–2(e)(3)(ii), 

the $12,000 is included in G’s includible 

compensation for purposes of determining 

G’s includible compensation in year 2008. 

Example 2. (i) Facts. Same facts as in 

Example 1, except that G’s severance from 

employment is on May 31, 2008, G’s $12,000 

of accumulated sick and vacation pay is 

payable on September 15, 2008 (which is by 

the later of 21⁄2 months after severance from 

employment or the end of the calendar year 

that includes the date of severance from 

employment by G), and G’s election to defer 

the accumulated sick and vacation pay is 

made before May 1, 2008. 

(ii) Conclusion. Under this section and 

§ 1.415(c)–2(e)(3)(ii), the $12,000 is included 

in G’s includible compensation for purposes 

of determining G’s includible compensation 

in year 2008. 

Example 3. (i) Facts. Employer X maintains 

an eligible plan and a vacation leave plan. 

Under the terms of the vacation leave plan, 

employees generally accrue three weeks of 

vacation per year. Up to one week’s unused 

vacation may be carried over from one year 

to the next, so that in any single year an 

employee may have a maximum of four 

weeks’ vacation time. At the beginning of 

each calendar year, under the terms of the 

eligible plan (which constitutes an agreement 

providing for the deferral), the value of any 

unused vacation time from the prior year in 

excess of one week is automatically 

contributed to the eligible plan, to the extent 

of the employee’s maximum deferral 

limitations. Amounts in excess of the 

maximum deferral limitations are forfeited. 

(ii) Conclusion. The value of the unused 

vacation pay contributed to X’s eligible plan 

pursuant to the terms of the plan and the 

terms of the vacation leave plan is treated as 

an annual deferral to the eligible plan for 

January of the calendar year. No amounts 

contributed to the eligible plan will be 

considered made available to a participant in 

X’s eligible plan. 

* * * * * 

■ Par. 19. Section 1.457–5 is amended 

by revising paragraph (d) Example 2 to 

read as follows: 

§ 1.457–5 Individual limitation for 

combined annual deferrals under multiple 

eligible plans. 

* * * * * 

(d) * * * 

Example 2. (i) Facts. Participant E, who 

will turn 63 on April 1, 2006, participates in 

four eligible plans during year 2006: Plan W 

which is an eligible governmental plan; and 

Plans X, Y, and Z which are each eligible 

plans of three different tax-exempt entities. 

For year 2006, the limitation that applies to 

Participant E under all four plans under 

§ 1.457–4(c)(1)(i)(A) is $15,000. For year 

2006, the additional age 50 catch-up 

limitation that applies to Participant E under 

all four plans under § 1.457–4(c)(2) is $5,000. 

Further, for year 2006, different limitations 

under § 1.457–4(c)(3) and (c)(3)(ii)(B) apply 

to Participant E under each of these plans, as 

follows: under Plan W, the underutilized 

limitation under § 1.457–4(c)(3)(ii)(B) is 

$7,000; under Plan X, the underutilized 

limitation under § 1.457–4(c)(3)(ii)(B) is 

$2,000; under Plan Y, the underutilized 

limitation under § 1.457–4(c)(3)(ii)(B) is 

$8,000; and under Plan Z, § 1.457–4(c)(3) is 

not applicable since normal retirement age is 

62 under Plan Z. Participant E’s includible 

compensation is in each case in excess of any 

applicable deferral. 

(ii) Conclusion. For purposes of applying 

this section to Participant E for year 2006, 

Participant E could elect to defer $23,000 

under Plan Y, which is the maximum 

deferral limitation under § 1.457–4(c)(1) 

through (3), and to defer no amount under 

Plans W, X, and Z. The $23,000 maximum 

amount is equal to the sum of $15,000 plus 

$8,000, which is the catch-up amount 

applicable to Participant E under Plan Y and 

which is the largest catch-up amount 

applicable to Participant E under any of the 

four plans for year 2006. Alternatively, 

Participant E could instead elect to defer the 

following combination of amounts: an 

aggregate total of $15,000 to Plans X, Y, and 

Z, if no contribution is made to Plan W; an 

aggregate total of $20,000 to any of the four 

plans; or $22,000 to Plan W and none to any 

of the other three plans. 

(iii) If the underutilized amount under 

Plans W, X, and Y for year 2006 were in each 

case zero (because E had always contributed 

the maximum amount or E was a new 

participant) or an amount not in excess of 

$5,000, the maximum exclusion under this 

section would be $20,000 for Participant E 

for year 2006 ($15,000 plus the $5,000 age 50 

catch-up amount), which Participant E could 

contribute to any of the plans. 

■ Par. 20. Section 1.457–6 is amended 

by revising paragraphs (a) and (c) to 

read as follows: 

§ 1.457–6 Timing of distributions under 

eligible plans. 

(a) In general. Except as provided in 

paragraph (c) of this section (relating to 

distributions on account of an 


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Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules and Regulations 16931 

unforeseeable emergency), paragraph (e) 

of this section (relating to distributions 

of small accounts), § 1.457–10(a) 

(relating to plan terminations), or 

§ 1.457–10(c) (relating to domestic 

relations orders), amounts deferred 

under an eligible plan may not be paid 

to a participant or beneficiary before the 

participant has a severance from 

employment with the eligible employer 

or when the participant attains age 701⁄2, 

if earlier. For rules relating to loans, see 

paragraph (f) of this section. This 

section does not apply to distributions 

of excess amounts under § 1.457–4(e). 

However, except to the extent set forth 

by the Commissioner in revenue rulings, 

notices, and other guidance published 

in the Internal Revenue Bulletin (see 

§ 601.601(d) of this chapter), this section 

applies to amounts held in a separate 

account for eligible rollover 

distributions maintained by an eligible 

governmental plan as described in 

§ 1.457–10(e)(2). 

* * * * * 

(c) Rules applicable to distributions 

for unforeseeable emergencies—(1) In 

general. An eligible plan may permit a 

distribution to a participant or 

beneficiary for an unforeseeable 

emergency. The distribution must 

satisfy the requirements of paragraph 

(c)(2) of this section. 

(2) Requirements—(i) Unforeseeable 

emergency defined. An unforeseeable 

emergency must be defined in the plan 

as a severe financial hardship of the 

participant or beneficiary resulting from 

an illness or accident of the participant 

or beneficiary, the participant’s or 

beneficiary’s spouse, or the participant’s 

or beneficiary’s dependent (as defined 

in section 152, and, for taxable years 

beginning on or after January 1, 2005, 

without regard to section 152(b)(1), 

(b)(2), and (d)(1)(B)); loss of the 

participant’s or beneficiary’s property 

due to casualty (including the need to 

rebuild a home following damage to a 

home not otherwise covered by 

homeowner’s insurance, such as damage 

that is the result of a natural disaster); 

or other similar extraordinary and 

unforeseeable circumstances arising as a 

result of events beyond the control of 

the participant or the beneficiary. For 

example, the imminent foreclosure of or 

eviction from the participant’s or 

beneficiary’s primary residence may 

constitute an unforeseeable emergency. 

In addition, the need to pay for medical 

expenses, including non-refundable 

deductibles, as well as for the cost of 

prescription drug medication, may 

constitute an unforeseeable emergency. 

Finally, the need to pay for the funeral 

expenses of a spouse or a dependent (as 

defined in section 152, and, for taxable 

years beginning on or after January 1, 

2005, without regard to section 

152(b)(1), (b)(2), and (d)(1)(B)) of a 

participant or beneficiary may also 

constitute an unforeseeable emergency. 

Except as otherwise specifically 

provided in this paragraph (c)(2)(i), the 

purchase of a home and the payment of 

college tuition are not unforeseeable 

emergencies under this paragraph 

(c)(2)(i). 

(ii) Unforeseeable emergency 

distribution standard. Whether a 

participant or beneficiary is faced with 

an unforeseeable emergency permitting 

a distribution under this paragraph (c) is 

to be determined based on the relevant 

facts and circumstances of each case, 

but, in any case, a distribution on 

account of unforeseeable emergency 

may not be made to the extent that such 

emergency is or may be relieved through 

reimbursement or compensation from 

insurance or otherwise, by liquidation 

of the participant’s assets, to the extent 

the liquidation of such assets would not 

itself cause severe financial hardship, or 

by cessation of deferrals under the plan. 

(iii) Distribution necessary to satisfy 

emergency need. Distributions because 

of an unforeseeable emergency must be 

limited to the amount reasonably 

necessary to satisfy the emergency need 

(which may include any amounts 

necessary to pay for any federal, state, 

or local income taxes or penalties 

reasonably anticipated to result from the 

distribution). 

* * * * * 

■ Par. 21. Section 1.457–10 is amended 

by revising paragraph (b)(8) to read as 

follows: 

§ 1.457–10 Miscellaneous provisions. 

* * * * * 

(b) * * * 

(8) Purchase of permissive service 

credit by plan-to-plan transfers from an 

eligible governmental plan to a qualified 

plan—(i) General rule. An eligible 

governmental plan of a State may 

provide for the transfer of amounts 

deferred by a participant or beneficiary 

to a defined benefit governmental plan 

(as defined in section 414(d)), and no 

amount shall be includible in gross 

income by reason of the transfer, if the 

conditions in paragraph (b)(8)(ii) of this 

section are met. A transfer under this 

paragraph (b)(8) is not treated as a 

distribution for purposes of § 1.457–6. 

Therefore, such a transfer may be made 

before severance from employment. 

(ii) Conditions for plan-to-plan 

transfers from an eligible governmental 

plan to a qualified plan. A transfer may 

be made under this paragraph (b)(8) 

only if the transfer is either—

(A) For the purchase of permissive 

service credit (as defined in section 

415(n)(3)(A)) under the receiving 

defined benefit governmental plan; or 

(B) A repayment to which section 415 

does not apply by reason of section 

415(k)(3). 

(iii) Example. The provisions of this 

paragraph (b)(8) are illustrated by the 

following example: 

Example. (i) Facts. Plan X is an eligible 

governmental plan maintained by County Y 

for its employees. Plan X provides for 

distributions only in the event of death, an 

unforeseeable emergency, or severance from 

employment with County Y (including 

retirement from County Y). Plan S is a 

qualified defined benefit plan maintained by 

State T for its employees. County Y is within 

State T. Employee A is an employee of 

County Y and is a participant in Plan X. 

Employee A previously was an employee of 

State T and is still entitled to benefits under 

Plan S. Plan S includes provisions allowing 

participants in certain plans, including Plan 

X, to transfer assets to Plan S for the purchase 

of service credit under Plan S and does not 

permit the amount transferred to exceed the 

amount necessary to fund the benefit 

resulting from the service credit. Although 

not required to do so, Plan X allows 

Employee A to transfer assets to Plan S to 

provide a service benefit under Plan S. 

(ii) Conclusion. The transfer is 

permitted under this paragraph (b)(8). 

* * * * * 

PART 11—TEMPORARY INCOME TAX 

REGULATIONS UNDER THE 

EMPLOYEE RETIREMENT INCOME 

SECURITY ACT OF 1974 

■ Par. 22. The authority citation for part 

11 continues to read in part as follows: 

Authority: 26 U.S.C. 7805. * * * 

§ 11.415(c)(4)–1 [Removed] 

■ Par. 23. Section 11.415(c)(4)–1 is 

removed. 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: March 20, 2007. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. E7–5750 Filed 4–4–07; 8:45 am] 

BILLING CODE 4830–01–P 


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