59774 Federal Register / Vol. 65, No. 195 / Friday, October 6, 2000 / Proposed Rules

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–114697–00]

RIN 1545–AY36

Nondiscrimination Requirements for

Certain Defined Contribution

Retirement Plans

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations that would

prescribe conditions under which

certain defined contribution retirement

plans (sometimes referred to as ‘‘new

comparability’’ plans) are permitted to

demonstrate compliance with

applicable nondiscrimination

requirements based on plan benefits

rather than plan contributions. This

document also provides notice of a

public hearing on these proposed

regulations.

DATES: Written comments, requests to

speak and outlines of oral comments to

be discussed at the public hearing

scheduled for January 25, 2001, at 10

a.m., must be received by January 5,

2001.

ADDRESSES: Send submissions to:

CC:M&SP:RU (REG–114697–00) room

5226, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. Submissions may be hand

delivered Monday through Friday

between the hours of 8 a.m. and 5 p.m.

to: CC:M&SP:RU (REG–114697–00),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC. Alternatively,

taxpayers may submit comments

electronically via the Internet by

selecting the ‘‘Tax Regs’’ option of the

IRS Home Page, or by submitting

comments directly to the IRS Internet

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

reglist.html. The public hearing will be

held in the IRS Auditorium (7th Floor),

Internal Revenue Building, 1111

Constitution Avenue NW., Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, John T.

Ricotta, 202–622–6060 or Linda S. F.

Marshall, 202–622–6090; concerning

submissions and the hearing, and/or to

be placed on the building access list to

attend the hearing, Sonya Cruse, 202–

622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

amendments to 26 CFR part 1 under

section 401(a)(4) of the Internal Revenue

Code of 1986 (Code).

Section 401(a)(4) provides that a plan

or trust forming part of a stock bonus,

pension or profit-sharing plan of an

employer shall not constitute a qualified

plan under section 401(a) of the Code

unless the contributions or benefits

provided under the plan do not

discriminate in favor of highly

compensated employees (HCEs) (within

the meaning of section 414(q)). Whether

a plan satisfies this requirement

depends on the form of the plan and its

effect in operation.

Section 415(b)(6)(A) provides that the

computation of benefits under a defined

contribution plan, for purposes of

section 401(a)(4), shall not be made on

a basis inconsistent with regulations

prescribed by the Secretary. The

legislative history of this provision

explains that, in the case of target

benefit and other defined contribution

plans, ‘‘regulations may establish

reasonable earnings assumptions and

other factors for these plans to prevent

discrimination.’’ Conf. Rep. No. 1280,

93d Cong., 2d Sess. 277 (1974).

Under the section 401(a)(4)

regulations, a plan can demonstrate that

either the contributions or the benefits

provided under the plan are

nondiscriminatory in amount. Defined

contribution plans generally satisfy the

regulations by demonstrating that

contributions are nondiscriminatory in

amount, through certain safe harbors

provided for under the regulations or

through general testing.

A defined contribution plan (other

than an ESOP) may, however, satisfy the

regulations on the basis of benefits by

using ‘‘cross-testing’’ pursuant to rules

provided in § 1.401(a)(4)–8 of the

regulations. Under this cross-testing

method, contributions are converted to

equivalent benefits payable at normal

retirement age and tested on the basis of

these equivalent benefits. The

conversion is done by making an

actuarial projection of the benefits

payable at normal retirement age that

are attributable to the contributions.

Thus, this cross-testing method

effectively permits nonelective

employer contributions under a defined

contribution plan to be tested on the

basis of the benefits attributable to those

contributions, in a manner similar to the

testing of employer-provided benefits

under a defined benefit plan.

In Notice 2000–14 (2000–10 I.R.B.

737), released February 24, 2000, the

IRS and the Treasury Department

initiated a review of issues related to

use of the cross-testing method by socalled ‘‘new comparability plans’’ and

requested public comments on this plan

design from plan sponsors, plan

participants and other interested parties.

In general, new comparability plans are

defined contribution plans that have

built-in disparities between the

allocation rates for classifications of

participants consisting entirely or

predominately of HCEs and the

allocation rates for other employees.

In a typical new comparability plan,

HCEs receive high allocation rates,

while nonhighly compensated

employees (NHCEs), regardless of their

age or years of service, receive

comparatively low allocation rates. For

example, HCEs in such a plan might

receive allocations of 18 or 20% of

compensation, while NHCEs might

receive allocations of 3% of

compensation. A similar plan design,

sometimes known as a ‘‘superintegrated’’ plan, provides for an

additional allocation rate that applies

only to compensation in excess of a

specified threshold, but the specified

threshold (e.g., $100,000) or the

additional allocation rate (e.g., 10%) is

higher than the maximum threshold and

rate allowed under the permitted

disparity rules of section 401(l).

These new comparability and similar

plans rely on the cross-testing method to

demonstrate compliance with the

nondiscrimination rules by comparing

the actuarially projected value of the

employer contributions for the younger

NHCEs with the actuarial projections of

the larger contributions (as a percentage

of compensation) for the older HCEs. As

a result, these plans are able generally

to provide higher rates of employer

contributions to HCEs, while NHCEs are

not allowed to earn the higher allocation

rates as they work additional years for

the employer or grow older.

Notwithstanding the analytical

underpinnings of cross-testing, the IRS

and the Treasury Department are

concerned whether new comparability

and similar plans are consistent with

the basic purpose of the

nondiscrimination rules under section

401(a)(4).

A variety of public comments were

submitted in response to Notice 2000–

14. Some comments expressed the view

that changes in the application of the

nondiscrimination rules to new

comparability plans are unnecessary.

These comments noted that in some

cases such plans are adopted by

employers that previously had no

retirement plan for their employees. At

the same time, many of these comments

advanced suggestions as to the types of

Federal Register / Vol. 65, No. 195 / Friday, October 6, 2000 / Proposed Rules 59775

1For example, if any HCE had an allocation of

12% of compensation, all NHCEs in the plan would

be required to have an allocation of at least 4% of

compensation.

conditions that might be imposed on

new comparability plans if changes in

the rules are in fact proposed.

Other comments expressed the view

that the rules need to be changed to

increase the contributions made for

NHCEs in new comparability plans and

similar tax-qualified plan designs. These

comments suggested various methods

for ensuring that NHCEs receive larger

allocations of employer contributions

under new comparability plans,

including imposing a maximum ratio of

the allocation rates for HCEs to those for

NHCEs or requiring a minimum

allocation rate for the NHCEs.

Still other comments questioned the

policy justification for permitting new

comparability plans under the

nondiscrimination rules governing taxqualified plans because new

comparability plan designs often

provide such an overwhelming

percentage of total plan allocations to

HCEs, with only a modest percentage of

the plan allocations going to the NHCEs.

Some of these comments expressed

concern that new comparability plans in

some instances have been marketed as

a technique for limiting most employees

to lower allocation rates than they

would receive under other defined

contribution plan designs (such as

salary ratio or age-weighted) and

allocating the difference to one or more

HCEs. They noted that, in some cases,

the percentage of total plan allocations

provided to the HCEs can exceed 90%.

After consideration of the comments

received, the IRS and Treasury are

issuing these proposed regulations,

which would prescribe conditions that

new comparability and similar plans

must satisfy if they are to use the crosstesting method. The proposed

regulations preserve the existing crosstesting rules of the section 401(a)(4)

regulations, and would not affect crosstested defined contribution plans that

provide broadly available allocation

rates, as defined in the proposed

regulations. The definition of broadly

available allocation rates includes plans

that base allocations or allocation rates

on age or service. In contrast to new

comparability plans, these plans

provide an opportunity for participants

to ‘‘grow into’’ higher allocation rates as

they age or accumulate additional

service.

These proposed regulations would

continue to permit new comparability

plans. As suggested in various

comments, the proposed regulations

would set forth a minimum allocation

‘‘gateway’’ that would constrain the

plan designs with the greatest disparity

in favor of HCEs, while leaving many

new comparability plan designs

unchanged. A new comparability plan

that satisfies the minimum allocation

gateway could continue to use the

existing cross-testing rules of the section

401(a)(4) regulations.

The proposed regulations also would

prevent circumvention of the minimum

allocation gateway by aggregating (for

purposes of satisfying the

nondiscrimination rules) a new

comparability defined contribution plan

with a defined benefit plan that

provides only minimal benefits or

covers only a relatively small number of

the employees, or by aggregating a

defined contribution plan with a

defined benefit plan that benefits

primarily HCEs. However, an aggregated

defined contribution and defined

benefit plan that is primarily defined

benefit in character (as defined in the

proposed regulations) could test for

nondiscrimination on the basis of

benefits in the same manner as under

current law. Similarly, the ability to test

for nondiscrimination on a benefits

basis as under current law would be

unrestricted if each of the defined

contribution and defined benefit

portions of the aggregated plan is a

broadly available separate plan (as

defined in the proposed regulations).

The proposed regulations would not

affect defined benefit plans except

where a defined contribution plan is

aggregated with a defined benefit plan

for nondiscrimination purposes and

thus is a part of a DB/DC plan (as

defined in § 1.401(a)(4)–9). The

proposed regulations would not apply

merely because a plan sponsor

maintains both a defined contribution

plan and a defined benefit plan. The

proposed regulations would not require

aggregation of a defined contribution

plan with a defined benefit plan or

otherwise modify the existing rules

regarding when plans are required or

permitted to be aggregated.

Explanation of Provisions

A. Overview

The basic structure of the proposed

regulations permits defined contribution

plans with broadly available allocation

rates to test on a benefits basis (‘‘crosstest’’) in the same manner as under

current law, and permits other defined

contribution plans to cross-test once

they pass a gateway that prescribes

minimum allocation rates for NHCEs.

Similarly, the proposed regulations

permit a DB/DC plan to test on a

benefits basis in the same manner as

under current law if the DB/DC plan

either is primarily defined benefit in

character or consists of broadly

available separate plans. Other DB/DC

plans are permitted to test on a benefits

basis once they pass a corresponding

gateway prescribing minimum aggregate

normal allocation rates for NHCEs.

B. Gateway for Cross-Testing of New

Comparability and Similar Plans

The proposed regulations would

require that a defined contribution plan

that does not provide broadly available

allocation rates (as defined in these

proposed regulations) satisfy a gateway

in order to be eligible to use the crosstesting rules to meet the

nondiscrimination requirements of

section 401(a)(4). A plan would satisfy

this minimum allocation gateway if

each NHCE in the plan has an allocation

rate that is at least one third of the

allocation rate of the HCE with the

highest allocation rate; 1 however, a plan

would be deemed to satisfy this

minimum allocation gateway if each

NHCE received an allocation of at least

5% of the NHCE’s compensation (within

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

The proposed regulations would not

change the general rule prohibiting

aggregation of a 401(k) plan or 401(m)

plan with a plan providing nonelective

contributions. Accordingly, elective

contributions and matching

contributions would not be taken into

account for purposes of the gateway. If

an employer also provides a 401(k) plan,

however, then to the extent the HCEs

are electing contributions under that

plan, the highest HCE allocation rate

may be lower than it otherwise would

be, which, in turn would lower the

minimum required allocation for the

NHCEs under the gateway. Further, if

the employer sponsors a safe harbor

401(k) plan that provides for 3%

nonelective contributions, then, as

noted in Notice 98–52 (1998–2 C.B.

634), those nonelective contributions

may be taken into account in

determining the allocation rates for the

NHCEs under section 401(a)(4),

including the minimum allocation

gateway.

C. Plans With Broadly Available

Allocation Rates

As suggested in Notice 2000–14, a

plan that has broadly available

allocation rates would not need to

satisfy the minimum allocation gateway

and may continue to be tested for

nondiscrimination on the basis of

benefits as under current law. In order

to be broadly available, each allocation

rate under the plan must be currently

available to a group of employees that

59776 Federal Register / Vol. 65, No. 195 / Friday, October 6, 2000 / Proposed Rules

satisfies section 410(b) (without regard

to the average benefit percentage test).

Thus, for example, if within one plan an

employer provides different allocation

rates for nondiscriminatory groups of

employees at different locations or

different profit centers, the plan would

not need to satisfy the minimum

allocation gateway in order to use cross

testing.

In addition, a plan that provides

allocation rates that increase as an

employee ages or accumulates

additional service would be treated as

having broadly available allocation

rates, if the schedule of allocation rates

satisfies certain conditions that permit

participants to ‘‘grow into’’ higher

allocation rates. The conditions are that

the same schedule of allocation rates is

available to all employees in the plan

and that the schedule provides for

smoothly increasing allocation rates at

regular intervals of age or service.

The proposed regulation would

provide that in order for a schedule of

allocation rates to increase smoothly,

the allocation rate for each age or

service band cannot be more than 5

percentage points higher than the

allocation rate for the immediately

preceding band and cannot be more

than twice that allocation rate. For

example, if the allocation rate for an age

or service band were 6%, the allocation

rate for the next higher age or service

band could not exceed 11% (i.e., the

lesser of 11% (6% plus 5%) and 12%

(2 times 6%)).

Further, in order for a schedule of

allocation rates to be considered to be

increasing smoothly, the ratio of the

allocation rate for any age or service

band to the allocation rate for the

immediately preceding band cannot

exceed the ratio of the allocation rates

between the two immediately preceding

bands. The proposed regulations would

provide that the intervals for the age or

service bands are regular if they are all

of the same length (although this

requirement generally would not apply

to the first and last bands).

The definition of broadly available

allocation rates is designed to be

sufficiently flexible to accommodate a

wide variety of age- and service-based

plans (including age-weighted profitsharing plans that provide for

allocations that result in the same

equivalent accrual rate for all

employees).

The conditions described above

relating to a plan’s schedule of agebased or service-based allocation rates

are intended to exempt from the

minimum allocation gateway those

plans in which NHCEs actually receive

the benefit of higher rates as they attain

higher ages or complete additional years

of service. Without conditions such as

these, plans can be designed to backload

allocation rates excessively, providing

for lengthy plateau periods in which

rates increase little if at all, followed by

sharp increases.

Comments are invited on whether

there are plans using schedules of

allocation rates (such as schedules of

rates based on points or otherwise

combining age and service) that would

fall outside the definition of broadly

available allocation rates but that do

afford sufficient opportunity for NHCEs

to ‘‘grow into’’ higher allocation rates.

D. Application to Defined Contribution

Plans That Are Combined With Defined

Benefit Plans

The proposed regulations would

prescribe rules for testing defined

contribution plans that are aggregated

with defined benefit plans for purposes

of sections 401(a)(4) and 410(b). These

rules would apply in situations in

which the employer aggregates the plans

because one of the plans does not satisfy

sections 401(a)(4) and 410(b) standing

alone.

1. Gateway for Benefits Testing of

Combined Plans

Under the proposed regulations, the

combination of a defined contribution

plan and a defined benefit plan may

demonstrate nondiscrimination on the

basis of benefits if the combined plan is

primarily defined benefit in character,

consists of broadly available separate

plans (as these terms are defined in the

proposed regulations), or satisfies a

gateway requirement. This minimum

aggregate allocation gateway is generally

similar to the minimum allocation

gateway for defined contribution plans

that are not combined with a defined

benefit plan. To apply this minimum

aggregate allocation gateway, the

employee’s aggregate normal allocation

rate is determined by adding the

employee’s allocation under the defined

contribution plan to the employee’s

equivalent allocation under the defined

benefit plan. The use of aggregation

would allow an employer that provides

both a defined contribution and a

defined benefit plan to the NHCEs to

take both plans into account in

determining whether the minimum

aggregate allocation gateway is met.

Under the gateway, if the aggregate

normal allocation rate of the HCE with

the highest aggregate normal allocation

rate under the plan (HCE rate) is less

than 15%, the aggregate normal

allocation rate for all NHCEs must be at

least 1⁄3 of the HCE rate. If the HCE rate

is between 15% and 25%, the aggregate

normal allocation rate for all NHCEs

must be at least 5%. If the HCE rate

exceeds 25%, then the aggregate normal

allocation rate for each NHCE must be

at least 5% plus one percentage point

for each 5-percentage-point increment

(or portion thereof) by which the HCE

rate exceeds 25% (e.g., the NHCE

minimum is 6% for an HCE rate that

exceeds 25% but not 30%, and 7% for

an HCE rate that exceeds 30% but not

35%, etc.).

In addition, in determining the

equivalent allocation rate for an NHCE

under a defined benefit plan, a plan is

permitted to treat each NHCE who

benefits under the defined benefit plan

as having an equivalent allocation rate

equal to the average of the equivalent

allocation rates under the defined

benefit plan for all NHCEs benefitting

under that plan. This averaging rule

recognizes the ‘‘grow-in’’ feature

inherent in traditional defined benefit

plans (i.e., the defined benefit plan

provides higher equivalent allocation

rates at higher ages).

Comments are invited on possible

special situations involving DB/DC

plans, such as situations arising as a

result of a merger or acquisition or a

situation in which some HCEs in a DB/

DC plan have unusually high equivalent

normal allocation rates for reasons other

than the design of the plan. Comments

are invited as to whether the regulations

should address such special

circumstances and, if so, how (e.g.,

through a maximum required rate for

NHCEs under a DB/DC plan or other

approaches).

2. Primarily Defined Benefit in

Character

A combined plan that is primarily

defined benefit in character would not

be subject to the gateway requirement

and may continue to be tested for

nondiscrimination on the basis of

benefits as under current law. A

combined plan would be primarily

defined benefit in character if, for more

than 50% of the NHCEs benefitting

under the plan, the normal accrual rate

attributable to benefits provided under

defined benefit plans for the NHCE

exceeds the equivalent accrual rate

attributable to contributions under

defined contribution plans for the

NHCE. For example, a DB/DC plan

would be primarily defined benefit in

character where the defined

contribution plan covers only salaried

employees, the defined benefit plan

covers only hourly employees, and more

than half of the NHCEs participating in

the DB/DC plan are hourly employees

participating only in the defined benefit

plan.

Federal Register / Vol. 65, No. 195 / Friday, October 6, 2000 / Proposed Rules 59777

3. Broadly Available Separate Plans

A combined plan that consists of

broadly available separate plans would

not be subject to the gateway

requirement and may continue to be

tested for nondiscrimination on the

basis of benefits as under current law.

A DB/DC plan consists of broadly

available separate plans if the defined

contribution plan and the defined

benefit plan each would satisfy the

requirements of section 410(b) and the

nondiscrimination in amount

requirement of § 1.401(a)(4)–1(b)(2) if

each plan were tested separately,

assuming satisfaction of the average

benefit percentage test of § 1.410(b)–5.

Thus, the defined contribution plan

must separately satisfy the

nondiscrimination requirements (taking

into account these proposed regulations

as applicable), but for this purpose

assuming satisfaction of the average

benefit percentage test. Similarly, the

defined benefit plan must separately

satisfy the nondiscrimination

requirements, assuming for this purpose

satisfaction of the average benefit

percentage test. In conducting the

required separate testing, all plans of a

single type (defined contribution or

defined benefit) within the DB/DC plan

are aggregated, but those plans are

tested without regard to plans of the

other type.

This alternative would be useful, for

example, where an employer maintains

a defined contribution plan that

provides a uniform allocation rate for all

covered employees at one business unit

and a safe harbor defined benefit plan

for all covered employees at another

unit, where the group of employees

covered by each plan is a group that

satisfies the nondiscriminatory

classification requirement of section

410(b). Because the employer provides

broadly available separate plans, it may

continue to aggregate the plans and test

for nondiscrimination on the basis of

benefits, as an alternative to using the

qualified separate line of business rules

or demonstrating satisfaction of the

average benefit percentage test.

E. Use of Component Plans and

Permitted Disparity

Component plans under the

restructuring rules cannot be used for

the determination of whether a defined

contribution plan provides broadly

available allocation rates or satisfies the

minimum allocation gateway, or the

determination of whether a DB/DC plan

satisfies the minimum aggregate

allocation gateway, is primarily defined

benefit in character, or consists of

broadly available separate plans. For

purposes of the two gateways and

determining whether a DB/DC plan is

primarily defined benefit in character,

allocation rates and equivalent

allocation rates are determined without

the use of permitted disparity. For

purposes of determining whether a DB/

DC plan consists of broadly available

separate plans, permitted disparity may

be used in the defined contribution plan

or the defined benefit plan but not in

both plans with respect to each

employee who participates in both.

Proposed Effective Date

The regulations are proposed to be

applicable for plan years beginning on

or after January 1, 2002.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required. It

also has 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

regulation does 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, these

proposed regulations will be submitted

to the Chief Counsel for Advocacy of the

Small Business Administration for

comment on their impact on small

business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

electronic or written comments

(preferably a signed original and eight

(8) copies) that are submitted timely to

the IRS. In addition to the other requests

for comments set forth in this

document, the IRS and Treasury also

request comments on the clarity of the

proposed rule and how it may be made

easier to understand. All comments will

be available for public inspection and

copying.

A public hearing has been scheduled

for January 25, 2001, at 10 a.m. in the

IRS Auditorium (7th Floor), Internal

Revenue Building, 1111 Constitution

Avenue NW., Washington, DC. Due to

building security procedures, visitors

must enter at the 10th street entrance,

located between Constitution and

Pennsylvania Avenues, NW. In

addition, all visitors must present photo

identification to enter the building.

Because of access restrictions, visitors

will not be admitted beyond the

immediate entrance area more than 15

minutes before the hearing starts. For

information about having your name

placed on the building access list to

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this

preamble.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons who wish to present oral

comments at the hearing must submit

written comments and submit an

outline of the topics to be discussed and

the time to be devoted to each topic

(signed original and eight (8) copies) by

January 5, 2001.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal authors of these

regulations are John T. Ricotta and

Linda S. F. Marshall of the Office of the

Division Counsel/Associate Chief

Counsel (Tax Exempt and Government

Entities). However, other personnel

from the IRS and Treasury participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. In § 1.401(a)(4)–8, paragraph

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

§ 1.401(a)(4)–8 Cross-testing.

* * * * *

(b) Nondiscrimination in amount of

benefits provided under a defined

contribution plan—(1) General rule and

gateway—(i) General rule. Equivalent

benefits under a defined contribution

plan (other than an ESOP) are

nondiscriminatory in amount for a plan

year if—

(A) The plan would satisfy

§ 1.401(a)(4)–2(c)(1) for the plan year if

an equivalent accrual rate, as

determined under paragraph (b)(2) of

this section, were substituted for each

employee’s allocation rate in the

determination of rate groups; and

59778 Federal Register / Vol. 65, No. 195 / Friday, October 6, 2000 / Proposed Rules

(B) For plan years beginning on or

after January 1, 2002, if the plan does

not have broadly available allocation

rates (within the meaning of paragraph

(b)(1)(iii) of this section) for the plan

year, the plan satisfies the minimum

allocation gateway of paragraph

(b)(1)(iv) of this section for the plan

year.

(ii) Allocations after testing age. A

plan does not fail to satisfy paragraph

(b)(1)(i)(A) of this section merely

because allocations are made at the

same rate for employees who are older

than their testing age (determined

without regard to the current-age rule in

paragraph (4) of the definition of testing

age in § 1.401(a)(4)–12), as they are

made for employees who are at that age.

(iii) Broadly available allocation

rates—(A) In general. A plan has

broadly available allocation rates for the

plan year if each allocation rate under

the plan is currently available during

the plan year (within the meaning of

§ 1.401(a)(4)–4(b)(2)), to a group of

employees that satisfies section 410(b)

(without regard to the average benefit

percentage test of § 1.410(b)–5). For this

purpose, the disregard of age and

service conditions described in

§ 1.401(a)(4)–4(b)(2)(ii)(A) applies only

if the plan provides an allocation

formula under which the allocation

rates for all employees benefitting under

the plan are determined using a single

schedule of rates that are based solely

on either age or service, and only if the

allocation rates under the schedule

increase smoothly at regular intervals,

within the meaning of paragraphs

(b)(1)(iii)(B) and (C) of this section. A

plan does not fail to provide broadly

available allocation rates merely

because it provides the minimum

benefit described in section 416(c)(2).

(B) Smoothly increasing schedule of

allocation rates. A plan uses a single

schedule of allocation rates that are

based solely on age or service if it uses

a single schedule of allocation rates that

consists of a series of either age or

service bands under which the same

allocation rate applies to all employees

whose age is within each age band or

whose years of service are within each

service band. A schedule of allocation

rates increases smoothly if the

allocation rate for each age or service

band within the schedule is greater than

the allocation rate for the immediately

preceding band (i.e., the age or service

band with the next lower number of

years of age or service) but by no more

than 5 percentage points. However, a

schedule of allocation rates will not be

treated as increasing smoothly if the

ratio of the allocation rate for any age or

service band to the rate for the

immediately preceding band is more

than 2.0 or if it exceeds the ratio of

allocation rates between the two

immediately preceding bands.

(C) Regular intervals. A schedule of

allocation rates has regular intervals of

age or service if each age or service

band, other than the band associated

with the highest age or years of service,

is the same length. For this purpose, if

the schedule is based on age, the first

age band will be deemed to be of the

same length as the other bands if it ends

at or before age 25. If the first age band

ends after age 25, then, in determining

whether the length of the first band is

the same as the length of other bands,

the starting age for the first age band is

permitted to be treated as age 25 or any

age earlier than 25.

(iv) Minimum allocation gateway. A

plan satisfies the minimum allocation

gateway of this paragraph (b)(1)(iv) if

each NHCE has an allocation rate that is

at least one third of the allocation rate

of the HCE with the highest allocation

rate. However, a plan is deemed to

satisfy this minimum allocation gateway

if each NHCE receives an allocation of

at least 5% of the NHCE’s compensation

within the meaning of section 415(c)(3).

(v) Determination of allocation rates.

For purposes of this paragraph (b)(1),

allocations and allocation rates are

determined under § 1.401(a)(4)–2(c)(2),

but without taking into account the

imputation of permitted disparity under

§ 1.401(a)(4)–7 in applying the

minimum allocation gateway of

paragraph (b)(1)(iv) of this section.

(vi) Examples. The following

examples illustrate the rules in this

paragraph (b)(1):

Example 1. (i) Plan M is a defined

contribution plan that provides an allocation

formula under which allocations are

provided to all employees according to the

following schedule:

Years of service

Allocation

rate

(percent)

Ratio of allocation rate

for band to

allocation

rate for immediately

preceding

band

0–5 .................... 3.0 N/A

6–10 .................. 4.5 1.50

11–15 ................ 6.5 1.44

16–20 ................ 8.5 1.31

21–25 ................ 10.0 1.18

26 or more ........ 11.5 1.15

(ii) Because Plan M provides that

allocation rates for all employees are

determined using a single schedule based

solely on service, the plan is permitted to

disregard the service requirement in

determining whether the allocation rates are

broadly available (within the meaning of

paragraph (b)(1)(iii) of this section), if the

allocation rates under the schedule increase

smoothly at regular intervals.

(iii) The schedule of allocation rates under

Plan M does not increase by more than 5

percentage points between adjacent bands

and the ratio of the allocation rate for any

band to the allocation rate for the

immediately preceding band is never more

than 2.0 and does not increase. Therefore, the

allocation rates increase smoothly. In

addition, the bands (other than the highest

band) are all 5 years long, so the increases

occur at regular intervals. Accordingly, the

service requirement is disregarded and each

allocation rate is broadly available within the

meaning of paragraph (b)(1)(iii) of this

section, as each allocation rate is currently

available to all employees in the Plan.

(iv) Under paragraph (b)(1)(i) of this

section, Plan M satisfies the

nondiscrimination in amount requirement of

§ 1.401(a)(4)–1(b)(2) on the basis of benefits

if it satisfies paragraph (b)(1)(i)(A) of this

section, regardless of whether it satisfies the

minimum allocation gateway of paragraph

(b)(1)(iv) of this section.

Example 2. (i) Plan N is a defined

contribution plan that provides an allocation

formula under which allocations are

provided to all employees according to the

following schedule:

Age

Allocation

rate

(percent)

Ratio of allocation rate

for band to

allocation

rate for immediately

preceding

band

under 25 ........... 3.0 N/A

25–34 ................ 6.0 2.00

35–44 ................ 9.0 1.50

45–54 ................ 12.0 1.33

55–64 ................ 16.0 1.33

65 or older ........ 21.0 1.31

(ii) Because Plan N provides that allocation

rates for all employees are determined using

a single schedule based solely on age, the

plan is permitted to disregard the age

requirement in determining whether the

allocation rates are broadly available (within

the meaning of paragraph (b)(1)(iii) of this

section), if the allocation rates under the

schedule increase smoothly at regular

intervals.

(iii) The schedule of allocation rates under

Plan N does not increase by more than 5

percentage points between adjacent bands

and the ratio of the allocation rate for any

band to the allocation rate for the

immediately preceding band is never more

than 2.0 and does not increase. Therefore, the

allocation rates increase smoothly. In

addition, the bands are all 10 years long

(other than the highest band and the first

band, which is deemed to be the same length

as the other bands because it ends prior to

age 25), so the increases occur at regular

intervals. Accordingly, the age requirement is

disregarded and each allocation rate is

broadly available within the meaning of

paragraph (b)(1)(iii) of this section, as each

Federal Register / Vol. 65, No. 195 / Friday, October 6, 2000 / Proposed Rules 59779

allocation rate is currently available to all

employees in the Plan.

(iv) Under paragraph (b)(1)(i) of this

section, Plan N satisfies the

nondiscrimination in amount requirement of

§ 1.401(a)(4)–1(b)(2) on the basis of benefits

if it satisfies paragraph (b)(1)(i)(A) of this

section, regardless of whether it satisfies the

minimum allocation gateway of paragraph

(b)(1)(iv) of this section.

Example 3. (i) Plan O is a profit-sharing

plan maintained by Employer A that covers

all of Employer A’s employees, consisting of

two HCEs, X and Y, and 7 NHCEs. Employee

X’s compensation is $170,000 and Employee

Y’s compensation is $150,000. The allocation

for Employees X and Y is $30,000 each,

resulting in an allocation rate of 17.6% for

Employee X and 20% for Employee Y. Under

Plan O, each NHCE receives an allocation of

5% of compensation within the meaning of

section 415(c)(3).

(ii) Because the allocation rate for X is not

currently available to any NHCE, Plan O does

not have broadly available allocation rates

and must satisfy the minimum allocation

gateway of paragraph (b)(1)(iv) of this

section.

(iii) The highest allocation rate for any HCE

under Plan O is 20%. Accordingly, Plan O

would satisfy the minimum allocation

gateway of paragraph (b)(1)(iv) of this section

if all NHCEs have an allocation rate of at least

6.67%, or if all NHCEs receive an allocation

of at least 5% of compensation within the

meaning of section 415(c)(3).

(iv) Under Plan O, each NHCE receives an

allocation of 5% of compensation within the

meaning of section 415(c)(3). Accordingly,

Plan O satisfies the minimum allocation

gateway of paragraph (b)(1)(iv) of this

section.

(v) Under paragraph (b)(1)(i) of this section,

Plan O satisfies the nondiscrimination in

amount requirement of § 1.401(a)(4)–1(b)(2)

on the basis of benefits if it satisfies

paragraph (b)(1)(i)(A) of this section.

* * * * *

Par. 3. Section 1.401(a)(4)–9 is

amended by adding paragraph (b)(2)(v)

and revising paragraph (c)(3)(ii) to read

as follows:

§ 1.401(a)(4)–9 Plan aggregation and

restructuring.

* * * * *

(b) * * *

(2) * * *

(v) Eligibility for testing on a benefits

basis—(A) General rule. For plan years

beginning on or after January 1, 2002,

unless, for the plan year, a DB/DC plan

is primarily defined benefit in character

(within the meaning of paragraph

(b)(2)(v)(B) of this section) or consists of

broadly available separate plans (within

the meaning of paragraph (b)(2)(v)(C) of

this section), the DB/DC plan must

satisfy the minimum aggregate

allocation gateway of paragraph

(b)(2)(v)(D) of this section for the plan

year in order to be permitted to

demonstrate satisfaction of the

nondiscrimination in amount

requirement of § 1.401(a)(4)–1(b)(2) on

the basis of benefits.

(B) Primarily defined benefit in

character. A DB/DC plan is primarily

defined benefit in character if, for more

than 50% of the NHCEs benefitting

under the plan, the normal accrual rate

for the NHCE attributable to benefits

provided under defined benefit plans

that are part of the DB/DC plan exceeds

the equivalent accrual rate for the NHCE

attributable to contributions under

defined contribution plans that are part

of the DB/DC plan.

(C) Broadly available separate plans.

A DB/DC plan consists of broadly

available separate plans if the defined

contribution plan and the defined

benefit plan that are part of the DB/DC

plan each would satisfy the

requirements of section 410(b) and the

nondiscrimination in amount

requirement of § 1.401(a)(4)–1(b)(2) if

each plan were tested separately and

assuming that the average benefit

percentage test of § 1.410(b)–5 were

satisfied. For this purpose, all defined

contribution plans that are part of the

DB/DC plan are treated as a single

defined contribution plan and all

defined benefit plans that are part of the

DB/DC plan are treated as a single

defined benefit plan. In addition, if

permitted disparity is used for an

employee for purposes of satisfying the

separate testing requirement of this

paragraph (b)(2)(v)(C) for plans of one

type, it may not be used in satisfying the

separate testing requirement for plans of

the other type for the employee.

(D) Minimum aggregate allocation

gateway. A DB/DC plan satisfies the

minimum aggregate allocation gateway

of this paragraph (b)(2)(v)(D) if each

NHCE has an aggregate normal

allocation rate that is at least one third

of the aggregate normal allocation rate of

the HCE with the highest such rate (HCE

rate), or, if less, 5% of the NHCE’s

compensation, provided that the HCE

rate does not exceed 25% of

compensation. If the HCE rate exceeds

25% of compensation, then the

aggregate normal allocation rate for each

NHCE must be 5% increased by one

percentage point for each 5-percentagepoint increment (or portion thereof) by

which the HCE rate exceeds 25% (e.g.,

the NHCE minimum is 6% for an HCE

rate that exceeds 25% but not 30%, and

7% for an HCE rate that exceeds 30%

but not 35%). For purposes of this

paragraph (b)(2)(v)(D), a plan is

permitted to treat each NHCE who

benefits under the defined benefit plan

as having an equivalent normal

allocation rate equal to the average of

the equivalent normal allocation rates

under the defined benefit plan for all

NHCEs benefitting under that plan.

(E) Determination of rates. For

purposes of this paragraph (b)(2)(v), the

normal accrual rate and the equivalent

normal allocation rate attributable to

defined benefit plans, the equivalent

accrual rate attributable to defined

contribution plans and the aggregate

normal allocation rate are determined

under paragraph (b)(2)(ii) of this section,

but without taking into account the

imputation of permitted disparity under

§ 1.401(a)(4)–7, except as otherwise

permitted under paragraph (b)(2)(v)(C)

of this section.

(F) Examples. The following examples

illustrate the application of this

paragraph (b)(2)(v):

Example 1. (i) Employer A maintains Plan

M, a defined benefit plan, and Plan N, a

defined contribution plan. All HCEs of

Employer A are covered by Plan M (at a 1%

accrual rate), but not covered by Plan N. All

NHCEs of Employer A are covered by Plan

N (at a 3% allocation rate), but not covered

by Plan M. Because Plan M does not satisfy

section 410(b) standing alone, Plans M and

N are aggregated for purposes of satisfying

sections 410(b) and 401(a)(4).

(ii) Because none of the NHCEs participate

in the defined benefit plan, the aggregated

DB/DC plan is not primarily defined benefit

in character within the meaning of paragraph

(b)(2)(v)(B) of this section nor does it consist

of broadly available separate plans within the

meaning of paragraph (b)(2)(v)(C) of this

section. Accordingly, the aggregated Plan M

and Plan N must satisfy the minimum

aggregate allocation gateway of paragraph

(b)(2)(v)(D) of this section in order to satisfy

the nondiscrimination in amount

requirement of § 1.401(a)(4)–1(b)(2) on the

basis of benefits.

Example 2. (i) Employer B maintains Plan

O, a defined benefit plan, and Plan P, a

defined contribution plan. All of the six

employees of Employer B are covered under

both Plan O and Plan P. Under Plan O, all

employees have a uniform normal accrual

rate of 1% of compensation. Under Plan P,

Employees A and B, who are HCEs, receive

an allocation rate of 15%, and participants C,

D, E and F, who are NHCEs, receive an

allocation rate of 3%. Employer B aggregates

Plans O and P for purposes of satisfying

sections 410(b) and 401(a)(4). The equivalent

normal allocation and normal accrual rates

under Plans O and P are as follows:

Employee

Equivalent

normal allocation rates

for the 1%

accrual

under Plan

O (defined

benefit plan)

percent

Equivalent

normal accrual rates

for the 15%/

3% allocations under

Plan P (defined contribution

plan) percent

HCE A (age 55) 3.93 3.82

HCE B (age 50) 2.61 5.74

59780 Federal Register / Vol. 65, No. 195 / Friday, October 6, 2000 / Proposed Rules

Employee

Equivalent

normal allocation rates

for the 1%

accrual

under Plan

O (defined

benefit plan)

percent

Equivalent

normal accrual rates

for the 15%/

3% allocations under

Plan P (defined contribution

plan) percent

C (age 60) ........ 5.91 .51

D (age 45) ........ 1.73 1.73

E (age 35) ......... .77 3.90

F (age 25) ......... .34 8.82

(ii) Although all of the NHCEs benefit

under the Plan O (the defined benefit plan),

the aggregated DB/DC plan is not primarily

defined benefit in character because the

normal accrual rate attributable to defined

benefit plans (which is 1% for all the NHCEs)

is greater than the equivalent accrual rate

under defined contribution plans only for

Employee C. In addition, because the 15%

allocation rate is only available to HCEs, the

defined contribution plan cannot satisfy the

requirements of § 1.401(a)(4)–2 and does not

have broadly available allocation rates within

the meaning of § 1.401(a)(4)–8(b)(1)(iii).

Further, the defined contribution plan does

not satisfy the minimum allocation gateway

of § 1.401(a)(4)–8(b)(1)(iv) (3% is less than 1⁄3

of the 15% HCE rate). Therefore, the defined

contribution plan within the DB/DC plan

cannot separately satisfy § 1.401(a)(4)–1(b)(2)

and does not constitute a broadly available

separate plan within the meaning of

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

Accordingly, the aggregated plans can satisfy

the nondiscrimination in amounts

requirement of § 1.401(a)(4)–1(b)(2) on the

basis of benefits only if the aggregated plans

satisfy the minimum aggregate allocation

gateway of paragraph (b)(2)(v)(D) of this

section.

(iii) Employee A has an aggregate normal

allocation rate of 18.93% under the

aggregated plans (3.93% from Plan O plus

15% from Plan P), which is the highest

aggregate normal allocation rate for any HCE

under the plans. Employee F has an aggregate

normal allocation rate of 3.34% under the

aggregated plans (.34% from Plan O plus 3%

from Plan P) which is less than the 5%

aggregate normal allocation rate that

Employee F would be required to have to

satisfy the minimum aggregate allocation

gateway of paragraph (b)(2)(v)(D) of this

section.

(iv) However, for purposes of satisfying the

minimum aggregate allocation gateway of

paragraph (b)(2)(v)(D) of this section,

Employer B is permitted to treat each NHCE

who benefits under the Plan O (the defined

benefit plan) as having an equivalent

allocation rate equal to the average of the

equivalent allocation rates under Plan O for

all NHCEs benefitting under that plan. The

average of the equivalent allocation rates for

all the NHCEs under Plan O is 2.19% (the

sum of 5.91%, 1.73%, .77%, and .34%,

divided by 4). Accordingly, Employer B is

permitted to treat all the NHCEs as having an

equivalent allocation rate attributable to Plan

O equal to 2.19%. Thus, all NHCEs can be

treated as having an aggregate normal

allocation rate of 5.19% for this purpose (3%

from the defined contribution plan and

2.19% from the defined benefit plan) and the

aggregated DB/DC plan satisfies the

minimum aggregate allocation gateway of

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

* * * * *

(c) * * *

(3) * * *

(ii) Restructuring not available for certain

testing purposes. The safe harbor in

§ 1.401(a)(4)–2(b)(3) for plans with uniform

points allocation formulas is not available in

testing (and thus cannot be satisfied by)

contributions under a component plan.

Similarly, component plans cannot be used

for purposes of determining whether a plan

provides broadly available allocation rates (as

defined in § 1.401(a)(4)–8(b)(1)(iii)), or

determining whether a plan is primarily

defined benefit in character or consists of

broadly available separate plans (as defined

in paragraphs (b)(2)(v)(B) and (C) of this

section). In addition, the minimum allocation

gateway of § 1.401(a)(4)–8(b)(1)(iv) and the

minimum aggregate allocation gateway of

paragraph (b)(2)(v)(D) of this section cannot

be satisfied on the basis of component plans.

See §§ 1.401(k)–1(b)(3)(iii) and 1.401(m)–

1(b)(3)(iii) for rules regarding the

inapplicability of restructuring to section

401(k) plans and section 401(m) plans.

David A. Mader,

Acting Deputy Commissioner of Internal

Revenue.

[FR Doc. 00–25652 Filed 10–5–00; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Part 117

[CGD01–00–193]

RIN 2115–AE47

Drawbridge Operation Regulations;

Kennebec River, ME

AGENCY: Coast Guard, DOT.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Coast Guard proposes to

change the drawbridge operating

regulations for the Carlton (U.S. 1)

highway-railroad bridge, at mile 14.0,

across the Kennebec River between Bath

and Woolwich, Maine. This proposed

rule will remove unnecessary operating

restrictions from the regulations and

provide relief to the bridge owner from

the requirement to crew the bridge

during periods when there have been

few requests to open the bridge.

DATES: Comments must reach the Coast

Guard on or before December 5, 2000.

ADDRESSES: You may mail comments to

Commander (obr), First Coast Guard

District, Bridge Branch, at 408 Atlantic

Avenue, Boston, MA 02110–3350, or

deliver them to the same address

between 7 a.m. and 3 p.m., Monday

through Friday, except Federal holidays.

The telephone number is (617) 223–

8364. The First Coast Guard District,

Bridge Branch, maintains the public

docket for this rulemaking. Comments

and material received from the public,

as well as documents indicated in this

preamble as being available in the

docket, will become part of this docket

and will be available for inspection or

copying at the First Coast Guard

District, Bridge Branch, 7 a.m. to 3 p.m.,

Monday through Friday, except, Federal

holidays.

FOR FURTHER INFORMATION CONTACT: John

McDonald, Project Officer, First Coast

Guard District, (617) 223–8364.

SUPPLEMENTARY INFORMATION:

Request for Comments

We encourage you to participate in

this rulemaking by submitting

comments or related material. If you do

so, please include your name and

address, identify the docket number for

this rulemaking (CGD01–00–193),

indicate the specific section of this

document to which each comment

applies, and give the reason for each

comment. Please submit all comments

and related material in an unbound

format, no larger than 81⁄2 by 11 inches,

suitable for copying. If you would like

to know if they reached us, please

enclose a stamped, self-addressed

postcard or envelope. We will consider

all comments and material received

during the comment period. We may

change this proposed rule in view of

them.

Public Meeting

We do not now plan to hold a public

meeting. But you may submit a request

for a meeting by writing to the First

Coast Guard District, Bridge Branch, at

the address under ADDRESSES explaining

why one would be beneficial. If we

determine that one would aid this

rulemaking, we will hold one at a time

and place announced by a later notice

in the Federal Register.

Background and Purpose

The Carlton (U.S. 1) highway-railroad

bridge, at mile 14.0, across the

Kennebec River has a vertical clearance

in the closed position of 10 feet at mean

high water and 16 feet at mean low

water. The existing drawbridge

operating regulations are listed at 33

CFR 117.525. Vehicular traffic no longer

travels over the Carlton Bridge because

a new fixed highway bridge has been

constructed upstream. The bridge will