Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations 34535

Point Latitude Longitude

7 .................... 24°29.20′N 81°17.30′W

8 .................... 24°22.30′N 81°43.17′W

9 .................... 24°28.00′N 81°43.17′W

10 .................. 24°28.70′N 81°43.50′W

11 .................. 24°29.80′N 81°43.17′W

12 .................. 24°33.10′N 81°35.15′W

13 .................. 24°33.60′N 81°26.00′W

14 .................. 24°38.20′N 81°07.00′W

15 .................. 24°43.20′N 80°53.20′W

16 .................. 24°46.10′N 80°46.15′W

17 .................. 24°51.10′N 80°37.10′W

18 .................. 24°57.50′N 80°27.50′W

19 .................. 25°09.90′N 80°16.20′W

20 .................. 25°24.00′N 80°09.10′W

21 .................. 25°31.50′N 80°07.00′W

22 .................. 25°39.70′N 80°06.85′W

23 .................. 25°45.00′N 80°06.10′W

* * * * *

[FR Doc. 01–16172 Filed 6–28–01; 8:45 am]

BILLING CODE 3510–08–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8954]

RIN 1545–AY36

Nondiscrimination Requirements for

Certain Defined Contribution

Retirement Plans

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations that permit certain defined

contribution retirement plans to

demonstrate compliance with the

nondiscrimination requirements based

on plan benefits rather than

contributions. Under the final

regulations, a defined contribution plan

can test on a benefits basis if it provides

broadly available allocation rates, agebased allocations, or passes a gateway

requiring allocation rates for nonhighly

compensated employees to be at least

5% of pay or at least one-third of the

highest allocation rate for highly

compensated employees. The

regulations also permit qualified

defined contribution and defined

benefit plans that are tested together as

a single, aggregated plan (and that are

not primarily defined benefit or broadly

available separate plans) to test on a

benefits basis after passing a similar

gateway, under which the allocation

rate for nonhighly compensated

employees need not exceed 71⁄2% of

pay. These final regulations affect

employers that maintain qualified

retirement plans and qualified

retirement plan participants.

DATES: Effective Date: These regulations

are effective June 29, 2001.

Applicability Date: These regulations

apply for plan years beginning on or

after January 1, 2002.

FOR FURTHER INFORMATION CONTACT: John

T. Ricotta, 202–622–6060 or Linda S.F.

Marshall, 202–622–6090 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains 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,

using actuarial assumptions, to

equivalent benefits payable at normal

retirement age, and these equivalent

benefits are tested 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, 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 predominantly 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 super-integrated

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 Treasury Department became

concerned that new comparability and

similar plans were not consistent with

the basic purpose of the

nondiscrimination rules under section

401(a)(4).

After consideration of the comments

received in response to Notice 2000–14,

the IRS and Treasury issued proposed

regulations on this subject (REG–

114697–00), which were published in

the Federal Register on October 6, 2000

(65 FR 59774). The proposed regulations

34536 Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations

preserved the cross-testing rules of the

section 401(a)(4) regulations, but

prescribed a gateway condition for new

comparability and similar plans to meet

in order to be eligible to use crosstesting to satisfy the nondiscrimination

rules on the basis of benefits. However,

defined contribution plans that provide

broadly available allocation rates, as

defined in the proposed regulations, did

not have to satisfy the gateway. The

definition of broadly available

allocation rates under the proposed

regulations covered plans that provide

different allocation rates to different,

nondiscriminatory groups of employees.

Under the proposed regulations, the

definition also covered plans that base

allocations or allocation rates on age or

years of service, that, in contrast to new

comparability plans, provide an

opportunity for participants to ‘‘grow

into’’ higher allocation rates as they age

or accumulate additional service.

The proposed regulations also

addressed a new comparability-type

plan design that aggregates a defined

benefit plan that benefits primarily

HCEs with a defined contribution plan

that benefits primarily NHCEs. This

design would permit an employer to

circumvent the minimum allocation

gateway by aggregating (for purposes of

the nondiscrimination rules) a new

comparability or similar defined

contribution plan with a defined benefit

plan that provides only minimal

benefits to NHCEs or covers only a

relatively small number of NHCEs. In

addition, a defined benefit plan that

benefits primarily HCEs, and that is

aggregated with a defined contribution

plan for nondiscrimination testing,

could produce results similar to a new

comparability plan but with a potential

for substantially more valuable benefits

for HCEs. The proposed regulations

provided a gateway for testing the

aggregated plans on the basis of benefits

that must be satisfied unless the

aggregated defined contribution and

defined benefit plan (the DB/DC plan) is

primarily defined benefit in character

(as defined in the proposed regulations),

or unless each of the defined

contribution and defined benefit

portions of the DB/DC plan is a broadly

available separate plan (as defined in

the proposed regulations).

Written comments responding to the

notice of proposed rulemaking were

received, and a public hearing was held

on January 25, 2001, at the request of

one commentator. After consideration of

the comments, the proposed regulations

are adopted as revised by this Treasury

decision.

Explanation of Provisions

A. Overview

Like the proposed regulations, these

final regulations permit defined

contribution plans with either broadly

available allocation rates or certain agebased allocation rates to test on a

benefits basis (cross-test) in the same

manner as under current law, and

permit other defined contribution plans

to cross-test once they pass a gateway

that prescribes minimum allocation

rates for NHCEs. Similarly, these final

regulations retain the rule in the

proposed regulations that permits 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

These final regulations retain the rule

in the proposed regulations that requires

a defined contribution plan that does

not provide broadly available allocation

rates or certain age-based allocation

rates (as these terms are defined in these

final regulations) to satisfy a gateway in

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

nondiscrimination requirements of

section 401(a)(4). Under these final

regulations, as under the proposed

regulations, a plan satisfies 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, but a plan is deemed to

satisfy the gateway if each NHCE

receives an allocation of at least 5% of

the NHCE’s compensation (within the

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

Several commentators raised

questions about the interaction of the

requirements under the proposed

regulations and other regulatory rules

relating to testing for nondiscrimination.

For example, some commentators asked

what was intended by the gateway

requirement that all NHCEs receive the

minimum required allocation. Except as

specifically provided, the regulatory

definitions and rules that apply for

purposes of section 401(a)(4) also apply

for purposes of these regulations. For

example, the term employee, as used in

these regulations, is defined in

§ 1.401(a)(4)–12 as an employee (within

the meaning of § 1.410(b)–9) who

benefits as an employee under the plan

for the plan year, and an NHCE is

defined in § 1.401(a)(4)–12 as an

employee who is not an HCE. Thus, an

individual who does not otherwise

benefit under the plan for the plan year

is not an employee under these

regulations, hence not an NHCE, and

need not be given the minimum

required allocation under the gateway.

Similarly, the allocation rate referred to

in the gateway is determined under

§ 1.401(a)(4)–2(c) as the allocations to an

employee’s account for a plan year,

expressed either as a percentage of plan

year compensation (which must be

calculated using a definition of

compensation that satisfies the

requirements of section 414(s)) or as a

dollar amount.

The general rules and regulatory

definitions applicable under section

410(b) apply also for purposes of these

regulations. For example, these

regulations do not change the general

rule prohibiting aggregation of a 401(k)

plan or 401(m) plan with a plan

providing nonelective contributions.

Accordingly, matching contributions are

not taken into account for purposes of

the gateway. Similarly, pursuant to

§ 1.410(b)–6(b)(3), if a plan benefits

employees who have not met the

minimum age and service requirements

of section 410(a)(1), the plan may be

treated as two separate plans, one for

those otherwise excludable employees

and one for the other employees

benefitting under the plan. Thus, if the

plan is treated as two separate plans in

this manner, cross-testing the portion of

the plan benefitting the nonexcludable

employees will not result in minimum

required allocations under the gateway

for the employees who have not met the

section 410(a)(1) minimum age and

service requirements.

One commentator suggested that the

regulatory provision that permits a plan

to satisfy the gateway requirement by

providing an allocation of at least 5% of

compensation within the meaning of

section 415(c)(3) not require that the

allocation be based on a full year’s

compensation in the case of an

employee who participates in the plan

for only a portion of the plan year. The

final regulations modify this

requirement as suggested. The final

regulations allow a plan to satisfy the

gateway by providing an allocation of at

least 5% of compensation within the

meaning of section 415(c)(3), limited to

a period otherwise permissible under

the timing rules applicable under the

definition of plan year compensation, in

the same manner as the general rules

under the section 401(a)(4) regulations.

The definition of plan year

compensation permits use of amounts

Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations 34537

paid only during the period of

participation within the plan year.

Some commentators questioned

whether it was necessary to require the

use of compensation within the

meaning of section 415(c)(3) for

purposes of the 5% of compensation

component of the minimum allocation

gateway. One of these commentators

argued that using compensation within

the meaning of section 414(s) would be

more appropriate. Two other

commentators argued that, for this

purpose, plans should be able to use a

definition of compensation that would

be a reasonable definition of

compensation for purposes of section

414(s) without regard to whether the

definition of compensation meets the

nondiscrimination standard under the

section 414(s) regulations.

After consideration of these

comments, the requirement that section

415(c)(3) compensation be used for

purposes of the 5% of compensation

component of the minimum allocation

gateway has been retained. For purposes

of the ‘‘one third’’ component of the

gateway, a definition of compensation

that satisfies section 414(s) is an

appropriate measure because this

component is based on the ratio of HCE

allocation rates to NHCE allocation

rates. By contrast, the 5% of

compensation component of the

gateway does not reflect a comparison of

NHCE allocations to HCE allocations,

but is based on a particular level of

NHCE allocations. Without the

comparison between HCE and NHCE

allocations, a rule permitting the use of

a definition of compensation that

satisfies section 414(s), but is less

inclusive than total compensation,

could lead to NHCE allocations that are

significantly smaller than the minimum

that is contemplated by the regulations.

Therefore, it is appropriate to require

the use of total compensation, as

defined in section 415(c)(3), for the 5%

allocation component of the gateway.

Furthermore, permitting the use of a

potentially discriminatory definition of

compensation would be inconsistent

with the nondiscrimination

requirements in general, including the

minimum allocation gateway.

C. Plans With Broadly Available

Allocation Rates

Like the proposed regulations, these

final regulations provide that a plan that

has broadly available allocation rates

need not satisfy the minimum allocation

gateway. In order to be broadly

available, each allocation rate under the

plan must be currently available to a

group of employees that satisfies section

410(b) (without regard to the average

benefit percentage test). Thus, 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.

For purposes of determining whether

an allocation rate that was available

only to employees who satisfied an age

or service condition was currently

available to a section 410(b) group, the

proposed regulations allowed such a

condition to be disregarded if certain

standards were met. The final

regulations retain this exception from

the application of the minimum

allocation gateway. However, this

exception has been relocated and is now

part of an expanded provision for plans

with age-based allocations (see Plans

with Age-Based Allocations portion of

this preamble).

In response to comments, the final

regulations also liberalize the

determination of whether a plan has

broadly available allocation rates. First,

the final regulations permit two

allocation rates to be aggregated in a

manner similar to the rule that permits

aggregation of certain benefits, rights or

features. This rule permits excess

NHCEs with a higher allocation rate to

be used to support a lower allocation

rate. For example, under this rule, if

under a plan there are two groups of

participants, one group that receives an

allocation rate of 10% and another that

receives an allocation rate of 3%, and if

the group of employees who receive the

10% allocation rate satisfies section

410(b) (without regard to the average

benefit percentage test), then the 10%

rate and the 3% rate can be aggregated

and treated as a single allocation rate for

purposes of determining whether the

plan has broadly available allocation

rates. In addition, the final regulations

provide that, in determining whether a

plan provides broadly available

allocation rates, differences in allocation

rates resulting from any method of

permitted disparity provided for under

the section 401(l) regulations are

disregarded.

D. Transition Allocations

Several commentators raised the

concern that a defined contribution plan

may fail the broadly available test

because of grandfathered allocation

rates provided to employees who

formerly participated in a defined

benefit plan or provided to a group of

employees in connection with a merger,

acquisition, or other similar transaction.

In response to these comments, the final

regulations permit an employee’s

allocation to be disregarded, to the

extent the employee’s allocation is a

transition allocation (as defined in the

regulations) for the plan year. Transition

allocations which can be disregarded

can be defined benefit replacement

allocations, pre-existing replacement

allocations, or pre-existing merger and

acquisition allocations (as defined in the

regulations).

In each case, the transition allocations

must be provided to a closed group of

employees and must be established

under plan provisions. Once the

allocations are established under the

plan, they cannot be modified, except to

reduce allocations for HCEs, or because

of de minimis changes (such as a change

in the definition of compensation to

include section 132(f) elective

reductions). A plan also does not violate

this requirement because of an

amendment that either adds or removes

a provision applicable to all employees

in the group eligible for the allocations

under which each employee who is

eligible for a transition allocation

receives the greater of the transition

allocation or another allocation for

which the employee would otherwise be

eligible. If the plan provides that all

employees who are eligible for the

transition allocation receive the greater

of the transition allocation or an

otherwise available allocation, the

otherwise available allocation is

considered currently available to all

such employees, including employees

for whom the transition allocation is

greater.

These final regulations set forth basic

conditions for defined benefit

replacement allocations. These

conditions provide a framework that is

designed to ensure that these allocations

are provided in a manner consistent

with the general principles underlying

the provisions for broadly available

allocation rates under these regulations.

The regulations then delegate authority

to the Commissioner to prescribe rules

for defined benefit replacement

allocations in revenue rulings, notices,

and other guidance published in the

Internal Revenue Bulletin. Rev. Rul.

2001–30 (2001–29 I.R.B.), dated July 16,

2001, published in conjunction with

these final regulations, prescribes

specific conditions for defined benefit

replacement allocations that relate to

the basic conditions set forth in the

regulations. This division of the

medium of guidance is designed to

provide ongoing flexibility to the IRS

and Treasury to respond to changing

circumstances, or additional

information relating to defined benefit

replacement allocations.

34538 Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations

The basic conditions that allocations

must satisfy in order to be defined

benefit replacement allocations are as

follows: (1) The allocations are provided

to a group of employees who formerly

benefitted under an established

nondiscriminatory defined benefit plan

of the employer or of a prior employer

that provided age-based equivalent

allocation rates; (2) the allocations for

each employee were reasonably

calculated, in a consistent manner, to

replace the retirement benefits that the

employee would have been provided

under the defined benefit plan if the

employee had continued to benefit

under the defined benefit plan; (3) no

employee who receives the allocation

receives any other allocations under the

plan for the plan year (except as

provided in these regulations); and (4)

the composition of the group of

employees who receive the allocations

is nondiscriminatory.

Rev. Rul. 2001–30 fleshes out these

basic conditions for determining

whether an allocation is a defined

benefit replacement allocation. Under

the revenue ruling, the defined benefit

plan’s benefit formula applicable to the

group of employees must be one that

generated equivalent normal allocation

rates (determined without regard to

changes in accrual rates attributable to

changes in an employee’s years of

service) that increased from year to year

as employees attained higher ages.

Further, if the defined benefit plan was

sponsored by the employer, the defined

benefit plan satisfied sections 410(b)

and 401(a)(4), without regard to section

410(b)(6)(C) and without aggregating

with any other plan, for the plan year

which immediately precedes the first

plan year for which the allocations are

provided. Finally, the defined benefit

plan must be one that has been

established and maintained without

substantial change for at least the 5

years ending on the date benefit

accruals under the defined benefit plan

cease (with one year substituted for 5

years in the case of a defined benefit

plan of a former employer).

In order to be defined benefit

replacement allocations for the plan

year, the allocations for each employee

in the group must be reasonably

calculated, in a consistent manner, to

replace the employee’s retirement

benefits under the defined benefit plan

based on the terms of the defined

benefit plan (including the section

415(b)(1)(A) limit) as in effect

immediately prior to the date accruals

under the defined benefit plan cease. In

addition, the group of employees who

receive the allocations in a plan year

must satisfy section 410(b) (determined

without regard to the average benefit

percentage test of § 1.410(b)–5).

Although the regulations and Rev.

Rul. 2001–30 prescribe conditions for

the defined benefit replacement

allocations, they still leave employers

with flexibility in structuring these

benefits. For example, there is more

than one way in which the allocations

may reasonably be calculated, such as a

level percentage of pay for each year or

an amount that increases as the

employee ages.

The final regulations provide special

rules applicable to allocations that are

either pre-existing replacement

allocations or pre-existing merger and

acquisition allocations. Allocations are

pre-existing replacement allocations if

the allocations are provided pursuant to

a plan provision adopted before June 29,

2001, are provided to employees who

formerly benefitted under a defined

benefit plan and are reasonably

calculated, in a consistent manner, to

replace some or all of the retirement

benefits that the employee would have

received under the defined benefit plan

and any other plan or arrangement of

the employer if the employee had

continued to benefit under such defined

benefit plan and such other plan or

arrangement. Allocations are preexisting merger and acquisition

allocations if the allocations were

established in connection with a stock

or asset acquisition, merger, or other

similar transaction occurring prior to

August 28, 2001, for a group of

employees who were employed by the

acquired trade or business prior to a

specified date, provided that the class of

employees eligible for the allocations is

closed no later than two years after the

transaction (or January 1, 2002, if

earlier), the allocations are provided

pursuant to a plan amendment adopted

by the date the class was closed, and the

allocations for each employee in the

group are reasonably calculated, in a

consistent manner, to replace some or

all of the retirement benefits that the

employee would have received under

any plan of the employer if the new

employer had continued to provide the

retirement benefits that the prior

employer was providing for employees

of the trade or business.

E. Plans With Age-Based Allocations

These final regulations provide a

separate exception from the application

of the minimum allocation gateway for

certain plans with age-based allocation

rates. This provision incorporates the

exception under the proposed

regulations for plans with gradual age or

service schedules, and expands the

exception to include plans that provide

for allocation rates based on a uniform

target benefit allocation.

A plan has a gradual age or service

schedule if the schedule of allocation

rates under the plan’s formula is

available to all employees in the plan

and provides for allocation rates that

increase smoothly at regular intervals.

The rules applicable to the schedule of

allocation rates are designed to be

sufficiently flexible to accommodate a

wide variety of age- or service-based

plans (including age-weighted profitsharing plans that provide for

allocations resulting in the same

equivalent accrual rate for all

employees). The final regulations clarify

that a plan projecting future age or

service may not use imputed disparity

in determining whether the allocation

rates under the schedule increase

smoothly at regular intervals. In

response to comments, the final

regulations also accommodate smoothly

increasing schedules of allocation rates

that are based on the sum of age and

years of service. In addition, to conform

with the rules for computation of

service under § 1.401(a)(4)–12,

references to service have been changed

to years of service.

The requirement that the allocation

rates under a schedule increase

smoothly at regular intervals provides

important protection for employees,

because this requirement limits the

exception from the minimum allocation

gateway to plans in which NHCEs

actually receive the benefit of higher

rates as they attain higher ages or

complete additional years of service.

Some commentators expressed concern

that employers could be forced to

reduce allocations to younger or shorterservice NHCEs in order to satisfy the

conditions for allocation rates that

increase smoothly at regular intervals.

In response to these comments, the final

regulations provide that a plan’s

schedule of allocation rates does not fail

to increase smoothly at regular intervals

merely because a specified minimum

uniform allocation rate is provided for

all employees or because the minimum

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

provided for all non-key employees

(either because the plan is top heavy or

without regard to whether the plan is

top heavy) if one of two alternative

conditions is satisfied. These two

alternative conditions are intended to

limit the potential use of a minimum

allocation to provide a schedule of rates

that delivers allocations similar to those

under a new comparability plan (i.e., a

flat allocation rate applicable for all

employees below a certain age, followed

by a sharply increasing schedule of rates

that effectively benefits only HCEs)

Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations 34539

1No exception to the minimum allocation

gateway is needed for target benefit plans that

comply with the safe-harbor testing provisions of

§ 1.401(a)(4)–8(b)(3), because they are deemed to

satisfy section 401(a)(4) with respect to an

equivalent amount of benefits.

without satisfying the minimum

allocation gateway.

A plan satisfies the first alternative

condition if the allocation rates under

the plan that exceed the specified

minimum rate could form part of a

schedule of allocation rates that increase

smoothly at regular intervals (as defined

in these regulations) in which the

lowest allocation rate is at least 1% of

plan year compensation. The second

alternative condition, available for a

plan using an age-based schedule,

allows the use of a minimum allocation

rate if, for each age band above the

minimum allocation rate, the allocation

rate applicable for that band is less than

or equal to the allocation rate that

would yield an equivalent accrual rate

at the highest age in the band that is the

same as the equivalent accrual rate

determined for the oldest hypothetical

employee who would receive just the

minimum allocation rate. Thus, under

this condition, the allocation rates above

the minimum allocation rate do not rise

more steeply than expected under an

age-weighted profit-sharing plan

generally intended to provide the same

accrual rate at all ages.

The exception to the minimum

allocation gateway for plans with agebased allocation rates also applies to

certain uniform target benefit plans that

do not comply with the safe-harbor

testing method provided in

§ 1.401(a)(4)–8(b)(3).1 A plan has

allocation rates based on a uniform

target benefit allocation if it would

comply with the requirements for a safe

harbor target benefit plan in

§ 1.401(a)(4)–8(b)(3) except that the

interest rate for determining the

actuarial present value of the stated plan

benefit and the theoretical reserve is

lower than a standard interest rate, the

stated benefit is calculated assuming

compensation increases, or the plan

computes the current year contribution

using the actual account balance instead

of the theoretical reserve.

F. Application to Defined Contribution

Plans That Are Combined With Defined

Benefit Plans (DB/DC Plans)

These regulations 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 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. These rules

do not apply to safe harbor floor-offset

arrangements described in § 1.401(a)(4)–

8(d), or to the situation in which plans

are aggregated solely for purposes of

satisfying the average benefit percentage

test of § 1.410(b)–5.

These regulations retain the rule of

the proposed regulations that the

combination of a defined contribution

plan and a defined benefit plan may

demonstrate nondiscrimination on the

basis of benefits if the combined plan

(the DB/DC plan) is primarily defined

benefit in character, consists of broadly

available separate plans (as these terms

are defined in the regulations), or

satisfies a minimum aggregate allocation

gateway requirement that is generally

similar to the minimum allocation

gateway for defined contribution plans

that are not combined with a defined

benefit plan.

1. Gateway for Benefits Testing of

Combined Plans

In order to apply this minimum

aggregate allocation gateway, the

employee’s aggregate normal allocation

rate is determined by adding the

employee’s allocation rate under the

defined contribution plan to the

employee’s equivalent allocation rate

under the defined benefit plan. This

aggregation allows an employer that

provides NHCEs with both a defined

contribution and a defined benefit plan

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 one-third 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%).

Several commentators expressed a

concern that the minimum aggregate

allocation gateway in the proposed

regulations could require contributions

for NHCEs that would make DB/DC

plans too expensive for employers in

certain circumstances. This could occur

in cases where one HCE had a very high

equivalent allocation rate on account of

age or some other factor, and could

prompt such an employer to redesign its

plans in ways that could disadvantage

NHCEs. In response to these comments,

these final regulations provide that a

plan is deemed to satisfy this minimum

aggregate allocation gateway if the

aggregate normal allocation rate for each

NHCE is at least 71⁄2% of compensation

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

determined over a period otherwise

permissible under the timing rules

applicable under the definition of plan

year compensation.

These regulations retain the rule that,

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 growin feature inherent in traditional defined

benefit plans (i.e., the defined benefit

plan provides higher equivalent

allocation rates at higher ages).

2. Primarily Defined Benefit in

Character

Like the proposed regulations, these

final regulations provide that a DB/DC

plan that is primarily defined benefit in

character is not subject to the gateway

requirement and may continue to be

tested for nondiscrimination on the

basis of benefits as under former law. 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 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 is 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.

Some comments suggested a

loosening of the standard as to when a

DB/DC plan is primarily defined benefit

in character, but no changes have been

made. The Treasury and IRS believe that

the determination of whether a DB/DC

plan is primarily defined benefit in

character should be based on the

relative size of the defined benefit

accruals and the defined contribution

allocations for individual employees, as

reflected in the actual benefits testing

34540 Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations

that is being done under section

401(a)(4). In particular, the actuarial

assumptions used to determine whether

a DB/DC plan is primarily defined

benefit in character must be the same

assumptions that are used to apply the

cross-testing rules.

3. Broadly Available Separate Plans

Like the proposed regulations, these

final regulations provide that a DB/DC

plan that consists of broadly available

separate plans may continue to be tested

for nondiscrimination on the basis of

benefits as under current law, even if it

does not satisfy the gateway

requirement. A DB/DC plan consists of

broadly available separate plans if the

defined contribution plan and the

defined benefit plan, tested separately,

would each satisfy the requirements of

section 410(b) and the

nondiscrimination in amount

requirement of § 1.401(a)(4)–1(b)(2),

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 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 is 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, and

where the group of employees covered

by each of those plans 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.

G. Use of Component Plans

As under the proposed regulations,

the rules set forth in these final

regulations cannot be satisfied using

component plans under the

restructuring rules. Although some

commentators requested that

restructuring be permitted for this

purpose, the IRS and Treasury have

determined that such use of component

plans would be inconsistent with the

purpose of these regulations.

Effective Date

These regulations apply for plan years

beginning on or after January 1, 2002.

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

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, the notice

of proposed rulemaking preceding 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 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.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2. In § 1.401(a)(4)–0, the entry for

§ 1.401(a)(4)–8(b)(1), is revised to read

as follows:

§ 1.401(a)(4)–0 Table of contents.

* * * * *

§ 1.401(a)(4)–8 Cross-testing.

* * * * *

(b) * * *

(1) General rule and gateway.

* * * * *

Par. 3. 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

(B) For plan years beginning on or

after January 1, 2002, the plan satisfies

one of the following conditions—

(1) The plan has broadly available

allocation rates (within the meaning of

paragraph (b)(1)(iii) of this section) for

the plan year;

(2) The plan has age-based allocation

rates that are based on either a gradual

age or service schedule (within the

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

section) or a uniform target benefit

allocation (within the meaning of

paragraph (b)(1)(v) of this section) for

the plan year; or

(3) The plan satisfies the minimum

allocation gateway of paragraph

(b)(1)(vi) 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, if two allocation rates could be

permissively aggregated under

§ 1.401(a)(4)–4(d)(4), assuming the

allocation rates were treated as benefits,

rights or features, they may be

aggregated and treated as a single

allocation rate. In addition, the

disregard of age and service conditions

described in § 1.401(a)(4)–4(b)(2)(ii)(A)

Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations 34541

does not apply for purposes of this

paragraph (b)(1)(iii)(A).

(B) Certain transition allocations. In

determining whether a plan has broadly

available allocation rates for the plan

year within the meaning of paragraph

(b)(1)(iii)(A) of this section, an

employee’s allocation may be

disregarded to the extent that the

allocation is a transition allocation for

the plan year. In order for an allocation

to be a transition allocation, the

allocation must comply with the

requirements of paragraph (b)(1)(iii)(C)

of this section and must be either—

(1) A defined benefit replacement

allocation within the meaning of

paragraph (b)(1)(iii)(D) of this section; or

(2) A pre-existing replacement

allocation or pre-existing merger and

acquisition allocation, within the

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

this section.

(C) Plan provisions relating to

transition allocations—(1) In general.

Plan provisions providing for transition

allocations for the plan year must

specify both the group of employees

who are eligible for the transition

allocations and the amount of the

transition allocations.

(2) Limited plan amendments.

Allocations are not transition

allocations within the meaning of

paragraph (b)(1)(iii)(B) of this section for

the plan year if the plan provisions

relating to the allocations are amended

after the date those plan provisions are

both adopted and effective. The

preceding sentence in this paragraph

(b)(1)(iii)(C)(2) does not apply to a plan

amendment that reduces transition

allocations to HCEs, makes de minimis

changes in the calculation of the

transition allocations (such as a change

in the definition of compensation to

include section 132(f) elective

reductions), or adds or removes a

provision permitted under paragraph

(b)(1)(iii)(C)(3) of this section.

(3) Certain permitted plan provisions.

An allocation does not fail to be a

transition allocation within the meaning

of paragraph (b)(1)(iii)(B) of this section

merely because the plan provides that

each employee who is eligible for a

transition allocation receives the greater

of such allocation and the allocation for

which the employee would otherwise be

eligible under the plan. In a plan that

contains such a provision, for purposes

of determining whether the plan has

broadly available allocation rates within

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

of this section, the allocation for which

an employee would otherwise be

eligible is considered currently available

to the employee, even if the employee’s

transition allocation is greater.

(D) Defined benefit replacement

allocation. An allocation is a defined

benefit replacement allocation for the

plan year if it is provided in accordance

with guidance prescribed by the

Commissioner published in the Internal

Revenue Bulletin (see

§ 601.601(d)(2)(ii)(b) of this chapter) and

satisfies the following conditions—

(1) The allocations are provided to a

group of employees who formerly

benefitted under an established

nondiscriminatory defined benefit plan

of the employer or of a prior employer

that provided age-based equivalent

allocation rates;

(2) The allocations for each employee

in the group were reasonably calculated,

in a consistent manner, to replace the

retirement benefits that the employee

would have been provided under the

defined benefit plan if the employee had

continued to benefit under the defined

benefit plan;

(3) Except as provided in paragraph

(b)(1)(iii)(C) of this section, no employee

who receives the allocation receives any

other allocations under the plan for the

plan year; and

(4) The composition of the group of

employees who receive the allocations

is nondiscriminatory.

(E) Pre-existing transition

allocations—(1) Pre-existing

replacement allocations. An allocation

is a pre-existing replacement allocation

for the plan year if the allocation

satisfies the following conditions—

(i) The allocations are provided

pursuant to a plan provision adopted

before June 29, 2001;

(ii) The allocations are provided to

employees who formerly benefitted

under a defined benefit plan of the

employer; and

(iii) The allocations for each employee

in the group are reasonably calculated,

in a consistent manner, to replace some

or all of the retirement benefits that the

employee would have received under

the defined benefit plan and any other

plan or arrangement of the employer if

the employee had continued to benefit

under such defined benefit plan and

such other plan or arrangement.

(2) Pre-existing merger and

acquisition allocations. An allocation is

a pre-existing merger and acquisition

allocation for the plan year if the

allocation satisfies the following

conditions—

(i) The allocations are provided solely

to employees of a trade or business that

has been acquired by the employer in a

stock or asset acquisition, merger, or

other similar transaction occurring prior

to August 28, 2001, involving a change

in the employer of the employees of the

trade or business;

(ii) The allocations are provided only

to employees who were employed by

the acquired trade or business before a

specified date that is no later than two

years after the transaction (or January 1,

2002, if earlier);

(iii) The allocations are provided

pursuant a plan provision adopted no

later than the specified date; and

(iv) The allocations for each employee

in the group are reasonably calculated,

in a consistent manner, to replace some

or all of the retirement benefits that the

employee would have received under

any plan of the employer if the new

employer had continued to provide the

retirement benefits that the prior

employer was providing for employees

of the trade or business.

(F) Successor employers. An employer

that accepts a transfer of assets (within

the meaning of section 414(l)) from the

plan of a prior employer may continue

to treat any transition allocations

provided under that plan as transition

allocations under paragraph (b)(1)(iii)(B)

of this section, provided that the

successor employer continues to satisfy

the applicable requirements set forth in

paragraphs (b)(1)(iii)(C) through (E) of

this section for the plan year.

(iv) Gradual age or service schedule—

(A) In general. A plan has a gradual age

or service schedule for the plan year if

the allocation formula for all employees

under the plan provides for a single

schedule of allocation rates under

which—

(1) The schedule defines a series of

bands based solely on age, years of

service, or the number of points

representing the sum of age and years of

service (age and service points), under

which the same allocation rate applies

to all employees whose age, years of

service, or age and service points are

within each band; and

(2) The allocation rates under the

schedule increase smoothly at regular

intervals, within the meaning of

paragraphs (b)(1)(iv)(B) and (C) of this

section.

(B) Smoothly increasing schedule of

allocation rates. A schedule of

allocation rates increases smoothly if

the allocation rate for each band within

the schedule is greater than the

allocation rate for the immediately

preceding band (i.e., the band with the

next lower number of years of age, years

of service, or age and service points) 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 band to the rate for the

immediately preceding band is more

than 2.0 or if it exceeds the ratio of

34542 Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations

allocation rates between the two

immediately preceding bands.

(C) Regular intervals. A schedule of

allocation rates has regular intervals of

age, years of service or age and service

points, if each band, other than the band

associated with the highest age, years of

service, or age and service points, is the

same length. For this purpose, if the

schedule is based on age, the first band

is 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. For a schedule of allocation

rates based on age and service points,

the rules of the preceding two sentences

are applied by substituting 25 age and

service points for age 25. For a schedule

of allocation rates based on service, the

starting service for the first service band

is permitted to be treated as one year of

service or any lesser amount of service.

(D) Minimum allocation rates

permitted. A schedule of allocation rates

under a plan does not fail to increase

smoothly at regular intervals, within the

meaning of paragraphs (b)(1)(iv)(B) and

(C) of this section, merely because a

minimum uniform allocation rate is

provided for all employees or the

minimum benefit described in section

416(c)(2) is provided for all non-key

employees (either because the plan is

top heavy or without regard to whether

the plan is top heavy) if the schedule

satisfies one of the following

conditions—

(1) The allocation rates under the plan

that are greater than the minimum

allocation rate can be included in a

hypothetical schedule of allocation rates

that increases smoothly at regular

intervals, within the meaning of

paragraphs (b)(1)(iv)(B) and (C) of this

section, where the hypothetical

schedule has a lowest allocation rate no

lower than 1% of plan year

compensation; or

(2) For a plan using a schedule of

allocation rates based on age, for each

age band in the schedule that provides

an allocation rate greater than the

minimum allocation rate, there could be

an employee in that age band with an

equivalent accrual rate that is less than

or equal to the equivalent accrual rate

that would apply to an employee whose

age is the highest age for which the

allocation rate equals the minimum

allocation rate.

(v) Uniform target benefit allocations.

A plan has allocation rates that are

based on a uniform target benefit

allocation for the plan year if the plan

fails to satisfy the requirements for the

safe harbor testing method in paragraph

(b)(3) of this section merely because the

determination of the allocations under

the plan differs from the allocations

determined under that safe harbor

testing method for any of the following

reasons—

(A) The interest rate used for

determining the actuarial present value

of the stated plan benefit and the

theoretical reserve is lower than a

standard interest rate;

(B) The stated benefit is calculated

assuming compensation increases at a

specified rate; or

(C) The plan computes the current

year contribution using the actual

account balance instead of the

theoretical reserve.

(vi) Minimum allocation gateway—(A)

General rule. A plan satisfies the

minimum allocation gateway of this

paragraph (b)(1)(vi) 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.

(B) Deemed satisfaction. A plan is

deemed to satisfy the minimum

allocation gateway of this paragraph

(b)(1)(vi) if each NHCE receives an

allocation of at least 5% of the NHCE’s

compensation within the meaning of

section 415(c)(3), measured over a

period of time permitted under the

definition of plan year compensation.

(vii) Determination of allocation rate.

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

this section, 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. However, in determining whether the

plan has broadly available allocation

rates as provided in paragraph (b)(1)(iii)

of this section, differences in allocation

rates attributable solely to the use of

permitted disparity described in

§ 1.401(l)–2 are disregarded.

(viii) Examples. The following

examples illustrate the rules in this

paragraph (b)(1):

Example 1. (i) Plan M, a defined

contribution plan without a minimum

service requirement, provides an allocation

formula under which allocations are

provided to all employees according to the

following schedule:

Completed years

of service

Allocation

rate

(in percent)

Ratio of allocation rate

for band to

allocation

rate for immediately

preceding

band

0–5 .................... 3.0 (1)

6–10 .................. 4.5 1.50

Completed years

of service

Allocation

rate

(in percent)

Ratio of allocation rate

for band to

allocation

rate for immediately

preceding

band

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

1 Not applicable.

(ii) Plan M provides that allocation rates

for all employees are determined using a

single schedule based solely on service, as

described in paragraph (b)(1)(iv)(A)(1) of this

section. Therefore, if the allocation rates

under the schedule increase smoothly at

regular intervals as described in paragraph

(b)(1)(iv)(A)(2) of this section, then the plan

has a gradual age or service schedule

described in paragraph (b)(1)(iv) of this

section.

(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 as

described in paragraph (b)(1)(iv)(B) of this

section. In addition, the bands (other than the

highest band) are all 5 years long, so the

increases occur at regular intervals as

described in paragraph (b)(1)(iv)(C) of this

section. Thus, the allocation rates under the

plan’s schedule increase smoothly at regular

intervals as described in paragraph

(b)(1)(iv)(A)(2) of this section. Accordingly,

the plan has a gradual age or service schedule

described in paragraph (b)(1)(iv) of this

section.

(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)(vi) of this section.

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

Example 1, except that the 4.5% allocation

rate applies for all employees with 10 years

of service or less.

(ii) Plan M provides that allocation rates

for all employees are determined using a

single schedule based solely on service, as

described in paragraph (b)(1)(iv)(A)(1) of this

section. Therefore, if the allocation rates

under the schedule increase smoothly at

regular intervals as described in paragraph

(b)(1)(iv)(A)(2) of this section, then the plan

has a gradual age or service schedule

described in paragraph (b)(1)(iv) of this

section.

(iii) The bands (other than the highest

band) in the schedule are not all the same

length, since the first band is 10 years long

while other bands are 5 years long. Thus, the

schedule does not have regular intervals as

described in paragraph (b)(1)(iv)(C) of this

section. However, under paragraph

(b)(1)(iv)(D) of this section, the schedule of

Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations 34543

allocation rates does not fail to increase

smoothly at regular intervals merely because

the minimum allocation rate of 4.5% results

in a first band that is longer than the other

bands, if either of the conditions of paragraph

(b)(1)(iv)(D)(1) or (2) of this section is

satisfied.

(iv) In this case, the schedule of allocation

rates satisfies the condition in paragraph

(b)(1)(iv)(D)(1) of this section because the

allocation rates under the plan that are

greater than the 4.5% minimum allocation

rate can be included in the following

hypothetical schedule of allocation rates that

increases smoothly at regular intervals and

has a lowest allocation rate of at least 1% of

plan year compensation:

Completed years

of service

Allocation

rate

(in percent)

Ratio of allocation rate

for band to

allocation

rate for immediately

preceding

band

0–5 .................... 2.5 (1)

6–10 .................. 4.5 1.80

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

1 Not applicable.

(v) Accordingly, the plan has a

gradual age or service schedule

described in paragraph (b)(1)(iv) of this

section. 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)(vi) of this section.

Example 3. (i) Plan N, a defined

contribution plan, provides an allocation

formula under which allocations are

provided to all employees according to the

following schedule:

Age

Allocation

rate

(in percent)

Ratio of allocation rate

for band to

allocation

rate for immediately

preceding

band

Under 25 ........... 3.0 (1)

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

1 Not applicable.

(ii) Plan N provides that allocation rates for

all employees are determined using a single

schedule based solely on age, as described in

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

Therefore, if the allocation rates under the

schedule increase smoothly at regular

intervals as described in paragraph

(b)(1)(iv)(A)(2) of this section, then the plan

has a gradual age or service schedule

described in paragraph (b)(1)(iv) of this

section.

(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 as

described in paragraph (b)(1)(iv)(B) of this

section. In addition, the bands (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) are all

5 years long, so the increases occur at regular

intervals as described in paragraph

(b)(1)(iv)(C) of this section. Thus, the

allocation rates under the plan’s schedule

increase smoothly at regular intervals as

described in paragraph (b)(1)(iv)(A)(2) of this

section. Accordingly, the plan has a gradual

age or service schedule described in

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

(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)(vi) of this section.

Example 4. (i) Plan O, a defined

contribution plan, provides an allocation

formula under which allocations are

provided to all employees according to the

following schedule:

Age

Allocation

rate

(in percent)

Ratio of allocation rate

for band to

allocation

rate for immediately

preceding

band

Under 40 ........... 3 (1)

40–44 ................ 6 2.00

45–49 ................ 9 1.50

50–54 ................ 12 1.33

55–59 ................ 16 1.33

60–64 ................ 20 1.25

65 or older ........ 25 1.25

1 Not applicable.

(ii) Plan O provides that allocation rates for

all employees are determined using a single

schedule based solely on age, as described in

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

Therefore, if the allocation rates under the

schedule increase smoothly at regular

intervals as described in paragraph

(b)(1)(iv)(A)(2) of this section, then the plan

has a gradual age or service schedule

described in paragraph (b)(1)(iv) of this

section.

(iii) The bands (other than the highest

band) in the schedule are not all the same

length, since the first band is treated as 15

years long while other bands are 5 years long.

Thus, the schedule does not have regular

intervals as described in paragraph

(b)(1)(iv)(C) of this section. However, under

paragraph (b)(1)(iv)(D) of this section, the

schedule of allocation rates does not fail to

increase smoothly at regular intervals merely

because the minimum allocation rate of 3%

results in a first band that is longer than the

other bands, if either of the conditions of

paragraph (b)(1)(iv)(D)(1) or (2) of this section

is satisfied.

(iv) In this case, in order to define a

hypothetical schedule that could include the

allocation rates in the actual schedule of

allocation rates, each of the bands below age

40 would have to be 5 years long (or be

treated as 5 years long). Accordingly, the

hypothetical schedule would have to provide

for a band for employees under age 30, a

band for employees in the range 30–34 and

a band for employees age 35–39.

(v) The ratio of the allocation rate for the

age 40–44 band to the next lower band is 2.0.

Accordingly, in order for the applicable

allocations rates under this hypothetical

schedule to increase smoothly, the ratio of

the allocation rate for each band in the

hypothetical schedule below age 40 to the

allocation rate for the immediately preceding

band would have to be 2.0. Thus, the

allocation rate for the hypothetical band

applicable for employees under age 30 would

be .75%, the allocation rate for the

hypothetical band for employees in the range

30–34 would be 1.5% and the allocation rate

for employees in the range 35–39 would be

3%.

(vi) Because the lowest allocation rate

under any possible hypothetical schedule is

less than 1% of plan year compensation, Plan

O will be treated as satisfying the

requirements of paragraphs (b)(1)(iv)(B) and

(C) of this section only if the schedule of

allocation rates satisfies the steepness

condition described in paragraph

(b)(1)(iv)(D)(2) of this section. In this case,

the steepness condition is not satisfied

because the equivalent accrual rate for an

employee age 39 is 2.81%, but there is no

hypothetical employee in the band for ages

40–44 with an equal or lower equivalent

accrual rate (since the lowest equivalent

accrual rate for hypothetical employees

within this band is 3.74% at age 44).

(vii) Since the schedule of allocation rates

under the plan does not increase smoothly at

regular intervals, Plan O’s schedule of

allocation rates is not a gradual age or service

schedule. Further, Plan O does not provide

uniform target benefit allocations. Therefore,

under paragraph (b)(1)(i) of this section, Plan

O cannot satisfy the nondiscrimination in

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

for the plan year on the basis of benefits

unless either Plan O provides for broadly

available allocation rates for the plan year as

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

section (i.e., the allocation rate at each age is

provided to a group of employees that

satisfies section 410(b) without regard to the

average benefit percentage test), or Plan O

satisfies the minimum allocation gateway of

paragraph (b)(1)(vi) of this section for the

plan year.

Example 5. (i) Plan P 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

34544 Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations

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

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

resulting in an allocation rate of 17.65% for

Employee X and 20% for Employee Y. Under

Plan P, each NHCE receives an allocation of

5% of compensation within the meaning of

section 415(c)(3), measured over a period of

time permitted under the definition of plan

year compensation.

(ii) Because the allocation rate for X is not

currently available to any NHCE, Plan P does

not have broadly available allocation rates

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

this section. Furthermore, Plan P does not

provide for age based-allocation rates within

the meaning of paragraph (b)(1)(iv) or (v) of

this section. Thus, under paragraph (b)(1)(i)

of this section, Plan P can satisfy the

nondiscrimination in amount requirement of

§ 1.401(a)(4)–1(b)(2) for the plan year on the

basis of benefits only if Plan P satisfies the

minimum allocation gateway of paragraph

(b)(1)(vi) of this section for the plan year.

(iii) The highest allocation rate for any HCE

under Plan P is 20%. Accordingly, Plan P

would satisfy the minimum allocation

gateway of paragraph (b)(1)(vi) 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) (measured over

a period of time permitted under the

definition of plan year compensation).

(iv) Under Plan P, each NHCE receives an

allocation of 5% of compensation within the

meaning of section 415(c)(3) (measured over

a period of time permitted under the

definition of plan year compensation).

Accordingly, Plan P satisfies the minimum

allocation gateway of paragraph (b)(1)(vi) of

this section.

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

Plan P 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. 4. 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—(1) General rule. A DB/DC

plan satisfies the minimum aggregate

allocation gateway 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 at least 5%

increased by 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%).

(2) Deemed satisfaction. A plan is

deemed to satisfy the minimum

aggregate allocation gateway of this

paragraph (b)(2)(v)(D) if the aggregate

normal allocation rate for each NHCE is

at least 71⁄2% of the NHCE’s

compensation within the meaning of

section 415(c)(3), measured over a

period of time permitted under the

definition of plan year compensation.

(3) Averaging of equivalent allocation

rates for NHCEs. 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 are not covered by Plan N.

All NHCEs of Employer A are covered by

Plan N (at a 3% allocation rate), but are 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 be

permitted to demonstrate satisfaction of 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:

Federal Register / Vol. 66, No. 126 / Friday, June 29, 2001 / Rules and Regulations 34545

Employee

Equivalent

normal allocation rates

for the 1%

accural

under plan

O (defined

benefit plan)

(in percent)

Equivalent

normal

accural

rates for the

15%/3% allocation

under plan

P (defined

contribution

plan)

(in percent)

HCE A (age 55) 3.93 3.82

HCE B (age 50) 2.61 5.74

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

D (age 45) ........ 1.74 1.73

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

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

(ii) Although all of the NHCEs benefit

under 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 each of 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 available only 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)(vi) (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 are

permitted to demonstrate satisfaction of 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 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 of the NHCEs under Plan O is 2.19% (the

sum of 5.91%, 1.74%, .77%, and .34%,

divided by 4). Accordingly, Employer B is

permitted to treat all of the NHCEs as having

an equivalent allocation rate attributable to

Plan O equal to 2.19%. Thus, all of the

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)),

determining whether a plan has a

gradual age or service schedule (as

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

determining whether a plan has

allocation rates that are based on a

uniform target benefit allocation (as

defined in § 1.401(a)(4)–8(b)(1)(v)), 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)(vi) 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.

* * * * *

Par. 5. Section 1.401(a)(4)–12 is

amended by adding a sentence to the

end of the definition of Standard

mortality table to read as follows:

§ 1.401(a)(4)–12 Definitions.

* * * * *

Standard mortality table. * * * The

applicable mortality table under section

417(e)(3)(A)(ii)(I) is also a standard

mortality table.

* * * * *

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: June 21, 2001.

Mark A. Weinberger,

Assistant Secretary of the Treasury.

[FR Doc. 01–16326 Filed 6–28–01; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF COMMERCE

Technology Administration

37 CFR Part 404

[Docket No. 010111012–1012–01]

RIN 0692–AA17

Licensing of Government Owned

Inventions

AGENCY: Technology Administration,

Commerce.

ACTION: Final rule.

SUMMARY: This final rule incorporates a

recently enacted change to 35 U.S.C.

209 with respect to the granting of

exclusive patent licenses by Federal

agencies. Federal agencies are now

authorized to provide the public no less

than 15 days to file an objection to the

proposed license. Under the present

regulation in 37 CFR part 404, the notice

period is 60 days although no specific

time period was required by statute.

This statutory change is being

implemented to address the concern

that the granting of exclusive licenses

was being unnecessarily delayed by the

60-day notice period.

DATES: This rule is effective June 29,

2001.

FOR FURTHER INFORMATION CONTACT: Mr.

John Raubitschek, Patent Counsel, at

telephone: (202) 482–8010.

SUPPLEMENTARY INFORMATION: In section

4(e) of Public Law 106–404, the

Technology Transfer Commercialization

Act of 2000, signed by the President on

November 1, 2000, agencies are now

required to give the public notice of at

least 15 days before granting an

exclusive or partially exclusive license

on a federally owned invention. This is

reflected in revisions to 37 CFR

404.7(a)(1)(i) and (b)(1)(i). One of the

reasons for the minimum notice was a

concern that the granting of exclusive

licenses was being unnecessarily

delayed by the 60 day notice period

prescribed by the current regulations.

Although agencies may now issue

shorter notices, they are expected to

balance the need for promptness against

the statutory purpose of ensuring that

Government inventions are used to

benefit the public.

Public Law 106–404 makes other

changes to 35 U.S.C. 209 which will be

separately addressed in a proposed rule.

In addition, the rule now cites 35

U.S.C. 208, instead of 35 U.S.C. 206, as

the correct authority for the Department

of Commerce over the patent licensing

regulation. The rule also cites section

3(d)(3) of DOO 10–18, instead of section