Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations 27927 

1Section 901 of PPA ’06 also added a parallel 

provision to section 401(a)(35) at section 204(j) of 

the Employee Retirement Income Security Act of 

1974, Public Law 93–406 (88 Stat. 829 (1974)) 

(ERISA). Under section 101 of Reorganization Plan 

No. 4 of 1978 (43 FR 47713), the Secretary of 

Continued 

• Amendment 25–72 for §§ 25.783(g) 

and 25.177. 

• Amendment 25–75 for § 25.729(e). 

• Amendment 25–79 for 

§ 25.811(e)(2). 

• Amendment 25–80 for § 25.1316. 

In addition, the certification basis 

includes certain special conditions, 

exemptions, or later amended sections 

of the applicable part that are not 

relevant to this proposed special 

condition. 

If the Administrator finds that the 

applicable airworthiness regulations 

(i.e., part 25) do not contain adequate or 

appropriate safety standards for the 

Falcon Model 2000EX because of a 

novel or unusual design feature, special 

conditions are prescribed under the 

provisions of § 21.16. 

In addition to the applicable 

airworthiness regulations and special 

conditions, the Falcon Model 2000EX 

must comply with the fuel-vent and 

exhaust-emission requirements of 14 

CFR part 34 and the noise certification 

requirements of 14 CFR part 36. 

The FAA issues special conditions, as 

defined in 14 CFR 11.19, in accordance 

with § 11.38, and they become part of 

the type-certification basis under 

§ 21.101. 

Special conditions are initially 

applicable to the model for which they 

are issued. Should the type certificate 

for that model be amended later to 

include any other model that 

incorporates the same novel or unusual 

design feature, or should any other 

model already included on the same 

type certificate be modified to 

incorporate the same novel or unusual 

design feature, the special conditions 

would also apply to the other model 

under § 21.101. 

Novel or Unusual Design Features 

The Falcon Model 2000EX will 

incorporate the following novel or 

unusual design features: 

The airplane will be equipped with an 

automatic braking system, which is a 

pilot-selectable function that allows 

earlier maximum braking at landing 

without pilot pedal input. When the 

autobrake system is armed before 

landing, it automatically commands 

maximum braking at main wheels 

touchdown. This will cause a high nose 

gear sink rate, and potentially higher 

gear and airframe loads than would 

occur with a traditional braking system. 

Therefore, the FAA has determined that 

a special condition is needed. 

Discussion 

The special condition defines a 

landing pitchover condition that takes 

into account the effects of the automatic 

braking system. The special condition 

defines the airplane configuration, 

speeds, and other parameters necessary 

to develop airframe and nose gear loads 

for this condition. The special condition 

requires that the airplane be designed to 

support the resulting limit and ultimate 

loads as defined in § 25.305. 

Discussion of Comments 

Notice of proposed special conditions 

No. 25–09–13–SC for the Dassault 

Aviation Falcon Model 2000EX 

airplanes was published in the Federal 

Register on December 10, 2009. No 

comments were received, and the 

special conditions are adopted as 

proposed. 

Applicability 

As discussed above, these special 

conditions are applicable to the Falcon 

Model 2000EX. Should Dassault 

Aviation apply at a later date for a 

change to the type certificate to include 

another model on the same type 

certificate incorporating the same novel 

or unusual design feature, the special 

conditions would apply to that model as 

well. 

Conclusion 

This action affects only certain novel 

or unusual design features on one model 

of airplanes. It is not a rule of general 

applicability. 

List of Subjects in 14 CFR Part 25 

Aircraft, Aviation safety, Reporting 

and recordkeeping requirements. 

The authority citation for these 

special conditions is as follows: 

Authority: 49 U.S.C. 106(g), 40113, 44701, 

44702, 44704. 

The Special Conditions 

Accordingly, pursuant to the 

authority delegated to me by the 

Administrator, the following special 

conditions are issued as part of the type 

certification basis for Dassault Aviation 

Falcon Model 2000EX airplanes. 

Landing Pitchover Condition 

A landing pitchover condition must 

be addressed that takes into account the 

effect of the autobrake system. The 

airplane is assumed to be at the design 

maximum landing weight, or at the 

maximum weight allowed with the 

autobrake system on. The airplane is 

assumed to land in a tail-down attitude 

and at the speeds defined in § 25.481. 

Following main gear contact, the 

airplane is assumed to rotate about the 

main gear wheels at the highest pitch 

rate allowed by the autobrake system. 

This is considered a limit load 

condition from which ultimate loads 

must also be determined. Loads must be 

determined for critical fuel and payload 

distributions and centers of gravity. 

Nose gear loads, as well as airframe 

loads, must be determined. The airplane 

must support these loads as described in 

§ 25.305. 

Issued in Renton, Washington, on May 12, 

2010. 

Ali Bahrami, 

Manager, Transport Airplane Directorate, 

Aircraft Certification Service. 

[FR Doc. 2010–11932 Filed 5–18–10; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9484] 

RIN 1545–BH04 

Diversification Requirements for 

Certain Defined Contribution Plans 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations under section 401(a)(35) of 

the Internal Revenue Code (Code) 

relating to diversification requirements 

for certain defined contribution plans 

holding publicly traded employer 

securities. These regulations will affect 

administrators of, employers 

maintaining, participants in, and 

beneficiaries of defined contribution 

plans that are invested in employer 

securities. 

DATES: Effective date: These regulations 

are effective on May 19, 2010. 

Applicability date: These regulations 

apply for plan years beginning on or 

after January 1, 2011. 

FOR FURTHER INFORMATION CONTACT: R. 

Lisa Mojiri-Azad or Jamie Dvoretzky at 

(202) 622–6060 (not a toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains final 

regulations under section 401(a)(35) of 

the Code, which was added by section 

901 of the Pension Protection Act of 

2006, Public Law 109–280 (120 Stat. 780 

(2006)) (PPA ’06).1


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27928 Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations 

Treasury has interpretative jurisdiction over the 

subject matter addressed in these final regulations 

for purposes of section 204(j) of ERISA. Thus, the 

guidance provided in these final regulations with 

respect to section 401(a)(35) of the Code also 

applies for purposes of section 204(j) of ERISA. 

2Section 401(a)(28)(B) provides certain 

diversification rights to participants in an employee 

stock ownership plan within the meaning of section 

4975(e)(7) (ESOP). Section 401(a)(28)(B)(v), as 

added by section 901(a)(2)(A) of PPA ’06, provides 

that section 401(a)(28)(B) does not to apply to a 

plan to which section 401(a)(35) applies. 

Section 401(a)(35)(A) provides that a 

trust which is part of an applicable 

defined contribution plan is not a 

qualified trust under section 401(a) 

unless the plan satisfies the 

diversification requirements of section 

401(a)(35)(B), (C), and (D). Under 

section 401(a)(35)(B), each individual 

must have the right to direct the plan to 

divest employer securities allocated to 

the individual’s account that are 

attributable to employee contributions 

or elective deferrals and to reinvest an 

equivalent amount in other investment 

options meeting the requirements of 

section 401(a)(35)(D).2

Under section 401(a)(35)(C), each 

individual who is a participant who has 

completed at least three years of service, 

a beneficiary of a participant who has 

completed at least three years of service, 

or a beneficiary of a deceased 

participant must be permitted to elect to 

direct the plan to divest employer 

securities allocated to the individual’s 

account and to reinvest an equivalent 

amount in other investment options 

meeting the requirements of section 

401(a)(35)(D). 

Section 401(a)(35)(D)(i) requires an 

applicable defined contribution plan to 

offer individuals not less than three 

investment options, other than 

employer securities, to which the 

individuals may direct the proceeds 

from the divestment of employer 

securities, each of which is diversified 

and has materially different risk and 

return characteristics. 

Under section 401(a)(35)(D)(ii)(I), a 

plan does not fail to meet the 

requirements of section 401(a)(35)(D) if 

it allows individuals to divest employer 

securities and reinvest the proceeds at 

periodic, reasonable opportunities 

occurring no less frequently than 

quarterly. 

Under section 401(a)(35)(D)(ii)(II), a 

plan is not permitted to impose 

restrictions or conditions with respect to 

the investment of employer securities 

that are not imposed on the investment 

of other assets of the plan. However, this 

rule does not apply to restrictions or 

conditions imposed to comply with 

securities laws. The Secretary is 

authorized to issue regulations 

providing additional exceptions to the 

requirements of section 

401(a)(35)(D)(ii)(II). 

An applicable defined contribution 

plan under section 401(a)(35) is a 

defined contribution plan that holds any 

publicly traded employer securities. A 

publicly traded employer security is 

defined as an employer security under 

section 407(d)(1) of the Employee 

Retirement Income Security Act of 1974, 

Public Law 93–406 (88 Stat. 829 (1974)) 

(ERISA) which is readily tradable on an 

established securities market. Section 

401(a)(35)(F)(i) provides that a plan that 

holds employer securities that are not 

publicly traded employer securities is 

nevertheless treated as holding publicly 

traded employer securities if any 

employer corporation or any member of 

a controlled group of corporations 

which includes the employer 

(determined by applying section 

1563(a), except substituting 50 percent 

for 80 percent) has issued a class of 

stock that is a publicly traded employer 

security. However, section 401(a)(35)(F) 

does not apply to a plan if no employer 

corporation, or parent corporation (as 

defined in section 424(e)) of an 

employer corporation, has issued any 

publicly traded employer security and 

no employer or parent corporation has 

issued any special class of stock which 

grants particular rights to, or bears 

particular risks for, the holder or issuer 

with respect to any corporation 

described in section 401(a)(35)(F)(i) 

which has issued any publicly traded 

employer security. 

Section 401(a)(35)(E) provides that 

section 401(a)(35) does not apply to an 

employee stock ownership plan within 

the meaning of section 4975(e)(7) 

(ESOP) that holds no contributions (or 

earnings thereunder) that are subject to 

section 401(k) or (m) (generally relating 

to elective deferrals and matching and 

employee after-tax contributions) and 

the ESOP is a separate plan for purposes 

of section 414(l) with respect to any 

other defined benefit plan or defined 

contribution plan maintained by the 

same employer or employers. Section 

401(a)(35)(E) further provides that 

section 401(a)(35) does not apply to oneparticipant retirement plans (within the 

meaning of section 401(a)(35)(E)(iv)). 

Section 401(a)(35) is generally 

effective for plan years beginning after 

December 31, 2006. Section 

401(a)(35)(H) generally provides a three 

year phase-in rule with respect to an 

individual’s right to direct the 

divestment of employer securities 

attributable to employer contributions, 

except with respect to certain 

participants who have attained age 55. 

Section 901(c)(2) of PPA ’06 includes a 

special rule for a plan maintained 

pursuant to one or more collective 

bargaining agreements between 

employee representatives and one or 

more employers that was ratified on or 

before August 17, 2006. Under this rule, 

section 401(a)(35) is not effective until 

plan years beginning after the earlier of 

(1) the later of (a) December 31, 2007 or 

(b) the date on which the last of such 

collective bargaining agreements 

terminates (determined without regard 

to any extension thereof after August 17, 

2006) or (2) December 31, 2008. 

Section 101(m) of ERISA as amended 

by section 507 of PPA ’06 requires the 

plan administrator to furnish a notice to 

individuals not later than 30 days before 

the first date on which an individual is 

eligible to exercise his or her right to 

divest employer securities with respect 

to any type of contribution. The notice 

must set forth the diversification rights 

under section 204(j) of ERISA (which is 

the parallel provision in ERISA to 

section 401(a)(35)) and describe the 

importance of diversifying the 

investment of retirement account assets. 

Notice 2006–107 (2006–2 CB 1114 

(December 18, 2006)), (see 

§ 601.601(d)(2)(ii)(b)) includes guidance 

and transitional rules with respect to the 

diversification requirements of section 

401(a)(35). Notice 2006–107 also 

includes guidance regarding the related 

notice requirements of section 101(m) of 

ERISA, including a model notice. Notice 

2008–7 (2008–3 IRB 276 (January 22, 

2008)), (see § 601.601(d)(2)(ii)(b)) 

extends the transitional guidance and 

transitional relief that was included in 

Notice 2006–107 until the final 

regulations become effective. 

Notice 2009–97 (2009–52 IRB 972 

(December 28, 2009)), (see 

§ 601.601(d)(2)(ii)(b)) extends the 

deadline for adopting an interim or 

discretionary plan amendment under 

certain provisions of PPA ’06, including 

section 401(a)(35), to the last day of the 

first plan year that begins on or after 

January 1, 2010. 

On January 3, 2008, proposed 

regulations (REG–136701–07) under 

section 401(a)(35) of the Code were 

published in the Federal Register (73 

FR 421). No public hearing was 

requested. Written comments 

responding to the notice of proposed 

rulemaking were received. After 

consideration of all the comments, the 

proposed regulations are adopted, as 

amended by this Treasury decision. The 

most significant revisions are discussed 

in the Summary of Comments and 

Explanation of Revisions. 


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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations 27929 

Summary of Comments and 

Explanation of Revisions 

Certain Defined Contribution Plans or 

Investment Funds Not Treated as 

Holding Employer Securities 

The proposed regulations provided 

that certain investment funds that 

include employer securities as part of a 

broader fund were treated as not 

holding employer securities. This 

exception was limited to the extent the 

employer securities were held indirectly 

through an investment company 

registered under the Investment 

Company Act of 1940; a common or 

collective trust fund or pooled 

investment fund maintained by a bank 

or trust company supervised by a State 

or a Federal agency; a pooled 

investment fund of an insurance 

company that is qualified to do business 

in a State; or any other investment fund 

designated by the Commissioner in 

revenue rulings, notices, or other 

guidance published in the Internal 

Revenue Bulletin. The proposed 

regulations also provided that this 

exception was limited to funds where 

the investment is independent of the 

employer and where the employer 

securities do not exceed 10 percent of 

the fund. 

Commentators requested that this 

exception be broadened to include 

funds that are managed by an 

investment manager within the meaning 

of section 3(38) of ERISA. The final 

regulations do not provide for this 

expansion because such a fund would 

not necessarily be holding employer 

securities only as an indirect result of its 

investment policy. However, the final 

regulations provide that, in the case of 

a multiemployer plan, an investment 

option will not be treated as holding 

employer securities to the extent the 

employer securities are held indirectly 

through an investment fund managed by 

an investment manager if the 

investment is independent of the 

employer and the percentage limitation 

rule is satisfied. 

The final regulations replace the 

reference to a fund that is an investment 

company registered under the 

Investment Company Act of 1940 with 

a regulated investment company as 

described in Code section 851(a). This 

change extends the types of investment 

companies to include exchange traded 

funds, which are unit investment trusts 

if they satisfy section 851(a). The final 

regulations also retain the rule from the 

proposed regulations that allows the 

Commissioner to designate additional 

types of funds as eligible for this 

exception. 

Commentators requested that the 

percentage limitation rule be 

eliminated. They argued that it would 

be difficult and costly to monitor the 

investment fund to ensure that the 

aggregate value of the employer 

securities held in such fund was not in 

excess of 10 percent of the total assets 

of all the fund’s investments. In 

response to these comments, the final 

regulations provide that the 

determination of whether the value of 

employer securities exceeds 10 percent 

of the total value of the fund’s 

investments is made for the plan year as 

of the end of the preceding plan year. 

The determination can be based on the 

information in the latest disclosure of 

the fund’s portfolio holdings (for 

example, Form N–CSR, ‘‘Certified 

Shareholder Report of Registered 

Management Investment Companies’’) 

that was filed with the Securities and 

Exchange Commission in that preceding 

plan year. 

The final regulations also provide that 

in a case where a fund that indirectly 

holds employer securities fails to meet 

the requirement that the investment be 

independent of the employer (including 

the situation where the fund no longer 

meets the percentage limitation rule), 

the plan does not fail to satisfy the 

diversification requirements under 

section 401(a)(35) merely because it 

does not offer those rights for up to 90 

days after the investment fund is treated 

as holding employer securities. 

Prohibition on Restrictions or 

Conditions 

Section 401(a)(35)(D)(ii)(II) provides 

that a plan is not permitted to impose 

restrictions or conditions with respect to 

the investment of employer securities 

that are not imposed on the investment 

of other assets of the plan. Like the 

proposed regulations, the final 

regulations provide that the prohibition 

on restrictions or conditions with 

respect to the investment of employer 

securities applies to any direct or 

indirect restriction on an individual’s 

right to divest an investment in 

employer securities that is not imposed 

on an investment that is not employer 

securities, as well as a direct or indirect 

benefit that is conditioned on 

investment in employer securities. 

The proposed regulations provided 

for a number of permitted restrictions 

and conditions. The proposed 

regulations would have permitted a plan 

to impose a restriction or condition 

either directly or indirectly because of 

applicable securities laws or because the 

plan becomes an applicable defined 

contribution plan, limits investments in 

employer securities, limits trading 

frequency, does not permit investment 

in a frozen fund, imposes a fee on other 

investment options that is not imposed 

on the investment in employer 

securities or imposes a reasonable fee on 

the divestment of employer securities, 

or allows investments to be made in a 

stable value or similar fund more 

frequently than other investment funds. 

A commentator requested clarification 

with respect to the exception for frozen 

funds. The commentator requested that 

a frozen fund include a plan that 

reinvests employer security dividends 

in additional employer securities as 

long as the plan does not permit any 

further investment in employer 

securities. The final regulations clarify 

that the plan is permitted to allow 

reinvestment of dividends paid on 

employer securities. The final 

regulations also clarify that the frozen 

fund exception is only available for a 

plan that does not have another 

employer securities fund. 

Commentators requested that the list 

for permitted indirect restrictions or 

conditions be expanded to include 

certain defined contribution plans that 

make matching contributions in 

employer securities and allow 

participants to divest employer 

securities attributable to such 

contributions, but do not permit 

participants to later elect to reinvest any 

portion of their account balances in 

employer stock. The final regulations do 

not adopt this suggestion. The IRS and 

the Treasury Department (Treasury) 

have concluded that the inability to 

reinvest in employer securities generally 

acts as a material deterrent to an 

individual who might otherwise have 

elected to diversify his or her account 

balance of employer securities. 

However, the final regulations provide a 

transitional rule for certain leveraged 

ESOPs. An employer stock fund does 

not fail to be a frozen fund merely 

because of the allocation of employer 

securities that are released as matching 

contributions from the plan’s suspense 

account that holds employer securities 

acquired with an exempt loan under 

section 4975(d)(3). This transitional rule 

only applies to employer securities that 

were acquired in a plan year beginning 

before January 1, 2007, with the 

proceeds of an exempt loan within the 

meaning of section 4975(d)(3) which is 

not refinanced after the end of the last 

plan year beginning before January 1, 

2007. This transitional rule was added 

because these leveraged ESOPs cannot 

cease allocations of employer securities 

acquired with an exempt loan that are 

held in a suspense account without 

significant effect on the company’s debt 

arrangements. 


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27930 Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations 

3See also section 411(d)(6)(C)(ii). 

Commentators suggested that the 

special rule for a stable value or similar 

fund be expanded to allow transfers out 

of a stable value fund or similar fund 

more frequently than other funds. In 

response to comments, the final 

regulations provide that a plan is 

generally permitted to allow transfers to 

be made into or out of a stable value 

fund more frequently than a fund 

invested in employer securities. Thus, a 

plan that includes a broad range of 

investment alternatives as described in 

section 401(a)(35)(D)(i), including a 

stable value or similar fund, does not 

impose an impermissible restriction 

merely because it permits transfers into 

and out of the stable value or similar 

fund more frequently than the other 

funds (taking into account any 

restrictions or conditions imposed with 

respect to the other investment options 

under the plan). 

Commentators requested clarification 

as to the meaning of a stable value or 

similar fund. The final regulations 

provide that a stable value or similar 

fund means an investment product or 

fund designed to preserve or guarantee 

principal and provide a reasonable rate 

of return, while providing liquidity for 

benefit distributions or transfers to other 

investment alternatives (such as a 

product or fund described in 

Department of Labor Regulation section 

2550.404c–5(e)(4)(iv)(A) or (v)(A)). 

One commentator noted that the 

Department of Labor regulations for 

qualified default investment alternatives 

(QDIAs) require QDIAs to be restrictionfree for 90 days. The commentator 

requested clarification that the 

restriction-free 90-day period does not 

cause a plan to violate the prohibition 

on imposing a restriction or condition 

with respect to employer securities that 

is not imposed on other investments. 

However, the commentator further 

stated that service providers will have 

difficulty administering restrictions 

only after 90 days and therefore 

requested that the final regulations 

permit restriction-free transfers for 

QDIAs permanently. The final 

regulations expand the list of permitted 

indirect restrictions to provide that a 

plan may provide for transfers out of a 

QDIA (within the meaning of 

Department of Labor Regulation section 

2550.404c–5(e)) more frequently than a 

fund invested in employer securities. 

A commentator requested clarification 

concerning plans being permitted to 

restrict reinvestments in only one 

employer stock fund when the plan 

allows investment in another employer 

stock fund, provided that the stock 

contained in each fund has the same 

characteristics except for differences in 

the tax cost basis of the trust. The final 

regulations provide that any applicable 

tax consequences are disregarded in 

determining whether a plan imposes an 

indirect restriction or condition on an 

individual’s right to divest an 

investment in employer securities. 

Accordingly, a plan is permitted to 

provide that an individual may not 

reinvest divested amounts in the same 

employer securities account but is 

permitted to invest such divested 

amounts in another employer securities 

account where the only relevant 

difference between the separate 

accounts is the section 402(e)(4) cost (or 

other basis) of the trust in the shares 

held in each account. 

Several commentators requested 

clarification regarding the 7-day rule in 

the proposed regulations. The preamble 

to the proposed regulations explained 

that the 7-day rule was an example and 

not the exclusive method to limit 

trading frequency. The permitted 

restriction for trading frequency 

provides that a plan is permitted to 

impose reasonable restrictions that are 

designed to limit short-term trading in 

employer securities. Thus, the 7-day 

rule, which was mentioned in the 

preamble to the proposed regulations, is 

an example and other short-term trading 

restrictions (such as a restriction based 

on multiple trades within a specified 

period) are allowable if they meet the 

reasonably designed standard. 

Miscellaneous 

Commentators requested clarification 

with respect to an ESOP that has been 

satisfying the diversification 

requirements under section 401(a)(28) 

by distributing the portion of the 

participant’s account covered by an 

election within 90 days after the period 

during which the election may be made, 

but which is now subject to the 

diversification requirements under 

section 401(a)(35). Such a distribution 

option does not satisfy the 

diversification requirements under 

section 401(a)(35). These commentators 

were concerned that an amendment 

which eliminates this distribution 

option would be a violation of the anticutback rules under section 411(d)(6). 

Section 1107 of PPA ’06 provides that 

any amendment which is made 

pursuant to a provision of PPA ’06 will 

not fail to meet the requirements of 

section 411(d)(6) unless otherwise 

provided by the Secretary of the 

Treasury.3 Thus, an amendment to an 

ESOP which is now subject to the 

diversification requirements under 

section 401(a)(35) that eliminates the 

distribution option available for ESOPs 

subject to the diversification 

requirements under section 401(a)(28), 

as permitted under section 1107 of PPA 

’06, would not violate the anti-cutback 

rules under section 411(d)(6). 

In addition, it is expected that 

guidance will be issued in the near 

future exercising the authority under 

§ 1.411(d)–4, A–2(d)(4), to permit 

elimination of such a distribution 

option with respect to an ESOP that is 

subject to section 401(a)(35) after the 

end of the limited period to which 

section 1107 of PPA ’06 applies. The 

guidance will permit elimination of 

such a distribution option during the 

extended remedial amendment period 

permitted with respect to section 

401(a)(35) under Notice 2009–97, that 

is, to the last day of the first plan year 

that begins on or after January 1, 2010. 

Effective/Applicability Date 

The final regulations are effective and 

applicable for plan years beginning on 

or after January 1, 2011. 

For the period after the statutory 

effective date and before the regulatory 

effective date set forth in the preceding 

sentence, a plan must comply with 

section 401(a)(35). During this period, a 

plan is permitted to rely on Notice 

2006–107, the proposed regulations, or 

these final regulations for purposes of 

satisfying the requirements of section 

401(a)(35). 

Special Analyses 

It has been determined that these final 

regulations are 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 

§ 1.401(a)(35)–1 would 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 this regulation was submitted 

to the Chief Counsel for Advocacy of the 

Small Business Administration for 

comments on its impact on small 

business. 

Drafting Information 

The principal authors of these 

regulations are Dana A. Barry, formerly 

of the Office of Division Counsel/ 

Associate Chief Counsel (Tax Exempt 

and Government Entities), and R. Lisa 

Mojiri-Azad, Office of Division Counsel/ 

Associate Chief Counsel (Tax Exempt 

and Government Entities). However, 


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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations 27931 

other personnel from the IRS and the 

Treasury Department participated in the 

development of these regulations. 

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 is amended by adding an entry 

in numerical order to read as follows: 

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

Section 1.401(a)(35)–1 is also issued under 

26 U.S.C. 401(a)(35). * * * 

■ Par. 2. Section 1.401(a)(35)–1 is added 

to read as follows: 

§ 1.401(a)(35)–1 Diversification 

requirements for certain defined 

contribution plans. 

(a) General rule—(1) Diversification 

requirements. Section 401(a)(35) 

imposes diversification requirements on 

applicable defined contribution plans. A 

trust that is part of an applicable 

defined contribution plan is not a 

qualified trust under section 401(a) 

unless the plan— 

(i) Satisfies the diversification 

election requirements for elective 

deferrals and employee contributions 

set forth in paragraph (b) of this section; 

(ii) Satisfies the diversification 

election requirements for employer 

nonelective contributions set forth in 

paragraph (c) of this section; 

(iii) Satisfies the investment option 

requirement set forth in paragraph (d) of 

this section; and 

(iv) Does not apply any restrictions or 

conditions on investments in employer 

securities that violate the requirements 

of paragraph (e) of this section. 

(2) Definitions, effective dates, and 

transition rules. The definitions of 

applicable defined contribution plan, 

employer security, parent corporation, 

and publicly traded are set forth in 

paragraph (f) of this section. 

Applicability dates and transition rules 

are set forth in paragraph (g) of this 

section. 

(b) Diversification requirements for 

elective deferrals and employee 

contributions invested in employer 

securities—(1) General rule. With 

respect to any individual described in 

paragraph (b)(2) of this section, if any 

portion of the individual’s account 

under an applicable defined 

contribution plan attributable to elective 

deferrals (as described in section 

402(g)(3)(A)), employee contributions, 

or rollover contributions is invested in 

employer securities, then the plan 

satisfies the requirements of this 

paragraph (b) if the individual may elect 

to divest those employer securities and 

reinvest an equivalent amount in other 

investment options. The plan may limit 

the time for divestment and 

reinvestment to periodic, reasonable 

opportunities occurring no less 

frequently than quarterly. 

(2) Applicable individual with respect 

to elective deferrals and employee 

contributions. An individual is 

described in this paragraph (b)(2) if the 

individual is— 

(i) A participant; 

(ii) An alternate payee who has an 

account under the plan; or 

(iii) A beneficiary of a deceased 

participant. 

(c) Diversification requirements for 

employer nonelective contributions 

invested in employer securities—(1) 

General rule. With respect to any 

individual described in paragraph (c)(2) 

of this section, if a portion of the 

individual’s account under an 

applicable defined contribution plan 

attributable to employer nonelective 

contributions is invested in employer 

securities, then the plan satisfies the 

requirements of this paragraph (c) if the 

individual may elect to divest those 

employer securities and reinvest an 

equivalent amount in other investment 

options. The plan may limit the time for 

divestment and reinvestment to 

periodic, reasonable opportunities 

occurring no less frequently than 

quarterly. 

(2) Applicable individual with respect 

to employer nonelective contributions. 

An individual is described in this 

paragraph (c)(2) if the individual is— 

(i) A participant who has completed 

at least three years of service; 

(ii) An alternate payee who has an 

account under the plan with respect to 

a participant who has completed at least 

three years of service; or 

(iii) A beneficiary of a deceased 

participant. 

(3) Completion of three years of 

service. For purposes of paragraph (c)(2) 

of this section, a participant completes 

three years of service on the last day of 

the vesting computation period 

provided for under the plan that 

constitutes the completion of the third 

year of service under section 411(a)(5). 

However, for a plan that uses the 

elapsed time method of crediting service 

for vesting purposes (or a plan that 

provides for immediate vesting without 

using a vesting computation period or 

the elapsed time method of determining 

vesting), a participant completes three 

years of service on the day immediately 

preceding the third anniversary of the 

participant’s date of hire. 

(d) Investment options. An applicable 

defined contribution plan must offer not 

less than three investment options, 

other than employer securities, to which 

an individual who has the right to 

divest under paragraph (b)(1) or (c)(1) of 

this section may direct the proceeds 

from the divestment of employer 

securities. Each of the three investment 

options must be diversified and have 

materially different risk and return 

characteristics. For this purpose, 

investment options that constitute a 

broad range of investment alternatives 

within the meaning of Department of 

Labor Regulation section 2550.404c– 

1(b)(3) are treated as being diversified 

and having materially different risk and 

return characteristics. 

(e) Restrictions or conditions on 

investments in employer securities—(1) 

Impermissible restrictions or 

conditions—(i) General rule. Except as 

provided in paragraph (e)(2) of this 

section, an applicable defined 

contribution plan violates the 

requirements of this paragraph (e) if the 

plan imposes restrictions or conditions 

with respect to the investment of 

employer securities that are not 

imposed on the investment of other 

assets of the plan. A restriction or 

condition with respect to employer 

securities means— 

(A) A restriction on an individual’s 

right to divest an investment in 

employer securities that is not imposed 

on an investment that is not employer 

securities; or 

(B) A benefit that is conditioned on 

investment in employer securities. 

(ii) Indirect restrictions or 

conditions—(A) Except as provided in 

paragraph (e)(3) of this section, a plan 

violates the requirements of this 

paragraph (e) if the plan imposes a 

restriction or condition described in 

paragraph (e)(1)(i)(A) or (B) of this 

section either directly or indirectly. 

(B) A plan imposes an indirect 

restriction on an individual’s right to 

divest an investment in employer 

securities if, for example, the plan 

provides that a participant who divests 

his or her account balance with respect 

to the investment in employer securities 

is not permitted for a period of time 

thereafter to reinvest in employer 

securities. 

(C) A plan does not impose an 

indirect restriction or condition merely 

because there are tax consequences that 

result from an individual’s divestment 

of an investment in employer securities. 

Thus, the loss of the special treatment 

for net unrealized appreciation provided 


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27932 Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations 

under section 402(e)(4) with respect to 

employer securities is disregarded. 

Similarly, a plan does not impose an 

impermissible restriction or condition 

merely because it provides that an 

individual may not reinvest divested 

amounts in the same employer 

securities account but is permitted to 

invest such divested amounts in another 

employer securities account where the 

only relevant difference between the 

separate accounts is the section 

402(e)(4) cost (or other basis) of the trust 

in the shares held in each account. (See 

§ 1.402(a)–1(b) for rules regarding 

section 402(e)(4).) 

(2) Permitted restrictions or 

conditions—(i) In general. An 

applicable defined contribution plan 

does not violate the requirements of this 

paragraph (e) merely because it imposes 

a restriction or a condition set forth in 

paragraph (e)(2)(ii) or (e)(2)(iii) of this 

section. 

(ii) Securities laws. A plan is 

permitted to impose a restriction or 

condition on the divestiture of employer 

securities that is either required in order 

to ensure compliance with applicable 

securities laws or is reasonably designed 

to ensure compliance with applicable 

securities laws. For example, it is 

permissible for a plan to limit 

divestiture rights for participants who 

are subject to section 16(b) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78f) to a reasonable period (such 

as 3 to 12 days) following publication of 

the employer’s quarterly earnings 

statements because it is reasonably 

designed to ensure compliance with 

Rule 10b–5 of the Securities and 

Exchange Commission. 

(iii) Deferred application of the 

diversification requirements—(A) 

Becoming an applicable defined 

contribution plan. An applicable 

defined contribution plan is permitted 

to restrict the application of the 

diversification requirements of section 

401(a)(35) and this section for up to 90 

days after the plan becomes an 

applicable defined contribution plan 

(for example, a plan becoming an 

applicable defined contribution plan 

because the employer securities held 

under the plan become publicly traded). 

(B) Loss of exception for indirect 

investments. In the case where an 

investment fund described in paragraph 

(f)(3)(ii)(A) of this section no longer 

meets the requirement in paragraph 

(f)(3)(ii)(B) of this section that the 

investment must be independent of the 

employer (including the situation where 

the fund no longer meets the percentage 

limitation rule in paragraph (f)(3)(ii)(C) 

of this section), the plan does not fail to 

satisfy the diversification requirements 

of section 401(a)(35) and this section 

merely because it does not offer those 

rights with respect to that investment 

fund for up to 90 days after the 

investment fund ceases to meet those 

requirements. 

(3) Permitted indirect restrictions or 

conditions—(i) In general. An 

applicable defined contribution plan 

does not violate the requirements of this 

paragraph (e) merely because it imposes 

an indirect restriction or condition set 

forth in this paragraph (e)(3). 

(ii) Limitation on investment in 

employer securities. A plan is permitted 

to limit the extent to which an 

individual’s account balance can be 

invested in employer securities, 

provided the limitation applies without 

regard to a prior exercise of rights to 

divest employer securities. For example, 

a plan does not impose a restriction that 

violates this paragraph (e) merely 

because the plan prohibits a participant 

from investing additional amounts in 

employer securities if more than 10 

percent of that participant’s account 

balance is invested in employer 

securities. 

(iii) Trading frequency. A plan is 

permitted to impose reasonable 

restrictions on the timing and number of 

investment elections that an individual 

can make to invest in employer 

securities, provided that the restrictions 

are designed to limit short-term trading 

in the employer securities. For example, 

a plan could provide that a participant 

may not elect to invest in employer 

securities if the employee has elected to 

divest employer securities within a 

short period of time, such as seven days, 

prior to the election to invest in 

employer securities. 

(iv) Fees. The plan has not provided 

an indirect benefit that is conditioned 

on investment in employer securities 

merely because the plan imposes fees on 

other investment options that are not 

imposed on the investment in employer 

securities. In addition, the plan has not 

provided a restriction on the right to 

divest an investment in employer 

securities merely because the plan 

imposes a reasonable fee for the 

divestment of employer securities. 

(v) Stable value or similar fund. A 

plan is permitted to allow transfers to be 

made into or out of a stable value or 

similar fund more frequently than a 

fund invested in employer securities for 

purposes of paragraph (e)(1)(ii) of this 

section. Thus, a plan that includes a 

broad range of investment alternatives 

as described in paragraph (d) of this 

section, including a stable value or 

similar fund, does not impose an 

impermissible restriction under 

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

merely because it permits transfers into 

or out of that fund more frequently than 

other funds under the plan, provided 

that the plan would otherwise satisfy 

this paragraph (e) (taking into account 

any restrictions or conditions imposed 

with respect to the other investment 

options under the plan). For purposes of 

this section, a stable value fund or 

similar fund means an investment 

product or fund designed to preserve or 

guarantee principal and provide a 

reasonable rate of return, while 

providing liquidity for benefit 

distributions or transfers to other 

investment alternatives (such as a 

product or fund described in 

Department of Labor Regulation 

§ 2550.404c–5(e)(4)(iv)(A) or (v)(A)). 

(vi) Transfers out of a qualified 

default investment alternative (QDIA). A 

plan is permitted to provide for transfers 

out of a QDIA within the meaning of 

Department of Labor Regulation section 

2550.404c–5(e) more frequently than a 

fund invested in employer securities. 

(vii) Frozen funds—(A) General rule. 

A plan is permitted to prohibit any 

further investment in employer 

securities. Thus, a plan is not treated as 

imposing an indirect restriction merely 

because it provides that an employee 

that divests an investment in employer 

securities is not permitted to reinvest in 

employer securities, but only if the plan 

does not permit additional contributions 

or other investments to be invested in 

employer securities. For this purpose, a 

plan does not provide for further 

investment in employer securities 

merely because dividends paid on 

employer securities under the plan are 

reinvested in employer securities. 

(B) Transitional relief for certain 

leveraged employee stock ownership 

plans (ESOPs). An employer stock fund 

does not fail to be a frozen fund under 

this paragraph (e)(3)(vii) merely because 

of the allocation of employer securities 

that are released as matching 

contributions from the plan’s suspense 

account that holds employer securities 

acquired with an exempt loan under 

section 4975(d)(3). This paragraph 

(e)(3)(vii)(B) only applies to employer 

securities that were acquired in a plan 

year beginning before January 1, 2007, 

with the proceeds of an exempt loan 

within the meaning of section 

4975(d)(3) which is not refinanced after 

the end of the last plan year beginning 

before January 1, 2007. 

(4) Delegation of authority to 

Commissioner. The Commissioner may 

provide for additional permitted 

restrictions or conditions or permitted 

indirect restrictions or conditions in 

revenue rulings, notices, or other 


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Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations 27933 

guidance published in the Internal 

Revenue Bulletin. 

(f) Definitions—(1) Application of 

definitions. This paragraph (f) contains 

definitions that are applicable for 

purposes of this section. 

(2) Applicable defined contribution 

plan—(i) General rule. Except as 

provided in this paragraph (f)(2), an 

applicable defined contribution plan 

means any defined contribution plan 

which holds employer securities that 

are publicly traded. See paragraph 

(f)(2)(iv) of this section for a special rule 

that treats certain plans that hold 

employer securities that are not publicly 

traded as applicable defined 

contribution plans and paragraph 

(f)(3)(ii) of this section for a special rule 

that treats certain plans as not holding 

publicly traded employer securities for 

purposes of this section. 

(ii) Exception for certain ESOPs. An 

employee stock ownership plan (ESOP), 

as defined in section 4975(e)(7), is not 

an applicable defined contribution plan 

if the plan is a separate plan for 

purposes of section 414(l) with respect 

to any other defined benefit plan or 

defined contribution plan maintained 

by the same employer or employers and 

holds no contributions (or earnings 

thereunder) that are (or were ever) 

subject to section 401(k) or 401(m). 

Thus, an ESOP is an applicable defined 

contribution plan if the ESOP is a 

portion of a larger plan (whether or not 

that larger plan includes contributions 

that are subject to section 401(k) or 

401(m)). For purposes of this paragraph 

(f)(2)(ii), a plan is not considered to hold 

amounts ever subject to section 401(k) 

or 401(m) merely because the plan holds 

amounts attributable to rollover 

amounts in a separate account that were 

previously subject to section 401(k) or 

401(m). 

(iii) Exception for one-participant 

plans. A one-participant plan, as 

defined in section 401(a)(35)(E)(iv), is 

not an applicable defined contribution 

plan. 

(iv) Certain defined contribution 

plans treated as holding publicly traded 

employer securities—(A) General rule. A 

defined contribution plan holding 

employer securities that are not publicly 

traded is treated as an applicable 

defined contribution plan if any 

employer maintaining the plan or any 

member of a controlled group of 

corporations that includes such 

employer has issued a class of stock 

which is publicly traded. For purposes 

of this paragraph (f)(2)(iv), a controlled 

group of corporations has the meaning 

given such term by section 1563(a), 

except that ‘‘50 percent’’ is substituted 

for ‘‘80 percent’’ each place it appears. 

(B) Exception for certain plans. 

Paragraph (f)(2)(iv)(A) of this section 

does not apply to a plan if— 

(1) No employer maintaining the plan 

(or a parent corporation with respect to 

such employer) has issued stock that is 

publicly traded; and 

(2) No employer maintaining the plan 

(or parent corporation with respect to 

such employer) has issued any special 

class of stock which grants to the holder 

or issuer particular rights, or bears 

particular risks for the holder or issuer, 

with respect to any employer 

maintaining the plan (or any member of 

a controlled group of corporations that 

includes such employer) which has 

issued any stock that is publicly traded. 

(3) Employer security—(i) General 

rule. Employer security has the meaning 

given such term by section 407(d)(1) of 

the Employee Retirement Income 

Security Act of 1974, as amended 

(ERISA). 

(ii) Certain defined contribution plans 

or investment funds not treated as 

holding employer securities—(A) 

Exception for certain indirect 

investments. Subject to paragraphs 

(f)(3)(ii)(B) and (C) of this section, a plan 

(and an investment option described in 

paragraph (d) of this section) is not 

treated as holding employer securities 

for purposes of this section to the extent 

the employer securities are held 

indirectly as part of a broader fund that 

is— 

(1) A regulated investment company 

described in section 851(a); 

(2) A common or collective trust fund 

or pooled investment fund maintained 

by a bank or trust company supervised 

by a State or a Federal agency; 

(3) A pooled investment fund of an 

insurance company that is qualified to 

do business in a State; 

(4) An investment fund managed by 

an investment manager within the 

meaning of section 3(38) of ERISA for a 

multiemployer plan; or 

(5) Any other investment fund 

designated by the Commissioner in 

revenue rulings, notices, or other 

guidance published in the Internal 

Revenue Bulletin. 

(B) Investment must be independent. 

The exception set forth in paragraph 

(f)(3)(ii)(A) of this section applies only 

if the investment in the employer 

securities is held in a fund under 

which— 

(1) There are stated investment 

objectives of the fund; and 

(2) The investment is independent of 

the employer (or employers) and any 

affiliate thereof. 

(C) Percentage limitation rule. For 

purposes of paragraph (f)(3)(ii)(B)(2) of 

this section, an investment in employer 

securities in a fund is not considered to 

be independent of the employer (or 

employers) and any affiliate thereof if 

the aggregate value of the employer 

securities held in the fund is in excess 

of 10 percent of the total value of all of 

the fund’s investments for the plan year. 

The determination of whether the value 

of employer securities exceeds 10 

percent of the total value of the fund’s 

investments for the plan year is made as 

of the end of the preceding plan year. 

The determination can be based on the 

information in the latest disclosure of 

the fund’s portfolio holdings that was 

filed with the Securities and Exchange 

Commission (SEC) in that preceding 

plan year. 

(4) Parent corporation. Parent 

corporation has the meaning given such 

term by section 424(e). 

(5) Publicly traded—(i) In general. A 

security is publicly traded if it is readily 

tradable on an established securities 

market. 

(ii) Readily tradable on an established 

securities market. For purposes of this 

paragraph (f)(5), except as provided by 

the Commissioner in revenue rulings, 

notices, or other guidance published in 

the Internal Revenue Bulletin, a security 

is readily tradable on an established 

securities market if— 

(A) The security is traded on a 

national securities exchange that is 

registered under section 6 of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78f); or 

(B) The security is traded on a foreign 

national securities exchange that is 

officially recognized, sanctioned, or 

supervised by a governmental authority 

and the security is deemed by the SEC 

as having a ‘‘ready market’’ under SEC 

Rule 15c3–1 (17 CFR 240.15c3–1). 

(g) Applicability date and transition 

rules—(1) Statutory effective date—(i) 

General rule. Except as otherwise 

provided in this paragraph (g) and 

section 901(c)(3)(A) and (B) of the 

Pension Protection Act of 2006, Public 

Law 109–280 (120 Stat. 780 (2006)) 

(PPA ’06), section 401(a)(35) is effective 

for plan years beginning after December 

31, 2006. 

(ii) Collectively bargained plans—(A) 

Delayed statutory effective date. In the 

case of a plan maintained pursuant to 

one or more collective bargaining 

agreements between employee 

representatives and one or more 

employers ratified on or before August 

17, 2006, section 401(a)(35) is effective 

for plan years beginning after the earlier 

of— 

(1) The later of— 

(i) December 31, 2007; or 

(ii) The date on which the last such 

collective bargaining agreement 


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27934 Federal Register / Vol. 75, No. 96 / Wednesday, May 19, 2010 / Rules and Regulations 

terminates (determined without regard 

to any extension thereof); or 

(2) December 31, 2008. 

(B) Treatment of plans with both 

collectively bargained and noncollectively bargained employees. If a 

collective bargaining agreement applies 

to some, but not all, of the plan 

participants, the definition of whether 

the plan is considered a collectively 

bargained plan for purposes of this 

paragraph (g)(1)(ii) is made in the same 

manner as the definition of whether a 

plan is collectively bargained under 

section 436(f)(3). 

(2) Regulatory effective/applicability 

date. This section is effective and 

applicable for plan years beginning on 

or after January 1, 2011. 

(3) Statutory transition rules—(i) 

General rule. Pursuant to section 

401(a)(35)(H), in the case of the portion 

of an account to which paragraph (c) of 

this section applies and that consists of 

employer securities acquired in a plan 

year beginning before January 1, 2007, 

the requirements of paragraph (c) of this 

section only apply to the applicable 

percentage of such securities. 

(ii) Applicable percentage—(A) 

Phase-in percentage. For purposes of 

this paragraph (g)(3), the applicable 

percentage is determined as follows— 

Plan year to which paragraph (c) of this section 

applies: 

The applicable 

percentage is: 

1st ..................................... 33 

2nd .................................... 66 

3rd and following .............. 100 

(B) Special rule. For a plan for which 

the special effective date under section 

901(c)(3) of PPA ’06 applies, the 

applicable percentage under this 

paragraph (g)(3)(ii) is determined 

without regard to the delayed effective 

date in section 901(c)(3)(A) and (B) of 

PPA ’06. 

(iii) Nonapplication for participants 

age 55 with three years of service. 

Paragraph (g)(3)(i) of this section does 

not apply to an individual who is a 

participant who attained age 55 and had 

completed at least three years of service 

(as defined in paragraph (c)(3) of this 

section) before the first day of the first 

plan year beginning after December 31, 

2005. 

(iv) Separate application by class of 

securities. This paragraph (g)(3) applies 

separately with respect to each class of 

securities. 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: May 5, 2010. 

Michael F. Mundaca, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 2010–11924 Filed 5–18–10; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9483] 

RIN 1545–BH65 

Qualified Nonpersonal Use Vehicles 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations relating to qualified 

nonpersonal use vehicles as defined in 

section 274(i). Qualified nonpersonal 

use vehicles are excepted from the 

substantiation requirements of section 

274(d)(4) that apply to listed property as 

defined in section 280F(d)(4). These 

final regulations add clearly marked 

public safety officer vehicles as a new 

type of qualified nonpersonal use 

vehicle. These final regulations affect 

employers that provide their employees 

with qualified nonpersonal use vehicles 

and the employees who use such 

vehicles. 

DATES: Effective Date: These regulations 

are effective on May 19, 2010. 

Applicability Date: These regulations 

apply to uses of clearly marked public 

safety officer vehicles occurring after 

May 19, 2010. 

FOR FURTHER INFORMATION CONTACT: Don 

Parkinson at (202) 622–6040 (not a tollfree number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains final Income 

Tax Regulations under section 274(i) 

added by section 2(b) of Public Law 99– 

44 (May 24, 1985), which provides a 

definition of qualified nonpersonal use 

vehicle. Temporary Regulation § 1.274– 

5T(k), identifying categories of qualified 

nonpersonal use vehicles and 

Temporary Regulation § 1.274–5T(l), 

providing for definitions of the terms 

‘‘automobile,’’ ‘‘vehicle,’’ ‘‘employer,’’ 

‘‘employee,’’ and ‘‘personal use’’ were 

issued in 1985. (TD 8061 1982–5 CB 93 

(1985)). A notice of proposed 

rulemaking was issued by crossreference to Temporary Regulation 

§ 1.274–5T(k). (LR–145–84, 50 FR 

46088, 1985–2 CB 809 (1985)). 

On June 9, 2008, proposed regulations 

(REG–106897–08) were published in the 

Federal Register (73 FR 32500). The 

proposed regulations incorporated the 

text of § 1.274–5T(k) and added clearly 

marked public safety officer vehicles as 

a new type of qualified nonpersonal use 

vehicle, listed along with clearly 

marked police and fire vehicles at 

§ 1.274–5(k)(2)(ii)(A). A definition of 

clearly marked public safety officer 

vehicles was added to the provision 

defining clearly marked police and fire 

vehicles at § 1.274–5(k)(3), and an 

example illustrating application of the 

rules to a public safety officer vehicle 

was added at § 1.274–5(k)(8) Example 3. 

The proposed regulations incorporated 

the text of § 1.274–5T(l) with no 

changes. The corresponding provisions 

of the proposed regulations in LR–145– 

84 were withdrawn on June 8, 2008. 

Written public comments on the 

proposed regulations at § 1.274–5(k) and 

(l) were received and no hearing was 

requested. After consideration of all the 

comments, these final regulations adopt 

the provisions of the proposed 

regulations with an amendment to 

Example 3 and the provision of a new 

Example 4 in § 1.274–5(k)(8) which are 

intended to assist taxpayers in 

determining whether individual 

employees meet the definition of public 

safety officer. The temporary regulations 

at § 1.274–5T(k) and (l) are withdrawn 

concurrently with the publication of 

these final regulations in the Federal 

Register. The remaining temporary 

regulations at § 1.274–5T are unaffected 

by this Treasury decision. 

Summary of Comments and 

Explanation of Provisions 

Section 274(d) provides that a 

taxpayer is not allowed a deduction or 

credit for certain expenses unless the 

expenses are substantiated. These 

substantiation requirements apply to 

expenses incurred in the of use of any 

listed property (defined in section 

280F(d)(4)), which includes any 

passenger automobile and any other 

property used as a means of 

transportation. Section 274(d) does not 

apply to any qualified nonpersonal use 

vehicle as defined in section 274(i). 

Both business and personal use of a 

vehicle that meets the criteria to be a 

qualified nonpersonal use vehicle under 

section 274(i) will also qualify as a 

working condition fringe benefit that is 

excluded from the recipient’s income 


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