From the U.S. Code Online via GPO Access
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[Laws in effect as of January 7, 2003]
[Document not affected by Public Laws enacted between
January 7, 2003 and February 12, 2003]
[CITE: 26USC401]
TITLE 26--INTERNAL REVENUE CODE
Subtitle A--Income Taxes
CHAPTER 1--NORMAL TAXES AND SURTAXES
Subchapter D--Deferred Compensation, Etc.
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.
Subpart A--General Rule
Sec. 401. Qualified pension, profit-sharing, and stock bonus
plans
(a) Requirements for qualification
A trust created or organized in the United States and forming part
of a stock bonus, pension, or profit-sharing plan of an employer for the
exclusive benefit of his employees or their beneficiaries shall
constitute a qualified trust under this section--
(1) if contributions are made to the trust by such employer, or
employees, or both, or by another employer who is entitled to deduct
his contributions under section 404(a)(3)(B) (relating to deduction
for contributions to profit-sharing and stock bonus plans), or by a
charitable remainder trust pursuant to a qualified gratuitous
transfer (as defined in section 664(g)(1)), for the purpose of
distributing to such employees or their beneficiaries the corpus and
income of the fund accumulated by the trust in accordance with such
plan;
(2) if under the trust instrument it is impossible, at any time
prior to the satisfaction of all liabilities with respect to
employees and their beneficiaries under the trust, for any part of
the corpus or income to be (within the taxable year or thereafter)
used for, or diverted to, purposes other than for the exclusive
benefit of his employees or their beneficiaries (but this paragraph
shall not be construed, in the case of a multiemployer plan, to
prohibit the return of a contribution within 6 months after the plan
administrator determines that the contribution was made by a mistake
of fact or law (other than a mistake relating to whether the plan is
described in section 401(a) or the trust which is part of such plan
is exempt from taxation under section 501(a), or the return of any
withdrawal liability payment determined to be an overpayment within
6 months of such determination).; \1\
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\1\ So in original. Period before semicolon probably should be a
closing parenthesis.
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(3) if the plan of which such trust is a part satisfies the
requirements of section 410 (relating to minimum participation
standards); and
(4) if the contributions or benefits provided under the plan do
not discriminate in favor of highly compensated employees (within
the meaning of section 414(q)). For purposes of this paragraph,
there shall be excluded from consideration employees described in
section 410(b)(3)(A) and (C).
(5) Special rules relating to nondiscrimination requirements.--
(A) Salaried or clerical employees.--A classification shall
not be considered discriminatory within the meaning of paragraph
(4) or section 410(b)(2)(A)(i) merely because it is limited to
salaried or clerical employees.
(B) Contributions and benefits may bear uniform relationship
to compensation.--A plan shall not be considered discriminatory
within the meaning of paragraph (4) merely because the
contributions or benefits of, or on behalf of, the employees
under the plan bear a uniform relationship to the compensation
(within the meaning of section 414(s)) of such employees.
(C) Certain disparity permitted.--A plan shall not be
considered discriminatory within the meaning of paragraph (4)
merely because the contributions or benefits of, or on behalf
of, the employees under the plan favor highly compensated
employees (as defined in section 414(q)) in the manner permitted
under subsection (l).
(D) Integrated defined benefit plan.--
(i) In general.--A defined benefit plan shall not be
considered discriminatory within the meaning of paragraph
(4) merely because the plan provides that the employer-
derived accrued retirement benefit for any participant under
the plan may not exceed the excess (if any) of--
(I) the participant's final pay with the employer,
over
(II) the employer-derived retirement benefit created
under Federal law attributable to service by the
participant with the employer.
For purposes of this clause, the employer-derived retirement
benefit created under Federal law shall be treated as
accruing ratably over 35 years.
(ii) Final pay.--For purposes of this subparagraph, the
participant's final pay is the compensation (as defined in
section 414(q)(4)) paid to the participant by the employer
for any year--
(I) which ends during the 5-year period ending with
the year in which the participant separated from service
for the employer, and
(II) for which the participant's total compensation
from the employer was highest.
(E) 2 or more plans treated as single plan.--For purposes of
determining whether 2 or more plans of an employer satisfy the
requirements of paragraph (4) when considered as a single plan--
(i) Contributions.--If the amount of contributions on
behalf of the employees allowed as a deduction under section
404 for the taxable year with respect to such plans, taken
together, bears a uniform relationship to the compensation
(within the meaning of section 414(s)) of such employees,
the plans shall not be considered discriminatory merely
because the rights of employees to, or derived from, the
employer contributions under the separate plans do not
become nonforfeitable at the same rate.
(ii) Benefits.--If the employees' rights to benefits
under the separate plans do not become nonforfeitable at the
same rate, but the levels of benefits provided by the
separate plans satisfy the requirements of regulations
prescribed by the Secretary to take account of the
differences in such rates, the plans shall not be considered
discriminatory merely because of the difference in such
rates.
(F) Social security retirement age.--For purposes of testing
for discrimination under paragraph (4)--
(i) the social security retirement age (as defined in
section 415(b)(8)) shall be treated as a uniform retirement
age, and
(ii) subsidized early retirement benefits and joint and
survivor annuities shall not be treated as being unavailable
to employees on the same terms merely because such benefits
or annuities are based in whole or in part on an employee's
social security retirement age (as so defined).
(G) State and local governmental plans.--Paragraphs (3) and
(4) shall not apply to a governmental plan (within the meaning
of section 414(d)) maintained by a State or local government or
political subdivision thereof (or agency or instrumentality
thereof).
(6) A plan shall be considered as meeting the requirements of
paragraph (3) during the whole of any taxable year of the plan if on
one day in each quarter it satisfied such requirements.
(7) A trust shall not constitute a qualified trust under this
section unless the plan of which such trust is a part satisfies the
requirements of section 411 (relating to minimum vesting standards).
(8) A trust forming part of a defined benefit plan shall not
constitute a qualified trust under this section unless the plan
provides that forfeitures must not be applied to increase the
benefits any employee would otherwise receive under the plan.
(9) Required distributions.--
(A) In general.--A trust shall not constitute a qualified
trust under this subsection unless the plan provides that the
entire interest of each employee--
(i) will be distributed to such employee not later than
the required beginning date, or
(ii) will be distributed, beginning not later than the
required beginning date, in accordance with regulations,
over the life of such employee or over the lives of such
employee and a designated beneficiary (or over a period not
extending beyond the life expectancy of such employee or the
life expectancy of such employee and a designated
beneficiary).
(B) Required distribution where employee dies before entire
interest is distributed.--
(i) Where distributions have begun under subparagraph
(A)(ii).--A trust shall not constitute a qualified trust
under this section unless the plan provides that if--
(I) the distribution of the employee's interest has
begun in accordance with subparagraph (A)(ii), and
(II) the employee dies before his entire interest
has been distributed to him,
the remaining portion of such interest will be distributed at
least as rapidly as under the method of distributions being
used under subparagraph (A)(ii) as of the date of his death.
(ii) 5-year rule for other cases.--A trust shall not
constitute a qualified trust under this section unless the
plan provides that, if an employee dies before the
distribution of the employee's interest has begun in
accordance with subparagraph (A)(ii), the entire interest of
the employee will be distributed within 5 years after the
death of such employee.
(iii) Exception to 5-year rule for certain amounts
payable over life of beneficiary.--If--
(I) any portion of the employee's interest is
payable to (or for the benefit of) a designated
beneficiary,
(II) such portion will be distributed (in accordance
with regulations) over the life of such designated
beneficiary (or over a period not extending beyond the
life expectancy of such beneficiary), and
(III) such distributions begin not later than 1 year
after the date of the employee's death or such later
date as the Secretary may by regulations prescribe,
for purposes of clause (ii), the portion referred to in
subclause (I) shall be treated as distributed on the date on
which such distributions begin.
(iv) Special rule for surviving spouse of employee.--If
the designated beneficiary referred to in clause (iii)(I) is
the surviving spouse of the employee--
(I) the date on which the distributions are required
to begin under clause (iii)(III) shall not be earlier
than the date on which the employee would have attained
age 70\1/2\, and
(II) if the surviving spouse dies before the
distributions to such spouse begin, this subparagraph
shall be applied as if the surviving spouse were the
employee.
(C) Required beginning date.--For purposes of this
paragraph--
(i) In general.--The term ``required beginning date''
means April 1 of the calendar year following the later of--
(I) the calendar year in which the employee attains
age 70\1/2\, or
(II) the calendar year in which the employee
retires.
(ii) Exception.--Subclause (II) of clause (i) shall not
apply--
(I) except as provided in section 409(d), in the
case of an employee who is a 5-percent owner (as defined
in section 416) with respect to the plan year ending in
the calendar year in which the employee attains age
70\1/2\, or
(II) for purposes of section 408(a)(6) or (b)(3).
(iii) Actuarial adjustment.--In the case of an employee
to whom clause (i)(II) applies who retires in a calendar
year after the calendar year in which the employee attains
age 70\1/2\, the employee's accrued benefit shall be
actuarially increased to take into account the period after
age 70\1/2\ in which the employee was not receiving any
benefits under the plan.
(iv) Exception for governmental and church plans.--
Clauses (ii) and (iii) shall not apply in the case of a
governmental plan or church plan. For purposes of this
clause, the term ``church plan'' means a plan maintained by
a church for church employees, and the term ``church'' means
any church (as defined in section 3121(w)(3)(A)) or
qualified church-controlled organization (as defined in
section 3121(w)(3)(B)).
(D) Life expectancy.--For purposes of this paragraph, the
life expectancy of an employee and the employee's spouse (other
than in the case of a life annuity) may be redetermined but not
more frequently than annually.
(E) Designated beneficiary.--For purposes of this paragraph,
the term ``designated beneficiary'' means any individual
designated as a beneficiary by the employee.
(F) Treatment of payments to children.--Under regulations
prescribed by the Secretary, for purposes of this paragraph, any
amount paid to a child shall be treated as if it had been paid
to the surviving spouse if such amount will become payable to
the surviving spouse upon such child reaching majority (or other
designated event permitted under regulations).
(G) Treatment of incidental death benefit distributions.--
For purposes of this title, any distribution required under the
incidental death benefit requirements of this subsection shall
be treated as a distribution required under this paragraph.
(10) Other requirements.--
(A) Plans benefiting owner-employees.--In the case of any
plan which provides contributions or benefits for employees some
or all of whom are owner-employees (as defined in subsection
(c)(3)), a trust forming part of such plan shall constitute a
qualified trust under this section only if the requirements of
subsection (d) are also met.
(B) Top-heavy plans.--
(i) In general.--In the case of any top-heavy plan, a
trust forming part of such plan shall constitute a qualified
trust under this section only if the requirements of section
416 are met.
(ii) Plans which may become top-heavy.--Except to the
extent provided in regulations, a trust forming part of a
plan (whether or not a top-heavy plan) shall constitute a
qualified trust under this section only if such plan
contains provisions--
(I) which will take effect if such plan becomes a
top-heavy plan, and
(II) which meet the requirements of section 416.
(iii) Exemption for governmental plans.--This
subparagraph shall not apply to any governmental plan.
(11) Requirement of joint and survivor annuity and preretirement
survivor annuity.--
(A) In general.--In the case of any plan to which this
paragraph applies, except as provided in section 417, a trust
forming part of such plan shall not constitute a qualified trust
under this section unless--
(i) in the case of a vested participant who does not die
before the annuity starting date, the accrued benefit
payable to such participant is provided in the form of a
qualified joint and survivor annuity, and
(ii) in the case of a vested participant who dies before
the annuity starting date and who has a surviving spouse, a
qualified preretirement survivor annuity is provided to the
surviving spouse of such participant.
(B) Plans to which paragraph applies.--This paragraph shall
apply to--
(i) any defined benefit plan,
(ii) any defined contribution plan which is subject to
the funding standards of section 412, and
(iii) any participant under any other defined
contribution plan unless--
(I) such plan provides that the participant's
nonforfeitable accrued benefit (reduced by any security
interest held by the plan by reason of a loan
outstanding to such participant) is payable in full, on
the death of the participant, to the participant's
surviving spouse (or, if there is no surviving spouse or
the surviving spouse consents in the manner required
under section 417(a)(2), to a designated beneficiary),
(II) such participant does not elect a payment of
benefits in the form of a life annuity, and
(III) with respect to such participant, such plan is
not a direct or indirect transferee (in a transfer after
December 31, 1984) of a plan which is described in
clause (i) or (ii) or to which this clause applied with
respect to the participant.
Clause (iii)(III) shall apply only with respect to the
transferred assets (and income therefrom) if the plan separately
accounts for such assets and any income therefrom.
(C) Exception for certain ESOP benefits.--
(i) In general.--In the case of--
(I) a tax credit employee stock ownership plan (as
defined in section 409(a)), or
(II) an employee stock ownership plan (as defined in
section 4975(e)(7)),
subparagraph (A) shall not apply to that portion of the
employee's accrued benefit to which the requirements of
section 409(h) apply.
(ii) Nonforfeitable benefit must be paid in full, etc.--
In the case of any participant, clause (i) shall apply only
if the requirements of subclauses (I), (II), and (III) of
subparagraph (B)(iii) are met with respect to such
participant.
(D) Special rule where participant and spouse married less
than 1 year.--A plan shall not be treated as failing to meet the
requirements of subparagraphs (B)(iii) or (C) merely because the
plan provides that benefits will not be payable to the surviving
spouse of the participant unless the participant and such spouse
had been married throughout the 1-year period ending on the
earlier of the participant's annuity starting date or the date
of the participant's death.
(E) Exception for plans described in section 404(c).--This
paragraph shall not apply to a plan which the Secretary has
determined is a plan described in section 404(c) (or a
continuation thereof) in which participation is substantially
limited to individuals who, before January 1, 1976, ceased
employment covered by the plan.
(F) Cross reference.--For--
(i) provisions under which participants may elect to
waive the requirements of this paragraph, and
(ii) other definitions and special rules for purposes of
this paragraph,
see section 417.
(12) A trust shall not constitute a qualified trust under this
section unless the plan of which such trust is a part provides that
in the case of any merger or consolidation with, or transfer of
assets or liabilities to, any other plan after September 2, 1974,
each participant in the plan would (if the plan then terminated)
receive a benefit immediately after the merger, consolidation, or
transfer which is equal to or greater than the benefit he would have
been entitled to receive immediately before the merger,
consolidation, or transfer (if the plan had then terminated). The
preceding sentence does not apply to any multiemployer plan with
respect to any transaction to the extent that participants either
before or after the transaction are covered under a multiemployer
plan to which title IV of the Employee Retirement Income Security
Act of 1974 applies.
(13) Assignment and alienation.--
(A) In general.--A trust shall not constitute a qualified
trust under this section unless the plan of which such trust is
a part provides that benefits provided under the plan may not be
assigned or alienated. For purposes of the preceding sentence,
there shall not be taken into account any voluntary and
revocable assignment of not to exceed 10 percent of any benefit
payment made by any participant who is receiving benefits under
the plan unless the assignment or alienation is made for
purposes of defraying plan administration costs. For purposes of
this paragraph a loan made to a participant or beneficiary shall
not be treated as an assignment or alienation if such loan is
secured by the participant's accrued nonforfeitable benefit and
is exempt from the tax imposed by section 4975 (relating to tax
on prohibited transactions) by reason of section 4975(d)(1).
This paragraph shall take effect on January 1, 1976 and shall
not apply to assignments which were irrevocable on September 2,
1974.
(B) Special rules for domestic relations orders.--
Subparagraph (A) shall apply to the creation, assignment, or
recognition of a right to any benefit payable with respect to a
participant pursuant to a domestic relations order, except that
subparagraph (A) shall not apply if the order is determined to
be a qualified domestic relations order.
(C) Special rule for certain judgments and settlements.--
Subparagraph (A) shall not apply to any offset of a
participant's benefits provided under a plan against an amount
that the participant is ordered or required to pay to the plan
if--
(i) the order or requirement to pay arises--
(I) under a judgment of conviction for a crime
involving such plan,
(II) under a civil judgment (including a consent
order or decree) entered by a court in an action brought
in connection with a violation (or alleged violation) of
part 4 of subtitle B of title I of the Employee
Retirement Income Security Act of 1974, or
(III) pursuant to a settlement agreement between the
Secretary of Labor and the participant, or a settlement
agreement between the Pension Benefit Guaranty
Corporation and the participant, in connection with a
violation (or alleged violation) of part 4 of such
subtitle by a fiduciary or any other person,
(ii) the judgment, order, decree, or settlement
agreement expressly provides for the offset of all or part
of the amount ordered or required to be paid to the plan
against the participant's benefits provided under the plan,
and
(iii) in a case in which the survivor annuity
requirements of section 401(a)(11) apply with respect to
distributions from the plan to the participant, if the
participant has a spouse at the time at which the offset is
to be made--
(I) either such spouse has consented in writing to
such offset and such consent is witnessed by a notary
public or representative of the plan (or it is
established to the satisfaction of a plan representative
that such consent may not be obtained by reason of
circumstances described in section 417(a)(2)(B)), or an
election to waive the right of the spouse to either a
qualified joint and survivor annuity or a qualified
preretirement survivor annuity is in effect in
accordance with the requirements of section 417(a),
(II) such spouse is ordered or required in such
judgment, order, decree, or settlement to pay an amount
to the plan in connection with a violation of part 4 of
such subtitle, or
(III) in such judgment, order, decree, or
settlement, such spouse retains the right to receive the
survivor annuity under a qualified joint and survivor
annuity provided pursuant to section 401(a)(11)(A)(i)
and under a qualified preretirement survivor annuity
provided pursuant to section 401(a)(11)(A)(ii),
determined in accordance with subparagraph (D).
A plan shall not be treated as failing to meet the requirements
of this subsection, subsection (k), section 403(b), or section
409(d) solely by reason of an offset described in this
subparagraph.
(D) Survivor annuity.--
(i) In general.--The survivor annuity described in
subparagraph (C)(iii)(III) shall be determined as if--
(I) the participant terminated employment on the
date of the offset,
(II) there was no offset,
(III) the plan permitted commencement of benefits
only on or after normal retirement age,
(IV) the plan provided only the minimum-required
qualified joint and survivor annuity, and
(V) the amount of the qualified preretirement
survivor annuity under the plan is equal to the amount
of the survivor annuity payable under the minimum-
required qualified joint and survivor annuity.
(ii) Definition.--For purposes of this subparagraph, the
term ``minimum-required qualified joint and survivor
annuity'' means the qualified joint and survivor annuity
which is the actuarial equivalent of the participant's
accrued benefit (within the meaning of section 411(a)(7))
and under which the survivor annuity is 50 percent of the
amount of the annuity which is payable during the joint
lives of the participant and the spouse.
(14) A trust shall not constitute a qualified trust under this
section unless the plan of which such trust is a part provides that,
unless the participant otherwise elects, the payment of benefits
under the plan to the participant will begin not later than the 60th
day after the latest of the close of the plan year in which--
(A) the date on which the participant attains the earlier of
age 65 or the normal retirement age specified under the plan,
(B) occurs the 10th anniversary of the year in which the
participant commenced participation in the plan, or
(C) the participant terminates his service with the
employer.
In the case of a plan which provides for the payment of an early
retirement benefit, a trust forming a part of such plan shall not
constitute a qualified trust under this section unless a participant
who satisfied the service requirements for such early retirement
benefit, but separated from the service (with any nonforfeitable
right to an accrued benefit) before satisfying the age requirement
for such early retirement benefit, is entitled upon satisfaction of
such age requirement to receive a benefit not less than the benefit
to which he would be entitled at the normal retirement age,
actuarially, reduced under regulations prescribed by the Secretary.
(15) a \2\ trust shall not constitute a qualified trust under
this section unless under the plan of which such trust is a part--
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\2\ So in original. Probably should be capitalized.
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(A) in the case of a participant or beneficiary who is
receiving benefits under such plan, or
(B) in the case of a participant who is separated from the
service and who has nonforfeitable rights to benefits,
such benefits are not decreased by reason of any increase in the
benefit levels payable under title II of the Social Security Act or
any increase in the wage base under such title II, if such increase
takes place after September 2, 1974, or (if later) the earlier of
the date of first receipt of such benefits or the date of such
separation, as the case may be.
(16) A trust shall not constitute a qualified trust under this
section if the plan of which such trust is a part provides for
benefits or contributions which exceed the limitations of section
415.
(17) Compensation limit.--
(A) In general.--A trust shall not constitute a qualified
trust under this section unless, under the plan of which such
trust is a part, the annual compensation of each employee taken
into account under the plan for any year does not exceed
$200,000.
(B) Cost-of-living adjustment.--The Secretary shall adjust
annually the $200,000 amount in subparagraph (A) for increases
in the cost-of-living at the same time and in the same manner as
adjustments under section 415(d); except that the base period
shall be the calendar quarter beginning July 1, 2001, and any
increase which is not a multiple of $5,000 shall be rounded to
the next lowest multiple of $5,000.
[(18) Repealed. Pub. L. 97-248, title II, Sec. 237(b), Sept. 3,
1982, 96 Stat. 511.]
(19) A trust shall not constitute a qualified trust under this
section if under the plan of which such trust is a part any part of
a participant's accrued benefit derived from employer contributions
(whether or not otherwise nonforfeitable), is forfeitable solely
because of withdrawal by such participant of any amount attributable
to the benefit derived from contributions made by such participant.
The preceding sentence shall not apply to the accrued benefit of any
participant unless, at the time of such withdrawal, such participant
has a nonforfeitable right to at least 50 percent of such accrued
benefit (as determined under section 411). The first sentence of
this paragraph shall not apply to the extent that an accrued benefit
is permitted to be forfeited in accordance with section
411(a)(3)(D)(iii) (relating to proportional forfeitures of benefits
accrued before September 2, 1974, in the event of withdrawal of
certain mandatory contributions).
(20) A trust forming part of a pension plan shall not be treated
as failing to constitute a qualified trust under this section merely
because the pension plan of which such trust is a part makes 1 or
more distributions within 1 taxable year to a distributee on account
of a termination of the plan of which the trust is a part, or in the
case of a profit-sharing or stock bonus plan, a complete
discontinuance of contributions under such plan. This paragraph
shall not apply to a defined benefit plan unless the employer
maintaining such plan files a notice with the Pension Benefit
Guaranty Corporation (at the time and in the manner prescribed by
the Pension Benefit Guaranty Corporation) notifying the Corporation
of such payment or distribution and the Corporation has approved
such payment or distribution or, within 90 days after the date on
which such notice was filed, has failed to disapprove such payment
or distribution. For purposes of this paragraph, rules similar to
the rules of section 402(a)(6)(B) (as in effect before its repeal by
section 521 of the Unemployment Compensation Amendments of 1992)
shall apply.
[(21) Repealed. Pub. L. 99-514, title XI, Sec. 1171(b)(5), Oct.
22, 1986, 100 Stat. 2513.]
(22) If a defined contribution plan (other than a profit-sharing
plan)--
(A) is established by an employer whose stock is not readily
tradable on an established market, and
(B) after acquiring securities of the employer, more than 10
percent of the total assets of the plan are securities of the
employer,
any trust forming part of such plan shall not constitute a qualified
trust under this section unless the plan meets the requirements of
subsection (e) of section 409. The requirements of subsection (e) of
section 409 shall not apply to any employees of an employer who are
participants in any defined contribution plan established and
maintained by such employer if the stock of such employer is not
readily tradable on an established market and the trade or business
of such employer consists of publishing on a regular basis a
newspaper for general circulation. For purposes of the preceding
sentence, subsections (b), (c), (m), and (o) of section 414 shall
not apply except for determining whether stock of the employer is
not readily tradable on an established market.
(23) A stock bonus plan shall not be treated as meeting the
requirements of this section unless such plan meets the requirements
of subsections (h) and (o) of section 409, except that in applying
section 409(h) for purposes of this paragraph, the term ``employer
securities'' shall include any securities of the employer held by
the plan.
(24) Any group trust which otherwise meets the requirements of
this section shall not be treated as not meeting such requirements
on account of the participation or inclusion in such trust of the
moneys of any plan or governmental unit described in section
818(a)(6).
(25) Requirement that actuarial assumptions be specified.--A
defined benefit plan shall not be treated as providing definitely
determinable benefits unless, whenever the amount of any benefit is
to be determined on the basis of actuarial assumptions, such
assumptions are specified in the plan in a way which precludes
employer discretion.
(26) Additional participation requirements.--
(A) In general.--In the case of a trust which is a part of a
defined benefit plan, such trust shall not constitute a
qualified trust under this subsection unless on each day of the
plan year such trust benefits at least the lesser of--
(i) 50 employees of the employer, or
(ii) the greater of--
(I) 40 percent of all employees of the employer, or
(II) 2 employees (or if there is only 1 employee,
such employee).
(B) Treatment of excludable employees.--
(i) In general.--A plan may exclude from consideration
under this paragraph employees described in paragraphs (3)
and (4)(A) of section 410(b).
(ii) Separate application for certain excludable
employees.--If employees described in section 410(b)(4)(B)
are covered under a plan which meets the requirements of
subparagraph (A) separately with respect to such employees,
such employees may be excluded from consideration in
determining whether any plan of the employer meets such
requirements if--
(I) the benefits for such employees are provided
under the same plan as benefits for other employees,
(II) the benefits provided to such employees are not
greater than comparable benefits provided to other
employees under the plan, and
(III) no highly compensated employee (within the
meaning of section 414(q)) is included in the group of
such employees for more than 1 year.
(C) Eligibility to participate.--In the case of
contributions under section 401(k) or 401(m), employees who are
eligible to contribute (or may elect to have contributions made
on their behalf) shall be treated as benefiting under the plan.
(D) Special rule for collective bargaining units.--Except to
the extent provided in regulations, a plan covering only
employees described in section 410(b)(3)(A) may exclude from
consideration any employees who are not included in the unit or
units in which the covered employees are included.
(E) Paragraph not to apply to multiemployer plans.--Except
to the extent provided in regulations, this paragraph shall not
apply to employees in a multiemployer plan (within the meaning
of section 414(f)) who are covered by collective bargaining
agreements.
(F) Special rule for certain dispositions or acquisitions.--
Rules similar to the rules of section 410(b)(6)(C) shall apply
for purposes of this paragraph.
(G) Separate lines of business.--At the election of the
employer and with the consent of the Secretary, this paragraph
may be applied separately with respect to each separate line of
business of the employer. For purposes of this paragraph, the
term ``separate line of business'' has the meaning given such
term by section 414(r) (without regard to paragraph (2)(A) or
(7) thereof).
(H) Exception for state and local governmental plans.--This
paragraph shall not apply to a governmental plan (within the
meaning of section 414(d)) maintained by a State or local
government or political subdivision thereof (or agency or
instrumentality thereof).
(I) Regulations.--The Secretary may by regulation provide
that any separate benefit structure, any separate trust, or any
other separate arrangement is to be treated as a separate plan
for purposes of applying this paragraph.
(27) Determinations as to profit-sharing plans.--
(A) Contributions need not be based on profits.--The
determination of whether the plan under which any contributions
are made is a profit-sharing plan shall be made without regard
to current or accumulated profits of the employer and without
regard to whether the employer is a tax-exempt organization.
(B) Plan must designate type.--In the case of a plan which
is intended to be a money purchase pension plan or a profit-
sharing plan, a trust forming part of such plan shall not
constitute a qualified trust under this subsection unless the
plan designates such intent at such time and in such manner as
the Secretary may prescribe.
(28) Additional requirements relating to employee stock
ownership plans.--
(A) In general.--In the case of a trust which is part of an
employee stock ownership plan (within the meaning of section
4975(e)(7)) or a plan which meets the requirements of section
409(a), such trust shall not constitute a qualified trust under
this section unless such plan meets the requirements of
subparagraphs (B) and (C).
(B) Diversification of investments.--
(i) In general.--A plan meets the requirements of this
subparagraph if each qualified participant in the plan may
elect within 90 days after the close of each plan year in
the qualified election period to direct the plan as to the
investment of at least 25 percent of the participant's
account in the plan (to the extent such portion exceeds the
amount to which a prior election under this subparagraph
applies). In the case of the election year in which the
participant can make his last election, the preceding
sentence shall be applied by substituting ``50 percent'' for
``25 percent''.
(ii) Method of meeting requirements.--A plan shall be
treated as meeting the requirements of clause (i) if--
(I) the portion of the participant's account covered
by the election under clause (i) is distributed within
90 days after the period during which the election may
be made, or
(II) the plan offers at least 3 investment options
(not inconsistent with regulations prescribed by the
Secretary) to each participant making an election under
clause (i) and within 90 days after the period during
which the election may be made, the plan invests the
portion of the participant's account covered by the
election in accordance with such election.
(iii) Qualified participant.--For purposes of this
subparagraph, the term ``qualified participant'' means any
employee who has completed at least 10 years of
participation under the plan and has attained age 55.
(iv) Qualified election period.--For purposes of this
subparagraph, the term ``qualified election period'' means
the 6-plan-year period beginning with the later of--
(I) the 1st plan year in which the individual first
became a qualified participant, or
(II) the 1st plan year beginning after December 31,
1986.
For purposes of the preceding sentence, an employer may elect
to treat an individual first becoming a qualified
participant in the 1st plan year beginning in 1987 as having
become a participant in the 1st plan year beginning in 1988.
(C) Use of independent appraiser.--A plan meets the
requirements of this subparagraph if all valuations of employer
securities which are not readily tradable on an established
securities market with respect to activities carried on by the
plan are by an independent appraiser. For purposes of the
preceding sentence, the term ``independent appraiser'' means any
appraiser meeting requirements similar to the requirements of
the regulations prescribed under section 170(a)(1).
(29) Security required upon adoption of plan amendment resulting
in significant underfunding.--
(A) In general.--If--
(i) a defined benefit plan (other than a multiemployer
plan) to which the requirements of section 412 apply adopts
an amendment an effect of which is to increase current
liability under the plan for a plan year, and
(ii) the funded current liability percentage of the plan
for the plan year in which the amendment takes effect is
less than 60 percent, including the amount of the unfunded
current liability under the plan attributable to the plan
amendment,
the trust of which such plan is a part shall not constitute a
qualified trust under this subsection unless such amendment does
not take effect until the contributing sponsor (or any member of
the controlled group of the contributing sponsor) provides
security to the plan.
(B) Form of security.--The security required under
subparagraph (A) shall consist of--
(i) a bond issued by a corporate surety company that is
an acceptable surety for purposes of section 412 of the
Employee Retirement Income Security Act of 1974,
(ii) cash, or United States obligations which mature in
3 years or less, held in escrow by a bank or similar
financial institution, or
(iii) such other form of security as is satisfactory to
the Secretary and the parties involved.
(C) Amount of security.--The security shall be in an amount
equal to the excess of--
(i) the lesser of--
(I) the amount of additional plan assets which would
be necessary to increase the funded current liability
percentage under the plan to 60 percent, including the
amount of the unfunded current liability under the plan
attributable to the plan amendment, or
(II) the amount of the increase in current liability
under the plan attributable to the plan amendment and
any other plan amendments adopted after December 22,
1987, and before such plan amendment, over
(ii) $10,000,000.
(D) Release of security.--The security shall be released
(and any amounts thereunder shall be refunded together with any
interest accrued thereon) at the end of the first plan year
which ends after the provision of the security and for which the
funded current liability percentage under the plan is not less
than 60 percent. The Secretary may prescribe regulations for
partial releases of the security by reason of increases in the
funded current liability percentage.
(E) Definitions.--For purposes of this paragraph, the terms
``current liability'', ``funded current liability percentage'',
and ``unfunded current liability'' shall have the meanings given
such terms by section 412(l), except that in computing unfunded
current liability there shall not be taken into account any
unamortized portion of the unfunded old liability amount as of
the close of the plan year.
(30) Limitations on elective deferrals.--In the case of a trust
which is part of a plan under which elective deferrals (within the
meaning of section 402(g)(3)) may be made with respect to any
individual during a calendar year, such trust shall not constitute a
qualified trust under this subsection unless the plan provides that
the amount of such deferrals under such plan and all other plans,
contracts, or arrangements of an employer maintaining such plan may
not exceed the amount of the limitation in effect under section
402(g)(1) for taxable years beginning in such calendar year.
(31) Direct transfer of eligible rollover distributions.--
(A) In general.--A trust shall not constitute a qualified
trust under this section unless the plan of which such trust is
a part provides that if the distributee of any eligible rollover
distribution--
(i) elects to have such distribution paid directly to an
eligible retirement plan, and
(ii) specifies the eligible retirement plan to which
such distribution is to be paid (in such form and at such
time as the plan administrator may prescribe),
such distribution shall be made in the form of a direct trustee-
to-trustee transfer to the eligible retirement plan so
specified.
(B) Certain mandatory distributions.--
(i) In general.--In case of a trust which is part of an
eligible plan, such trust shall not constitute a qualified
trust under this section unless the plan of which such trust
is a part provides that if--
(I) a distribution described in clause (ii) in
excess of $1,000 is made, and
(II) the distributee does not make an election under
subparagraph (A) and does not elect to receive the
distribution directly,
the plan administrator shall make such transfer to an
individual retirement plan of a designated trustee or issuer
and shall notify the distributee in writing (either
separately or as part of the notice under section 402(f))
that the distribution may be transferred to another
individual retirement plan.
(ii) Eligible plan.--For purposes of clause (i), the
term ``eligible plan'' means a plan which provides that any
nonforfeitable accrued benefit for which the present value
(as determined under section 411(a)(11)) does not exceed
$5,000 shall be immediately distributed to the participant.
(C) Limitation.--Subparagraphs (A) and (B) shall apply only
to the extent that the eligible rollover distribution would be
includible in gross income if not transferred as provided in
subparagraph (A) (determined without regard to sections 402(c),
403(a)(4), 403(b)(8), and 457(e)(16)). The preceding sentence
shall not apply to such distribution if the plan to which such
distribution is transferred--
(i) agrees to separately account for amounts so
transferred, including separately accounting for the portion
of such distribution which is includible in gross income and
the portion of such distribution which is not so includible,
or
(ii) is an eligible retirement plan described in clause
(i) or (ii) of section 402(c)(8)(B).
(D) Eligible rollover distribution.--For purposes of this
paragraph, the term ``eligible rollover distribution'' has the
meaning given such term by section 402(f)(2)(A).
(E) Eligible retirement plan.--For purposes of this
paragraph, the term ``eligible retirement plan'' has the meaning
given such term by section 402(c)(8)(B), except that a qualified
trust shall be considered an eligible retirement plan only if it
is a defined contribution plan, the terms of which permit the
acceptance of rollover distributions.
(32) Treatment of failure to make certain payments if plan has
liquidity shortfall.--
(A) In general.--A trust forming part of a pension plan to
which section 412(m)(5) applies shall not be treated as failing
to constitute a qualified trust under this section merely
because such plan ceases to make any payment described in
subparagraph (B) during any period that such plan has a
liquidity shortfall (as defined in section 412(m)(5)).
(B) Payments described.--A payment is described in this
subparagraph if such payment is--
(i) any payment, in excess of the monthly amount paid
under a single life annuity (plus any social security
supplements described in the last sentence of section
411(a)(9)), to a participant or beneficiary whose annuity
starting date (as defined in section 417(f)(2)) occurs
during the period referred to in subparagraph (A),
(ii) any payment for the purchase of an irrevocable
commitment from an insurer to pay benefits, and
(iii) any other payment specified by the Secretary by
regulations.
(C) Period of shortfall.--For purposes of this paragraph, a
plan has a liquidity shortfall during the period that there is
an underpayment of an installment under section 412(m) by reason
of paragraph (5)(A) thereof.
(33) Prohibition on benefit increases while sponsor is in
bankruptcy.--
(A) In general.--A trust which is part of a plan to which
this paragraph applies shall not constitute a qualified trust
under this section if an amendment to such plan is adopted while
the employer is a debtor in a case under title 11, United States
Code, or similar Federal or State law, if such amendment
increases liabilities of the plan by reason of--
(i) any increase in benefits,
(ii) any change in the accrual of benefits, or
(iii) any change in the rate at which benefits become
nonforfeitable under the plan,
with respect to employees of the debtor, and such amendment is
effective prior to the effective date of such employer's plan of
reorganization.
(B) Exceptions.--This paragraph shall not apply to any plan
amendment if--
(i) the plan, were such amendment to take effect, would
have a funded current liability percentage (as defined in
section 412(l)(8)) of 100 percent or more,
(ii) the Secretary determines that such amendment is
reasonable and provides for only de minimis increases in the
liabilities of the plan with respect to employees of the
debtor,
(iii) such amendment only repeals an amendment described
in subsection 412(c)(8), or
(iv) such amendment is required as a condition of
qualification under this part.
(C) Plans to which this paragraph applies.--This paragraph
shall apply only to plans (other than multiemployer plans)
covered under section 4021 of the Employee Retirement Income
Security Act of 1974.
(D) Employer.--For purposes of this paragraph, the term
``employer'' means the employer referred to in section
412(c)(11) (without regard to subparagraph (B) thereof).
(34) Benefits of missing participants on plan termination.--In
the case of a plan covered by title IV of the Employee Retirement
Income Security Act of 1974, a trust forming part of such plan shall
not be treated as failing to constitute a qualified trust under this
section merely because the pension plan of which such trust is a
part, upon its termination, transfers benefits of missing
participants to the Pension Benefit Guaranty Corporation in
accordance with section 4050 of such Act.
Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall apply only
in the case of a plan to which section 411 (relating to minimum vesting
standards) applies without regard to subsection (e)(2) of such section.
(b) Certain retroactive changes in plan
A stock bonus, pension, profit-sharing, or annuity plan shall be
considered as satisfying the requirements of subsection (a) for the
period beginning with the date on which it was put into effect, or for
the period beginning with the earlier of the date on which there was
adopted or put into effect any amendment which caused the plan to fail
to satisfy such requirements, and ending with the time prescribed by law
for filing the return of the employer for his taxable year in which such
plan or amendment was adopted (including extensions thereof) or such
later time as the Secretary may designate, if all provisions of the plan
which are necessary to satisfy such requirements are in effect by the
end of such period and have been made effective for all purposes for the
whole of such period.
(c) Definitions and rules relating to self-employed individuals and
owner-employees
For purposes of this section--
(1) Self-employed individual treated as employee
(A) In general
The term ``employee'' includes, for any taxable year, an
individual who is a self-employed individual for such taxable
year.
(B) Self-employed individual
The term ``self-employed individual'' means, with respect to
any taxable year, an individual who has earned income (as
defined in paragraph (2)) for such taxable year. To the extent
provided in regulations prescribed by the Secretary, such term
also includes, for any taxable year--
(i) an individual who would be a self-employed
individual within the meaning of the preceding sentence but
for the fact that the trade or business carried on by such
individual did not have net profits for the taxable year,
and
(ii) an individual who has been a self-employed
individual within the meaning of the preceding sentence for
any prior taxable year.
(2) Earned income
(A) In general
The term ``earned income'' means the net earnings from self-
employment (as defined in section 1402(a)), but such net
earnings shall be determined--
(i) only with respect to a trade or business in which
personal services of the taxpayer are a material income-
producing factor,
(ii) without regard to paragraphs (4) and (5) of section
1402(c),
(iii) in the case of any individual who is treated as an
employee under sections \3\ 3121(d)(3)(A), (C), or (D),
without regard to paragraph (2) of section 1402(c),
---------------------------------------------------------------------------
\3\ So in original. Probably should be ``section''.
---------------------------------------------------------------------------
(iv) without regard to items which are not included in
gross income for purposes of this chapter, and the
deductions properly allocable to or chargeable against such
items,
(v) with regard to the deductions allowed by section 404
to the taxpayer, and
(vi) with regard to the deduction allowed to the
taxpayer by section 164(f).
For purposes of this subparagraph, section 1402, as in effect
for a taxable year ending on December 31, 1962, shall be treated
as having been in effect for all taxable years ending before
such date. For purposes of this part only (other than sections
419 and 419A), this subparagraph shall be applied as if the term
``trade or business'' for purposes of section 1402 included
service described in section 1402(c)(6).
[(B) Repealed]
(C) Income from disposition of certain property
For purposes of this section, the term ``earned income''
includes gains (other than any gain which is treated under any
provision of this chapter as gain from the sale or exchange of a
capital asset) and net earnings derived from the sale or other
disposition of, the transfer of any interest in, or the
licensing of the use of property (other than good will) by an
individual whose personal efforts created such property.
(3) Owner-employee
The term ``owner-employee'' means an employee who--
(A) owns the entire interest in an unincorporated trade or
business, or
(B) in the case of a partnership, is a partner who owns more
than 10 percent of either the capital interest or the profits
interest in such partnership.
To the extent provided in regulations prescribed by the Secretary,
such term also means an individual who has been an owner-employee
within the meaning of the preceding sentence.
(4) Employer
An individual who owns the entire interest in an unincorporated
trade or business shall be treated as his own employer. A
partnership shall be treated as the employer of each partner who is
an employee within the meaning of paragraph (1).
(5) Contributions on behalf of owner-employees
The term ``contribution on behalf of an owner-employee''
includes, except as the context otherwise requires, a contribution
under a plan--
(A) by the employer for an owner-employee, and
(B) by an owner-employee as an employee.
(6) Special rule for certain fishermen
For purposes of this subsection, the term ``self-employed
individual'' includes an individual described in section 3121(b)(20)
(relating to certain fishermen).
(d) Contribution limit on owner-employees
A trust forming part of a pension or profit-sharing plan which
provides contributions or benefits for employees some or all of whom are
owner-employees shall constitute a qualified trust under this section
only if, in addition to meeting the requirements of subsection (a), the
plan provides that contributions on behalf of any owner-employee may be
made only with respect to the earned income of such owner-employee which
is derived from the trade or business with respect to which such plan is
established.
[(e) Repealed. Pub. L. 98-369, div. A, title VII, Sec. 713(d)(3), July
18, 1984, 98 Stat. 958]
(f) Certain custodial accounts and contracts
For purposes of this title, a custodial account, an annuity
contract, or a contract (other than a life, health or accident,
property, casualty, or liability insurance contract) issued by an
insurance company qualified to do business in a State shall be treated
as a qualified trust under this section if--
(1) the custodial account or contract would, except for the fact
that it is not a trust, constitute a qualified trust under this
section, and
(2) in the case of a custodial account the assets thereof are
held by a bank (as defined in section 408(n)) or another person who
demonstrates, to the satisfaction of the Secretary, that the manner
in which he will hold the assets will be consistent with the
requirements of this section.
For purposes of this title, in the case of a custodial account or
contract treated as a qualified trust under this section by reason of
this subsection, the person holding the assets of such account or
holding such contract shall be treated as the trustee thereof.
(g) Annuity defined
For purposes of this section and sections 402, 403, and 404, the
term ``annuity'' includes a face-amount certificate, as defined in
section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., sec.
80a-2); but does not include any contract or certificate issued after
December 31, 1962, which is transferable, if any person other than the
trustee of a trust described in section 401(a) which is exempt from tax
under section 501(a) is the owner of such contract or certificate.
(h) Medical, etc., benefits for retired employees and their spouses and
dependents
Under regulations prescribed by the Secretary, and subject to the
provisions of section 420, a pension or annuity plan may provide for the
payment of benefits for sickness, accident, hospitalization, and medical
expenses of retired employees, their spouses and their dependents, but
only if--
(1) such benefits are subordinate to the retirement benefits
provided by the plan,
(2) a separate account is established and maintained for such
benefits,
(3) the employer's contributions to such separate account are
reasonable and ascertainable,
(4) it is impossible, at any time prior to the satisfaction of
all liabilities under the plan to provide such benefits, for any
part of the corpus or income of such separate account to be (within
the taxable year or thereafter) used for, or diverted to, any
purpose other than the providing of such benefits,
(5) notwithstanding the provisions of subsection (a)(2), upon
the satisfaction of all liabilities under the plan to provide such
benefits, any amount remaining in such separate account must, under
the terms of the plan, be returned to the employer, and
(6) in the case of an employee who is a key employee, a separate
account is established and maintained for such benefits payable to
such employee (and his spouse and dependents) and such benefits (to
the extent attributable to plan years beginning after March 31,
1984, for which the employee is a key employee) are only payable to
such employee (and his spouse and dependents) from such separate
account.
For purposes of paragraph (6), the term ``key employee'' means any
employee, who at any time during the plan year or any preceding plan
year during which contributions were made on behalf of such employee, is
or was a key employee as defined in section 416(i). In no event shall
the requirements of paragraph (1) be treated as met if the aggregate
actual contributions for medical benefits, when added to actual
contributions for life insurance protection under the plan, exceed 25
percent of the total actual contributions to the plan (other than
contributions to fund past service credits) after the date on which the
account is established.
(i) Certain union-negotiated pension plans
In the case of a trust forming part of a pension plan which has been
determined by the Secretary to constitute a qualified trust under
subsection (a) and to be exempt from taxation under section 501(a) for a
period beginning after contributions were first made to or for such
trust, if it is shown to the satisfaction of the Secretary that--
(1) such trust was created pursuant to a collective bargaining
agreement between employee representatives and one or more
employers,
(2) any disbursements of contributions, made to or for such
trust before the time as of which the Secretary or his delegate
determined that the trust constituted a qualified trust,
substantially complied with the terms of the trust, and the plan of
which the trust is a part, as subsequently qualified, and
(3) before the time as of which the Secretary determined that
the trust constitutes a qualified trust, the contributions to or for
such trust were not used in a manner which would jeopardize the
interests of its beneficiaries,
then such trust shall be considered as having constituted a qualified
trust under subsection (a) and as having been exempt from taxation under
section 501(a) for the period beginning on the date on which
contributions were first made to or for such trust and ending on the
date such trust first constituted (without regard to this subsection) a
qualified trust under subsection (a).
[(j) Repealed. Pub. L. 97-248, title II, Sec. 238(b), Sept. 3, 1982, 96
Stat. 512]
(k) Cash or deferred arrangements
(1) General rule
A profit-sharing or stock bonus plan, a pre-ERISA money purchase
plan, or a rural cooperative plan shall not be considered as not
satisfying the requirements of subsection (a) merely because the
plan includes a qualified cash or deferred arrangement.
(2) Qualified cash or deferred arrangement
A qualified cash or deferred arrangement is any arrangement
which is part of a profit-sharing or stock bonus plan, a pre-ERISA
money purchase plan, or a rural cooperative plan which meets the
requirements of subsection (a)--
(A) under which a covered employee may elect to have the
employer make payments as contributions to a trust under the
plan on behalf of the employee, or to the employee directly in
cash;
(B) under which amounts held by the trust which are
attributable to employer contributions made pursuant to the
employee's election--
(i) may not be distributable to participants or other
beneficiaries earlier than--
(I) severance from employment, death, or disability,
(II) an event described in paragraph (10),
(III) in the case of a profit-sharing or stock bonus
plan, the attainment of age 59\1/2\, or
(IV) in the case of contributions to a profit-
sharing or stock bonus plan to which section 402(e)(3)
applies, upon hardship of the employee, and
(ii) will not be distributable merely by reason of the
completion of a stated period of participation or the lapse
of a fixed number of years;
(C) which provides that an employee's right to his accrued
benefit derived from employer contributions made to the trust
pursuant to his election is nonforfeitable, and
(D) which does not require, as a condition of participation
in the arrangement, that an employee complete a period of
service with the employer (or employers) maintaining the plan
extending beyond the period permitted under section 410(a)(1)
(determined without regard to subparagraph (B)(i) thereof).
(3) Application of participation and discrimination
standards
(A) A cash or deferred arrangement shall not be treated as a
qualified cash or deferred arrangement unless--
(i) those employees eligible to benefit under the
arrangement satisfy the provisions of section 410(b)(1), and
(ii) the actual deferral percentage for eligible highly
compensated employees (as defined in paragraph (5)) for the
plan year bears a relationship to the actual deferral
percentage for all other eligible employees for the
preceding plan year which meets either of the following
tests:
(I) The actual deferral percentage for the group of
eligible highly compensated employees is not more than
the actual deferral percentage of all other eligible
employees multiplied by 1.25.
(II) The excess of the actual deferral percentage
for the group of eligible highly compensated employees
over that of all other eligible employees is not more
than 2 percentage points, and the actual deferral
percentage for the group of eligible highly compensated
employees is not more than the actual deferral
percentage of all other eligible employees multiplied by
2.
If 2 or more plans which include cash or deferred arrangements
are considered as 1 plan for purposes of section 401(a)(4)
or 410(b), the cash or deferred arrangements included in
such plans shall be treated as 1 arrangement for purposes of
this subparagraph.
If any highly compensated employee is a participant under 2 or
more cash or deferred arrangements of the employer, for purposes
of determining the deferral percentage with respect to such
employee, all such cash or deferred arrangements shall be
treated as 1 cash or deferred arrangement. An arrangement may
apply clause (ii) by using the plan year rather than the
preceding plan year if the employer so elects, except that if
such an election is made, it may not be changed except as
provided by the Secretary.
(B) For purposes of subparagraph (A), the actual deferral
percentage for a specified group of employees for a plan year
shall be the average of the ratios (calculated separately for
each employee in such group) of--
(i) the amount of employer contributions actually paid
over to the trust on behalf of each such employee for such
plan year, to
(ii) the employee's compensation for such plan year.
(C) A cash or deferred arrangement shall be treated as
meeting the requirements of subsection (a)(4) with respect to
contributions if the requirements of subparagraph (A)(ii) are
met.
(D) For purposes of subparagraph (B), the employer
contributions on behalf of any employee--
(i) shall include any employer contributions made
pursuant to the employee's election under paragraph (2), and
(ii) under such rules as the Secretary may prescribe,
may, at the election of the employer, include--
(I) matching contributions (as defined in
401(m)(4)(A)) which meet the requirements of paragraph
(2)(B) and (C), and
(II) qualified nonelective contributions (within the
meaning of section 401(m)(4)(C)).
(E) For purposes of this paragraph, in the case of the first
plan year of any plan (other than a successor plan), the amount
taken into account as the actual deferral percentage of
nonhighly compensated employees for the preceding plan year
shall be--
(i) 3 percent, or
(ii) if the employer makes an election under this
subclause, the actual deferral percentage of nonhighly
compensated employees determined for such first plan year.
(F) Special rule for early participation.--If an employer
elects to apply section 410(b)(4)(B) in determining whether a
cash or deferred arrangement meets the requirements of
subparagraph (A)(i), the employer may, in determining whether
the arrangement meets the requirements of subparagraph (A)(ii),
exclude from consideration all eligible employees (other than
highly compensated employees) who have not met the minimum age
and service requirements of section 410(a)(1)(A).
(G) A governmental plan (within the meaning of section
414(d)) maintained by a State or local government or political
subdivision thereof (or agency or instrumentality thereof) shall
be treated as meeting the requirements of this paragraph.
(4) Other requirements
(A) Benefits (other than matching contributions) must not be
contingent on election to defer
A cash or deferred arrangement of any employer shall not be
treated as a qualified cash or deferred arrangement if any other
benefit is conditioned (directly or indirectly) on the employee
electing to have the employer make or not make contributions
under the arrangement in lieu of receiving cash. The preceding
sentence shall not apply to any matching contribution (as
defined in section 401(m)) made by reason of such an election.
(B) Eligibility of State and local governments and tax-exempt
organizations
(i) Tax-exempts eligible
Except as provided in clause (ii), any organization
exempt from tax under this subtitle may include a qualified
cash or deferred arrangement as part of a plan maintained by
it.
(ii) Governments ineligible
A cash or deferred arrangement shall not be treated as a
qualified cash or deferred arrangement if it is part of a
plan maintained by a State or local government or political
subdivision thereof, or any agency or instrumentality
thereof. This clause shall not apply to a rural cooperative
plan or to a plan of an employer described in clause (iii).
(iii) Treatment of Indian tribal governments
An employer which is an Indian tribal government (as
defined in section 7701(a)(40)), a subdivision of an Indian
tribal government (determined in accordance with section
7871(d)), an agency or instrumentality of an Indian tribal
government or subdivision thereof, or a corporation
chartered under Federal, State, or tribal law which is owned
in whole or in part by any of the foregoing may include a
qualified cash or deferred arrangement as part of a plan
maintained by the employer.
(C) Coordination with other plans
Except as provided in section 401(m), any employer
contribution made pursuant to an employee's election under a
qualified cash or deferred arrangement shall not be taken into
account for purposes of determining whether any other plan meets
the requirements of section 401(a) or 410(b). This subparagraph
shall not apply for purposes of determining whether a plan meets
the average benefit requirement of section 410(b)(2)(A)(ii).
(5) Highly compensated employee
For purposes of this subsection, the term ``highly compensated
employee'' has the meaning given such term by section 414(q).
(6) Pre-ERISA money purchase plan
For purposes of this subsection, the term ``pre-ERISA money
purchase plan'' means a pension plan--
(A) which is a defined contribution plan (as defined in
section 414(i)),
(B) which was in existence on June 27, 1974, and which, on
such date, included a salary reduction arrangement, and
(C) under which neither the employee contributions nor the
employer contributions may exceed the levels provided for by the
contribution formula in effect under the plan on such date.
(7) Rural cooperative plan
For purposes of this subsection--
(A) In general
The term ``rural cooperative plan'' means any pension plan--
(i) which is a defined contribution plan (as defined in
section 414(i)), and
(ii) which is established and maintained by a rural
cooperative.
(B) Rural cooperative defined
For purposes of subparagraph (A), the term ``rural
cooperative'' means--
(i) any organization which--
(I) is engaged primarily in providing electric
service on a mutual or cooperative basis, or
(II) is engaged primarily in providing electric
service to the public in its area of service and which
is exempt from tax under this subtitle or which is a
State or local government (or an agency or
instrumentality thereof), other than a municipality (or
an agency or instrumentality thereof),
(ii) any organization described in paragraph (4) or (6)
of section 501(c) and at least 80 percent of the members of
which are organizations described in clause (i),
(iii) a cooperative telephone company described in
section 501(c)(12),
(iv) any organization which--
(I) is a mutual irrigation or ditch company
described in section 501(c)(12) (without regard to the
85 percent requirement thereof), or
(II) is a district organized under the laws of a
State as a municipal corporation for the purpose of
irrigation, water conservation, or drainage, and
(v) an organization which is a national association of
organizations described in clause (i), (ii),,\4\ (iii), or
(iv).
---------------------------------------------------------------------------
\4\ So in original.
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(C) Special rule for certain distributions
A rural cooperative plan which includes a qualified cash or
deferred arrangement shall not be treated as violating the
requirements of section 401(a) or of paragraph (2) merely by
reason of a hardship distribution or a distribution to a
participant after attainment of age 59\1/2\. For purposes of
this section, the term ``hardship distribution'' means a
distribution described in paragraph (2)(B)(i)(IV) (without
regard to the limitation of its application to profit-sharing or
stock bonus plans).
(8) Arrangement not disqualified if excess contributions
distributed
(A) In general
A cash or deferred arrangement shall not be treated as
failing to meet the requirements of clause (ii) of paragraph
(3)(A) for any plan year if, before the close of the following
plan year--
(i) the amount of the excess contributions for such plan
year (and any income allocable to such contributions) is
distributed, or
(ii) to the extent provided in regulations, the employee
elects to treat the amount of the excess contributions as an
amount distributed to the employee and then contributed by
the employee to the plan.
Any distribution of excess contributions (and income) may be
made without regard to any other provision of law.
(B) Excess contributions
For purposes of subparagraph (A), the term ``excess
contributions'' means, with respect to any plan year, the excess
of--
(i) the aggregate amount of employer contributions
actually paid over to the trust on behalf of highly
compensated employees for such plan year, over
(ii) the maximum amount of such contributions permitted
under the limitations of clause (ii) of paragraph (3)(A)
(determined by reducing contributions made on behalf of
highly compensated employees in order of the actual deferral
percentages beginning with the highest of such percentages).
(C) Method of distributing excess contributions
Any distribution of the excess contributions for any plan
year shall be made to highly compensated employees on the basis
of the amount of contributions by, or on behalf of, each of such
employees.
(D) Additional tax under section 72(t) not to apply
No tax shall be imposed under section 72(t) on any amount
required to be distributed under this paragraph.
(E) Treatment of matching contributions forfeited by reason of
excess deferral or contribution
For purposes of paragraph (2)(C), a matching contribution
(within the meaning of subsection (m)) shall not be treated as
forfeitable merely because such contribution is forfeitable if
the contribution to which the matching contribution relates is
treated as an excess contribution under subparagraph (B), an
excess deferral under section 402(g)(2)(A), or an excess
aggregate contribution under section 401(m)(6)(B).
(F) Cross reference
For excise tax on certain excess contributions, see section
4979.
(9) Compensation
For purposes of this subsection, the term ``compensation'' has
the meaning given such term by section 414(s).
(10) Distributions upon termination of plan
(A) In general
An event described in this subparagraph is the termination
of the plan without establishment or maintenance of another
defined contribution plan (other than an employee stock
ownership plan as defined in section 4975(e)(7)).
(B) Distributions must be lump sum distributions
(i) In general
A termination shall not be treated as described in
subparagraph (A) with respect to any employee unless the
employee receives a lump sum distribution by reason of the
termination.
(ii) Lump-sum distribution
For purposes of this subparagraph, the term ``lump-sum
distribution'' has the meaning given such term by section
402(e)(4)(D) (without regard to subclauses (I), (II), (III),
and (IV) of clause (i) thereof). Such term includes a
distribution of an annuity contract from--
(I) a trust which forms a part of a plan described
in section 401(a) and which is exempt from tax under
section 501(a), or
(II) an annuity plan described in section 403(a).
(11) Adoption of simple plan to meet nondiscrimination tests
(A) In general
A cash or deferred arrangement maintained by an eligible
employer shall be treated as meeting the requirements of
paragraph (3)(A)(ii) if such arrangement meets--
(i) the contribution requirements of subparagraph (B),
(ii) the exclusive plan requirements of subparagraph
(C), and
(iii) the vesting requirements of section 408(p)(3).
(B) Contribution requirements
(i) In general
The requirements of this subparagraph are met if, under
the arrangement--
(I) an employee may elect to have the employer make
elective contributions for the year on behalf of the
employee to a trust under the plan in an amount which is
expressed as a percentage of compensation of the
employee but which in no event exceeds the amount in
effect under section 408(p)(2)(A)(ii),
(II) the employer is required to make a matching
contribution to the trust for the year in an amount
equal to so much of the amount the employee elects under
subclause (I) as does not exceed 3 percent of
compensation for the year, and
(III) no other contributions may be made other than
contributions described in subclause (I) or (II).
(ii) Employer may elect 2-percent nonelective
contribution
An employer shall be treated as meeting the requirements
of clause (i)(II) for any year if, in lieu of the
contributions described in such clause, the employer elects
(pursuant to the terms of the arrangement) to make
nonelective contributions of 2 percent of compensation for
each employee who is eligible to participate in the
arrangement and who has at least $5,000 of compensation from
the employer for the year. If an employer makes an election
under this subparagraph for any year, the employer shall
notify employees of such election within a reasonable period
of time before the 60th day before the beginning of such
year.
(iii) Administrative requirements
(I) In general
Rules similar to the rules of subparagraphs (B) and
(C) of section 408(p)(5) shall apply for purposes of
this subparagraph.
(II) Notice of election period
The requirements of this subparagraph shall not be
treated as met with respect to any year unless the
employer notifies each employee eligible to participate,
within a reasonable period of time before the 60th day
before the beginning of such year (and, for the first
year the employee is so eligible, the 60th day before
the first day such employee is so eligible), of the
rules similar to the rules of section 408(p)(5)(C) which
apply by reason of subclause (I).
(C) Exclusive plan requirement
The requirements of this subparagraph are met for any year
to which this paragraph applies if no contributions were made,
or benefits were accrued, for services during such year under
any qualified plan of the employer on behalf of any employee
eligible to participate in the cash or deferred arrangement,
other than contributions described in subparagraph (B).
(D) Definitions and special rule
(i) Definitions
For purposes of this paragraph, any term used in this
paragraph which is also used in section 408(p) shall have
the meaning given such term by such section.
(ii) Coordination with top-heavy rules
A plan meeting the requirements of this paragraph for
any year shall not be treated as a top-heavy plan under
section 416 for such year if such plan allows only
contributions required under this paragraph.
(12) Alternative methods of meeting nondiscrimination
requirements
(A) In general
A cash or deferred arrangement shall be treated as meeting
the requirements of paragraph (3)(A)(ii) if such arrangement--
(i) meets the contribution requirements of subparagraph
(B) or (C), and
(ii) meets the notice requirements of subparagraph (D).
(B) Matching contributions
(i) In general
The requirements of this subparagraph are met if, under
the arrangement, the employer makes matching contributions
on behalf of each employee who is not a highly compensated
employee in an amount equal to--
(I) 100 percent of the elective contributions of the
employee to the extent such elective contributions do
not exceed 3 percent of the employee's compensation, and
(II) 50 percent of the elective contributions of the
employee to the extent that such elective contributions
exceed 3 percent but do not exceed 5 percent of the
employee's compensation.
(ii) Rate for highly compensated employees
The requirements of this subparagraph are not met if,
under the arrangement, the rate of matching contribution
with respect to any elective contribution of a highly
compensated employee at any rate of elective contribution is
greater than that with respect to an employee who is not a
highly compensated employee.
(iii) Alternative plan designs
If the rate of any matching contribution with respect to
any rate of elective contribution is not equal to the
percentage required under clause (i), an arrangement shall
not be treated as failing to meet the requirements of clause
(i) if--
(I) the rate of an employer's matching contribution
does not increase as an employee's rate of elective
contributions increase, and
(II) the aggregate amount of matching contributions
at such rate of elective contribution is at least equal
to the aggregate amount of matching contributions which
would be made if matching contributions were made on the
basis of the percentages described in clause (i).
(C) Nonelective contributions
The requirements of this subparagraph are met if, under the
arrangement, the employer is required, without regard to whether
the employee makes an elective contribution or employee
contribution, to make a contribution to a defined contribution
plan on behalf of each employee who is not a highly compensated
employee and who is eligible to participate in the arrangement
in an amount equal to at least 3 percent of the employee's
compensation.
(D) Notice requirement
An arrangement meets the requirements of this paragraph if,
under the arrangement, each employee eligible to participate is,
within a reasonable period before any year, given written notice
of the employee's rights and obligations under the arrangement
which--
(i) is sufficiently accurate and comprehensive to
apprise the employee of such rights and obligations, and
(ii) is written in a manner calculated to be understood
by the average employee eligible to participate.
(E) Other requirements
(i) Withdrawal and vesting restrictions
An arrangement shall not be treated as meeting the
requirements of subparagraph (B) or (C) of this paragraph
unless the requirements of subparagraphs (B) and (C) of
paragraph (2) are met with respect to all employer
contributions (including matching contributions) taken into
account in determining whether the requirements of
subparagraphs (B) and (C) of this paragraph are met.
(ii) Social security and similar contributions not
taken into account
An arrangement shall not be treated as meeting the
requirements of subparagraph (B) or (C) unless such
requirements are met without regard to subsection (l), and,
for purposes of subsection (l), employer contributions under
subparagraph (B) or (C) shall not be taken into account.
(F) Other plans
An arrangement shall be treated as meeting the requirements
under subparagraph (A)(i) if any other plan maintained by the
employer meets such requirements with respect to employees
eligible under the arrangement.
(l) Permitted disparity in plan contributions or benefits
(1) In general
The requirements of this subsection are met with respect to a
plan if--
(A) in the case of a defined contribution plan, the
requirements of paragraph (2) are met, and
(B) in the case of a defined benefit plan, the requirements
of paragraph (3) are met.
(2) Defined contribution plan
(A) In general
A defined contribution plan meets the requirements of this
paragraph if the excess contribution percentage does not exceed
the base contribution percentage by more than the lesser of--
(i) the base contribution percentage, or
(ii) the greater of--
(I) 5.7 percentage points, or
(II) the percentage equal to the portion of the rate
of tax under section 3111(a) (in effect as of the
beginning of the year) which is attributable to old-age
insurance.
(B) Contribution percentages
For purposes of this paragraph--
(i) Excess contribution percentage
The term ``excess contribution percentage'' means the
percentage of compensation which is contributed by the
employer under the plan with respect to that portion of each
participant's compensation in excess of the integration
level.
(ii) Base contribution percentage
The term ``base contribution percentage'' means the
percentage of compensation contributed by the employer under
the plan with respect to that portion of each participant's
compensation not in excess of the integration level.
(3) Defined benefit plan
A defined benefit plan meets the requirements of this paragraph
if--
(A) Excess plans
(i) In general
In the case of a plan other than an offset plan--
(I) the excess benefit percentage does not exceed
the base benefit percentage by more than the maximum
excess allowance,
(II) any optional form of benefit, preretirement
benefit, actuarial factor, or other benefit or feature
provided with respect to compensation in excess of the
integration level is provided with respect to
compensation not in excess of such level, and
(III) benefits are based on average annual
compensation.
(ii) Benefit percentages
For purposes of this subparagraph, the excess and base
benefit percentages shall be computed in the same manner as
the excess and base contribution percentages under paragraph
(2)(B), except that such determination shall be made on the
basis of benefits attributable to employer contributions
rather than contributions.
(B) Offset plans
In the case of an offset plan, the plan provides that--
(i) a participant's accrued benefit attributable to
employer contributions (within the meaning of section
411(c)(1)) may not be reduced (by reason of the offset) by
more than the maximum offset allowance, and
(ii) benefits are based on average annual compensation.
(4) Definitions relating to paragraph (3)
For purposes of paragraph (3)--
(A) Maximum excess allowance
The maximum excess allowance is equal to--
(i) in the case of benefits attributable to any year of
service with the employer taken into account under the plan,
\3/4\ of a percentage point, and
(ii) in the case of total benefits, \3/4\ of a
percentage point, multiplied by the participant's years of
service (not in excess of 35) with the employer taken into
account under the plan.
In no event shall the maximum excess allowance exceed the base
benefit percentage.
(B) Maximum offset allowance
The maximum offset allowance is equal to--
(i) in the case of benefits attributable to any year of
service with the employer taken into account under the plan,
\3/4\ percent of the participant's final average
compensation, and
(ii) in the case of total benefits, \3/4\ percent of the
participant's final average compensation, multiplied by the
participant's years of service (not in excess of 35) with
the employer taken into account under the plan.
In no event shall the maximum offset allowance exceed 50 percent
of the benefit which would have accrued without regard to the
offset reduction.
(C) Reductions
(i) In general
The Secretary shall prescribe regulations requiring the
reduction of the \3/4\ percentage factor under subparagraph
(A) or (B)--
(I) in the case of a plan other than an offset plan
which has an integration level in excess of covered
compensation, or
(II) with respect to any participant in an offset
plan who has final average compensation in excess of
covered compensation.
(ii) Basis of reductions
Any reductions under clause (i) shall be based on the
percentages of compensation replaced by the employer-derived
portions of primary insurance amounts under the Social
Security Act for participants with compensation in excess of
covered compensation.
(D) Offset plan
The term ``offset plan'' means any plan with respect to
which the benefit attributable to employer contributions for
each participant is reduced by an amount specified in the plan.
(5) Other definitions and special rules
For purposes of this subsection--
(A) Integration level
(i) In general
The term ``integration level'' means the amount of
compensation specified under the plan (by dollar amount or
formula) at or below which the rate at which contributions
or benefits are provided (expressed as a percentage) is less
than such rate above such amount.
(ii) Limitation
The integration level for any year may not exceed the
contribution and benefit base in effect under section 230 of
the Social Security Act for such year.
(iii) Level to apply to all participants
A plan's integration level shall apply with respect to
all participants in the plan.
(iv) Multiple integration levels
Under rules prescribed by the Secretary, a defined
benefit plan may specify multiple integration levels.
(B) Compensation
The term ``compensation'' has the meaning given such term by
section 414(s).
(C) Average annual compensation
The term ``average annual compensation'' means the
participant's highest average annual compensation for--
(i) any period of at least 3 consecutive years, or
(ii) if shorter, the participant's full period of
service.
(D) Final average compensation
(i) In general
The term ``final average compensation'' means the
participant's average annual compensation for--
(I) the 3-consecutive year period ending with the
current year, or
(II) if shorter, the participant's full period of
service.
(ii) Limitation
A participant's final average compensation shall be
determined by not taking into account in any year
compensation in excess of the contribution and benefit base
in effect under section 230 of the Social Security Act for
such year.
(E) Covered compensation
(i) In general
The term ``covered compensation'' means, with respect to
an employee, the average of the contribution and benefit
bases in effect under section 230 of the Social Security Act
for each year in the 35-year period ending with the year in
which the employee attains the social security retirement
age.
(ii) Computation for any year
For purposes of clause (i), the determination for any
year preceding the year in which the employee attains the
social security retirement age shall be made by assuming
that there is no increase in the bases described in clause
(i) after the determination year and before the employee
attains the social security retirement age.
(iii) Social security retirement age
For purposes of this subparagraph, the term ``social
security retirement age'' has the meaning given such term by
section 415(b)(8).
(F) Regulations
The Secretary shall prescribe such regulations as are
necessary or appropriate to carry out the purposes of this
subsection, including--
(i) in the case of a defined benefit plan which provides
for unreduced benefits commencing before the social security
retirement age (as defined in section 415(b)(8)), rules
providing for the reduction of the maximum excess allowance
and the maximum offset allowance, and
(ii) in the case of an employee covered by 2 or more
plans of the employer which fail to meet the requirements of
subsection (a)(4) (without regard to this subsection), rules
preventing the multiple use of the disparity permitted under
this subsection with respect to any employee.
For purposes of clause (i), unreduced benefits shall not include
benefits for disability (within the meaning of section 223(d) of
the Social Security Act).
(6) Special rule for plan maintained by railroads
In determining whether a plan which includes employees of a
railroad employer who are entitled to benefits under the Railroad
Retirement Act of 1974 meets the requirements of this subsection,
rules similar to the rules set forth in this subsection shall apply.
Such rules shall take into account the employer-derived portion of
the employees' tier 2 railroad retirement benefits and any
supplemental annuity under the Railroad Retirement Act of 1974.
(m) Nondiscrimination test for matching contributions and employee
contributions
(1) In general
A defined contribution plan shall be treated as meeting the
requirements of subsection (a)(4) with respect to the amount of any
matching contribution or employee contribution for any plan year
only if the contribution percentage requirement of paragraph (2) of
this subsection is met for such plan year.
(2) Requirements
(A) Contribution percentage requirement
A plan meets the contribution percentage requirement of this
paragraph for any plan year only if the contribution percentage
for eligible highly compensated employees for such plan year
does not exceed the greater of--
(i) 125 percent of such percentage for all other
eligible employees for the preceding plan year, or
(ii) the lesser of 200 percent of such percentage for
all other eligible employees for the preceding plan year, or
such percentage for all other eligible employees for the
preceding plan year plus 2 percentage points.
This subparagraph may be applied by using the plan year rather
than the preceding plan year if the employer so elects, except
that if such an election is made, it may not be changed except
as provided by the Secretary.
(B) Multiple plans treated as a single plan
If two or more plans of an employer to which matching
contributions, employee contributions, or elective deferrals are
made are treated as one plan for purposes of section 410(b),
such plans shall be treated as one plan for purposes of this
subsection. If a highly compensated employee participates in two
or more plans of an employer to which contributions to which
this subsection applies are made, all such contributions shall
be aggregated for purposes of this subsection.
(3) Contribution percentage
For purposes of paragraph (2), the contribution percentage for a
specified group of employees for a plan year shall be the average of
the ratios (calculated separately for each employee in such group)
of--
(A) the sum of the matching contributions and employee
contributions paid under the plan on behalf of each such
employee for such plan year, to
(B) the employee's compensation (within the meaning of
section 414(s)) for such plan year.
Under regulations, an employer may elect to take into account (in
computing the contribution percentage) elective deferrals and
qualified nonelective contributions under the plan or any other plan
of the employer. If matching contributions are taken into account
for purposes of subsection (k)(3)(A)(ii) for any plan year, such
contributions shall not be taken into account under subparagraph (A)
for such year. Rules similar to the rules of subsection (k)(3)(E)
shall apply for purposes of this subsection.
(4) Definitions
For purposes of this subsection--
(A) Matching contribution
The term ``matching contribution'' means--
(i) any employer contribution made to a defined
contribution plan on behalf of an employee on account of an
employee contribution made by such employee, and
(ii) any employer contribution made to a defined
contribution plan on behalf of an employee on account of an
employee's elective deferral.
(B) Elective deferral
The term ``elective deferral'' means any employer
contribution described in section 402(g)(3).
(C) Qualified nonelective contributions
The term ``qualified nonelective contribution'' means any
employer contribution (other than a matching contribution) with
respect to which--
(i) the employee may not elect to have the contribution
paid to the employee in cash instead of being contributed to
the plan, and
(ii) the requirements of subparagraphs (B) and (C) of
subsection (k)(2) are met.
(5) Employees taken into consideration
(A) In general
Any employee who is eligible to make an employee
contribution (or, if the employer takes elective contributions
into account, elective contributions) or to receive a matching
contribution under the plan being tested under paragraph (1)
shall be considered an eligible employee for purposes of this
subsection.
(B) Certain nonparticipants
If an employee contribution is required as a condition of
participation in the plan, any employee who would be a
participant in the plan if such employee made such a
contribution shall be treated as an eligible employee on behalf
of whom no employer contributions are made.
(C) Special rule for early participation
If an employer elects to apply section 410(b)(4)(B) in
determining whether a plan meets the requirements of section
410(b), the employer may, in determining whether the plan meets
the requirements of paragraph (2), exclude from consideration
all eligible employees (other than highly compensated employees)
who have not met the minimum age and service requirements of
section 410(a)(1)(A).
(6) Plan not disqualified if excess aggregate contributions
distributed before end of following plan year
(A) In general
A plan shall not be treated as failing to meet the
requirements of paragraph (1) for any plan year if, before the
close of the following plan year, the amount of the excess
aggregate contributions for such plan year (and any income
allocable to such contributions) is distributed (or, if
forfeitable, is forfeited). Such contributions (and such income)
may be distributed without regard to any other provision of law.
(B) Excess aggregate contributions
For purposes of subparagraph (A), the term ``excess
aggregate contributions'' means, with respect to any plan year,
the excess of--
(i) the aggregate amount of the matching contributions
and employee contributions (and any qualified nonelective
contribution or elective contribution taken into account in
computing the contribution percentage) actually made on
behalf of highly compensated employees for such plan year,
over
(ii) the maximum amount of such contributions permitted
under the limitations of paragraph (2)(A) (determined by
reducing contributions made on behalf of highly compensated
employees in order of their contribution percentages
beginning with the highest of such percentages).
(C) Method of distributing excess aggregate contributions
Any distribution of the excess aggregate contributions for
any plan year shall be made to highly compensated employees on
the basis of the amount of contributions on behalf of, or by,
each such employee. Forfeitures of excess aggregate
contributions may not be allocated to participants whose
contributions are reduced under this paragraph.
(D) Coordination with subsection (k) and 402(g)
The determination of the amount of excess aggregate
contributions with respect to a plan shall be made after--
(i) first determining the excess deferrals (within the
meaning of section 402(g)), and
(ii) then determining the excess contributions under
subsection (k).
(7) Treatment of distributions
(A) Additional tax of section 72(t) not applicable
No tax shall be imposed under section 72(t) on any amount
required to be distributed under paragraph (6).
(B) Exclusion of employee contributions
Any distribution attributable to employee contributions
shall not be included in gross income except to the extent
attributable to income on such contributions.
(8) Highly compensated employee
For purposes of this subsection, the term ``highly compensated
employee'' has the meaning given to such term by section 414(q).
(9) Regulations
The Secretary shall prescribe such regulations as may be
necessary to carry out the purposes of this subsection and
subsection (k), including regulations permitting appropriate
aggregation of plans and contributions.
(10) Alternative method of satisfying tests
A defined contribution plan shall be treated as meeting the
requirements of paragraph (2) with respect to matching contributions
if the plan--
(A) meets the contribution requirements of subparagraph (B)
of subsection (k)(11),
(B) meets the exclusive plan requirements of subsection
(k)(11)(C), and
(C) meets the vesting requirements of section 408(p)(3).
(11) Additional alternative method of satisfying tests
(A) In general
A defined contribution plan shall be treated as meeting the
requirements of paragraph (2) with respect to matching
contributions if the plan--
(i) meets the contribution requirements of subparagraph
(B) or (C) of subsection (k)(12),
(ii) meets the notice requirements of subsection
(k)(12)(D), and
(iii) meets the requirements of subparagraph (B).
(B) Limitation on matching contributions
The requirements of this subparagraph are met if--
(i) matching contributions on behalf of any employee may
not be made with respect to an employee's contributions or
elective deferrals in excess of 6 percent of the employee's
compensation,
(ii) the rate of an employer's matching contribution
does not increase as the rate of an employee's contributions
or elective deferrals increase, and
(iii) the matching contribution with respect to any
highly compensated employee at any rate of an employee
contribution or rate of elective deferral is not greater
than that with respect to an employee who is not a highly
compensated employee.
(12) Cross reference
For excise tax on certain excess contributions, see section
4979.
(n) Coordination with qualified domestic relations orders
The Secretary shall prescribe such rules or regulations as may be
necessary to coordinate the requirements of subsection (a)(13)(B) and
section 414(p) (and the regulations issued by the Secretary of Labor
thereunder) with the other provisions of this chapter.
(o) Cross reference
For exemption from tax of a trust qualified under this
section, see section 501(a).
(Aug. 16, 1954, ch. 736, 68A Stat. 134; Pub. L. 87-792, Sec. 2, Oct. 10,
1962, 76 Stat. 809; Pub. L. 87-863, Sec. 2(a), Oct. 23, 1962, 76 Stat.
1141; Pub. L. 88-272, title II, Sec. 219(a), Feb. 26, 1964, 78 Stat. 57;
Pub. L. 89-97, title I, Sec. 106(d)(4), July 30, 1965, 79 Stat. 337;
Pub. L. 89-809, title II, Secs. 204(b)(1), (c), 205(a), Nov. 13, 1966,
80 Stat. 1577, 1578; Pub. L. 91-691, Sec. 1(a), Jan. 12, 1971, 84 Stat.
2074; Pub. L. 93-406, title II, Secs. 1012(b), 1016(a)(2), 1021,
1022(a)-(d), (f), 1023, 2001(c)-(e)(4), (h)(1), 2004(a)(1), Sept. 2,
1974, 88 Stat. 913, 929, 935, 938-940, 943, 952-955, 957, 979; Pub. L.
94-267, Sec. 1(c)(1), (2), Apr. 15, 1976, 90 Stat. 367; Pub. L. 94-455,
title VIII, Sec. 803(b)(2), title XV, Sec. 1505(b), title XIX,
Secs. 1901(a)(56), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1584, 1738,
1773, 1834; Pub. L. 95-600, title I, Secs. 135(a), 141(f)(3), 143(a),
152(e), Nov. 6, 1978, 92 Stat. 2785, 2795, 2796, 2799; Pub. L. 96-222,
title I, Sec. 101(a)(7)(L)(i)(V), (9), (14)(E)(iii), Apr. 1, 1980, 94
Stat. 199, 201, 205; Pub. L. 96-364, title II, Sec. 208(a), (e), title
IV, Sec. 410(b), Sept. 26, 1980, 94 Stat. 1289, 1290, 1308; Pub. L. 96-
605, title II, Secs. 221(a), 225(b)(1), (2), Dec. 28, 1980, 94 Stat.
3528, 3529; Pub. L. 97-34, title III, Secs. 312(b)(1), (c)(2)-(4),
(e)(2), 314(a)(1), 335, 338(a), Aug. 13, 1981, 95 Stat. 283-286, 297,
298; Pub. L. 97-248, title II, Secs. 237(a), (b), (e)(1), 238(b),
(d)(1), (2), 240(b), 242(a), 249(a), 254(a), Sept. 3, 1982, 96 Stat.
511-513, 520, 521, 527, 533; Pub. L. 97-448, title I,
Sec. 103(c)(10)(A), (d)(2), (g)(2)(A), title III, Sec. 306(a)(12), Jan.
12, 1983, 96 Stat. 2377-2379, 2405; Pub. L. 98-21, title I,
Sec. 124(c)(4)(A), Apr. 20, 1983, 97 Stat. 91; Pub. L. 98-369, div. A,
title II, Sec. 211(b)(5), title IV, Secs. 474(r)(13), 491(e)(4), (5),
title V, Secs. 521(a), 524(d)(1), 527(a), (b), 528(b), title VII,
Sec. 713(c)(2)(A), (d)(3), July 18, 1984, 98 Stat. 754, 842, 853, 865,
872, 875-877, 957, 958; Pub. L. 98-397, title II, Secs. 203(a), 204(a),
title III, Sec. 301(b), Aug. 23, 1984, 98 Stat. 1440, 1445, 1451; Pub.
L. 99-514, title XI, Secs. 1106(d)(1), 1111(a), (b), 1112(b), (d)(1),
1114(b)(7), 1116(a)-(e), 1117(a), 1119(a), 1121(b), 1136(a), 1143(a),
1145(a), 1171(b)(5), 1174(c)(2)(A), 1175(a)(1), 1176(a), title XVIII,
Secs. 1848(b), 1852(a)(4)(A), (6), (b)(8), (g), (h)(1), 1879(g)(1), (2),
1898(b)(2)(A), (3)(A), (7)(A), (13)(A), (14)(A), (c)(3), 1899A(10), Oct.
22, 1986, 100 Stat. 2435, 2439, 2444, 2445, 2451, 2454-2456, 2459, 2463,
2465, 2485, 2490, 2513, 2518, 2519, 2857, 2865-2869, 2906, 2907, 2945,
2948, 2950, 2953, 2958; Pub. L. 100-203, title IX, Sec. 9341(a), Dec.
22, 1987, 101 Stat. 1330-369; Pub. L. 100-647, title I,
Secs. 1011(c)(7)(A), (d)(4), (e)(3), (g)(1)-(3), (h)(3), (k)(1)(A), (B),
s2)-(7), (9), (l)(1)-(5)(A), (6), (7), 1011A(j), (l), 1011B(j)(1), (2),
(6), (k)(1), (2), title VI, Secs. 6053(a), 6055(a), 6071(a), (b), Nov.
10, 1988, 102 Stat. 3458-3460, 3463, 3464, 3468-3470, 3483, 3492, 3493,
3696, 3697, 3705; Pub. L. 101-140, title II, Sec. 203(a)(5), Nov. 8,
1989, 103 Stat. 830; Pub. L. 101-239, title VII, Secs. 7311(a),
7811(g)(1), (h)(3), 7816(l), 7881(i)(1)(A), (4)(A), Dec. 19, 1989, 103
Stat. 2354, 2409, 2421, 2442; Pub. L. 101-508, title XII, Sec. 12011(b),
Nov. 5, 1990, 104 Stat. 1388-571; Pub. L. 102-318, title V,
Secs. 521(b)(5)-(8), 522(a)(1), July 3, 1992, 106 Stat. 310, 313; Pub.
L. 103-66, title XIII, Sec. 13212(a), Aug. 10, 1993, 107 Stat. 471; Pub.
L. 103-465, title VII, Secs. 732(a), 751(a)(9)(C), 766(b), 776(d), Dec.
8, 1994, 108 Stat. 5004, 5021, 5037, 5048; Pub. L. 104-188, title I,
Secs. 1401(b)(5), (6), 1404(a), 1422(a), (b), 1426(a), 1431(b)(2),
(c)(1)(B), 1432(a), (b), 1433(a)-(e), 1441(a), 1443(a), (b), 1445(a),
1459(a), (b), 1704(a), (t)(67), Aug. 20, 1996, 110 Stat. 1789, 1791,
1800, 1801, 1803-1809, 1811, 1820, 1878, 1890; Pub. L. 105-34, title XV,
Secs. 1502(b), 1505(a)(1), (2), (b), 1525(a), 1530(c)(1), title XVI,
Sec. 1601(d)(2)(A), (B), (D), (3), Aug. 5, 1997, 111 Stat. 1059, 1063,
1072, 1078, 1088, 1089; Pub. L. 106-554, Sec. 1(a)(7) [title III,
Sec. 316(c)], Dec. 21, 2000, 114 Stat. 2763, 2763A-644; Pub. L. 107-16,
title VI, Secs. 611(c), (f)(3), (g)(1), 641(e)(3), 643(b), 646(a)(1),
657(a), 666(a), June 7, 2001, 115 Stat. 97, 99, 120, 122, 126, 135,
143.)
Amendment of Section
For termination of amendment by section 901 of Pub. L. 107-16,
see Effective and Termination Dates of 2001 Amendment note below.
References in Text
For the effective date of this paragraph, referred to in subsec.
(a)(11)(H)(i), (ii), see Effective Date of 1974 Amendment note set out
below.
The Employee Retirement Income Security Act of 1974, referred to in
subsec. (a)(12), (13)(C)(i)(II), (III), (iii)(II), (29)(B)(i), (33)(C),
(34), is Pub. L. 93-406, Sept. 2, 1974, 88 Stat. 829, as amended. Part 4
of subtitle B of title I of the Act is classified generally to part 4
(Sec. 1101 et seq.) of subtitle B of subchapter I of chapter 18 of Title
29, Labor. Title IV of the Act is classified generally to subchapter III
(Sec. 1301 et seq.) of chapter 18 of Title 29. Sections 412, 4021, and
4050 of the Act are classified to sections 1112, 1321, and 1350,
respectively, of Title 29. For complete classification of this Act to
the Code, see Short Title note set out under section 1001 of Title 29
and Tables.
The Social Security Act, referred to in subsecs. (a)(15),
(l)(4)(C)(ii), (5)(A)(ii), (D)(ii), (E)(i), (F), is act Aug. 14, 1935,
ch. 531, 49 Stat. 620, as amended, which is classified generally to
chapter 7 (Sec. 301 et seq.) of Title 42, The Public Health and Welfare.
Title II of the Social Security Act is classified generally to
subchapter II (Sec. 401 et seq.) of Title 42. Sections 223(d) and 230 of
the Social Security Act are classified to sections 423(d) and 430,
respectively, of Title 42. For complete classification of this Act to
the Code, see section 1305 of Title 42 and Tables.
Section 521 of the Unemployment Compensation Amendments of 1992,
referred to in subsec. (a)(20), is section 521 of Pub. L. 102-318, which
amended section 402(a) to (f) of this title generally, and, as so
amended, subsec. (a) of section 402 does not contain a par. (6)(B).
The Railroad Retirement Act of 1974, referred to in subsec. (l)(6),
is act Aug. 29, 1935, ch. 812, as amended generally by Pub. L. 93-445,
title I, Sec. 101, Oct. 16, 1974, 88 Stat. 1305, which is classified
generally to subchapter IV (Sec. 231 et seq.) of chapter 9 of Title 45,
Railroads. For further details and complete classification of this Act
to the Code, see Codification note set out preceding section 231 of
Title 45, section 231t of Title 45, and Tables.
Amendments
2001--Subsec. (a)(17). Pub. L. 107-16, Secs. 611(c)(1), 901,
temporarily substituted ``$200,000'' for ``$150,000'' in two places. See
Effective and Termination Dates of 2001 Amendment note below.
Subsec. (a)(17)(B). Pub. L. 107-16, Secs. 611(c)(2), 901,
temporarily substituted ``July 1, 2001'' for ``October 1, 1993'' and
temporarily substituted ``$5,000'' for ``$10,000'' in two places. See
Effective and Termination Dates of 2001 Amendment note below.
Subsec. (a)(31). Pub. L. 107-16, Secs. 657(a)(2)(A), 901,
temporarily substituted ``Direct'' for ``Optional direct'' in heading.
See Effective and Termination Dates of 2001 Amendment note below.
Subsec. (a)(31)(B). Pub. L. 107-16, Secs. 657(a)(1), 901,
temporarily added subpar. (B). Former subpar. (B) redesignated (C). See
Effective and Termination Dates of 2001 Amendment note below.
Pub. L. 107-16, Secs. 643(b), 901, temporarily inserted at end ``The
preceding sentence shall not apply t