Internal Revenue Code (Title 26 U.S.C.)
26 U.S.C. § 401 (2024) — Qualified pension, profit-sharing, and stock bonus plans
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)); (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) Governmental plans .—Paragraphs (3) and (4) shall not apply to a governmental plan (within the meaning of section 414(d)). (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 and the surviving spouse elects the treatment in this clause— (I) the regulations referred to in clause (iii)(II) shall treat the surviving spouse as if the surviving spouse were the employee, (II) 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 the applicable age, and (III) if the surviving spouse dies before the distributions to such spouse begin, this subparagraph shall be applied as if the surviving spouse is the employee. An election described in this clause shall be made at such time and in such manner as prescribed by the Secretary, shall include a timely notice to the plan administrator, and once made may not be revoked except with the consent of the Secretary. (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 the applicable age, 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 the applicable age, 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 70½, the employee's accrued benefit shall be actuarially increased to take into account the period after age 70½ 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)). (v) Applicable age .— (I) In the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age is 73. (II) In the case of an individual who attains age 74 after December 31, 2032, the applicable age is 75. (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) Definitions and rules relating to designated beneficiaries .—For purposes of this paragraph— (i) Designated beneficiary .—The term "designated beneficiary" means any individual designated as a beneficiary by the employee. (ii) Eligible designated beneficiary .—The term "eligible designated beneficiary" means, with respect to any employee, any designated beneficiary who is— (I) the surviving spouse of the employee, (II) subject to clause (iii), a child of the employee who has not reached majority (within the meaning of subparagraph (F)), (III) disabled (within the meaning of section 72(m)(7)), (IV) a chronically ill individual (within the meaning of section 7702B(c)(2), except that the requirements of subparagraph (A)(i) thereof shall only be treated as met if there is a certification that, as of such date, the period of inability described in such subparagraph with respect to the individual is an indefinite one which is reasonably expected to be lengthy in nature), or (V) an individual not described in any of the preceding subclauses who is not more than 10 years younger than the employee. The determination of whether a designated beneficiary is an eligible designated beneficiary shall be made as of the date of death of the employee. (iii) Special rule for children .—Subject to subparagraph (F), an individual described in clause (ii)(II) shall cease to be an eligible designated beneficiary as of the date the individual reaches majority and any remainder of the portion of the individual's interest to which subparagraph (H)(ii) applies shall be distributed within 10 years after such date. (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. (H) Special rules for certain defined contribution plans .—In the case of a defined contribution plan, if an employee dies before the distribution of the employee's entire interest— (i) In general .—Except in the case of a beneficiary who is not a designated beneficiary, subparagraph (B)(ii)— (I) shall be applied by substituting "10 years" for "5 years", and (II) shall apply whether or not distributions of the employee's interests have begun in accordance with subparagraph (A). (ii) Exception for eligible designated beneficiaries .—Subparagraph (B)(iii) shall apply only in the case of an eligible designated beneficiary. (iii) Rules upon death of eligible designated beneficiary .—If an eligible designated beneficiary dies before the portion of the employee's interest to which this subparagraph applies is entirely distributed, the exception under clause (ii) shall not apply to any beneficiary of such eligible designated beneficiary and the remainder of such portion shall be distributed within 10 years after the death of such eligible designated beneficiary. (iv) Special rule in case of certain trusts for disabled or chronically ill beneficiaries .—In the case of an applicable multi-beneficiary trust, if under the terms of the trust— (I) it is to be divided immediately upon the death of the employee into separate trusts for each beneficiary, or (II) no beneficiary (other than a 1 eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii)) has any right to the employee's interest in the plan until the death of all such eligible designated beneficiaries with respect to the trust, for purposes of a trust described in subclause (I), clause (ii) shall be applied separately with respect to the portion of the employee's interest that is payable to any eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii); and, for purposes of a trust described in subclause (II), subparagraph (B)(iii) shall apply to the distribution of the employee's interest and any beneficiary who is not such an eligible designated beneficiary shall be treated as a beneficiary of the eligible designated beneficiary upon the death of such eligible designated beneficiary. (v) Applicable multi-beneficiary trust .—For purposes of this subparagraph, the term "applicable multi-beneficiary trust" means a trust— (I) which has more than one beneficiary, (II) all of the beneficiaries of which are treated as designated beneficiaries for purposes of determining the distribution period pursuant to this paragraph, and (III) at least one of the beneficiaries of which is an eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii). For purposes of the preceding sentence, in the case of a trust the terms of which are described in clause (iv)(II), any beneficiary which is an organization described in section 408(d)(8)(B)(i) shall be treated as a designated beneficiary described in subclause (II). (vi) Application to certain eligible retirement plans .—For purposes of applying the provisions of this subparagraph in determining amounts required to be distributed pursuant to this paragraph, all eligible retirement plans (as defined in section 402(c)(8)(B), other than a defined benefit plan described in clause (iv) or (v) thereof or a qualified trust which is a part of a defined benefit plan) shall be treated as a defined contribution plan. (I) Temporary waiver of minimum required distribution.— (i) In general .—The requirements of this paragraph shall not apply for calendar year 2020 to— (I) a defined contribution plan which is described in this subsection or in section 403(a) or 403(b), (II) a defined contribution plan which is an eligible deferred compensation plan described in section 457(b) but only if such plan is maintained by an employer described in section 457(e)(1)(A), or (III) an individual retirement plan. (ii) Special rule for required beginning dates in 2020 .—Clause (i) shall apply to any distribution which is required to be made in calendar year 2020 by reason of— (I) a required beginning date occurring in such calendar year, and (II) such distribution not having been made before January 1, 2020. (iii) Special rules regarding waiver period .—For purposes of this paragraph— (I) the required beginning date with respect to any individual shall be determined without regard to this subparagraph for purposes of applying this paragraph for calendar years after 2020, and (II) if clause (ii) of subparagraph (B) applies, the 5-year period described in such clause shall be determined without regard to calendar year 2020. (J) Certain increases in payments under a commercial annuity .—Nothing in this section shall prohibit a commercial annuity (within the meaning of section 3405(e)(6)) that is issued in connection with any eligible retirement plan (within the meaning of section 402(c)(8)(B), other than a defined benefit plan) from providing one or more of the following types of payments on or after the annuity starting date: (i) annuity payments that increase by a constant percentage, applied not less frequently than annually, at a rate that is less than 5 percent per year, (ii) a lump sum payment that— (I) results in a shortening of the payment period with respect to an annuity or a full or partial commutation of the future annuity payments, provided that such lump sum is determined using reasonable actuarial methods and assumptions, as determined in good faith by the issuer of the contract, or (II) accelerates the receipt of annuity payments that are scheduled to be received within the ensuing 12 months, regardless of whether such acceleration shortens the payment period with respect to the annuity, reduces the dollar amount of benefits to be paid under the contract, or results in a suspension of annuity payments during the period being accelerated, (iii) an amount which is in the nature of a dividend or similar distribution, provided that the issuer of the contract determines such amount using reasonable actuarial methods and assumptions, as determined in good faith by the issuer of the contract, when calculating the initial annuity payments and the issuer's experience with respect to those factors, or (iv) a final payment upon death that does not exceed the excess of the total amount of the consideration paid for the annuity payments, less the aggregate amount of prior distributions or payments from or under the contract. (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 pay ment 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 trust shall not constitute a qualified trust under this section unless under the plan of which such trust is a part— (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, §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, §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 deter mining 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) 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. (D) 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. (E) 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. (F) 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). (G) Exception for governmental plans .—This paragraph shall not apply to a governmental plan (within the meaning of section 414(d)). (H) 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. (I) Protected participants.— (i) In general .—A plan shall be deemed to satisfy the requirements of subparagraph (A) if— (I) the plan is amended— (aa) to cease all benefit accruals, or (bb) to provide future benefit accruals only to a closed class of participants, (II) the plan satisfies subparagraph (A) (without regard to this subparagraph) as of the effective date of the amendment, and (III) the amendment was adopted before April 5, 2017, or the plan is described in clause (ii). (ii) Plans described .—A plan is described in this clause if the plan would be described in subsection (o)(1)(C), as applied for purposes of subsection (o)(1)(B)(iii)(IV) and by treating the effective date of the amendment as the date the class was closed for purposes of subsection (o)(1)(C). (iii) Special rules .—For purposes of clause (i)(II), in applying section 410(b)(6)(C), the amendments described in clause (i) shall not be treated as a significant change in coverage under section 410(b)(6)(C)(i)(II). (iv) Spun-off plans .—For purposes of this subparagraph, if a portion of a plan described in clause (i) is spun off to another employer, the treatment under clause (i) of the spun-off plan shall continue with respect to the other employer. (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. (v) Exception .—This subparagraph shall not apply to an applicable defined contribution plan (as defined in paragraph (35)(E)). (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) Benefit limitations .—In the case of a defined benefit plan (other than a multiemployer plan or a CSEC plan) to which the requirements of section 412 apply, the trust of which the plan is a part shall not constitute a qualified trust under this subsection unless the plan meets the requirements of section 436. (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)(A) 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 $7,000 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) is a qualified trust which is part of a plan which is a defined contribution plan and 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 430(j)(4) or 433(f)(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 430(j)(4) or 433(f)(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 430(j)(3) or 433(f) by reason of section 430(j)(4)(A) or 433(f)(5), respectively. (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 funding target attainment percentage (as defined in section 430(d)(2)) 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 section 412(d)(2), 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 or CSEC 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(b)(1), without regard to section 412(b)(2). (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. (35) Diversification requirements for certain defined contribution plans.— (A) In general .—A trust which is part of an applicable defined contribution plan shall not be treated as a qualified trust unless the plan meets the diversification requirements of subparagraphs (B), (C), and (D). (B) Employee contributions and elective deferrals invested in employer securities .—In the case of the portion of an applicable individual's account attributable to employee contributions and elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if the applicable individual may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D). (C) Employer contributions invested in employer securities .—In the case of the portion of the account attributable to employer contributions other than elective deferrals which is invested in employer securities, a plan meets the requirements of this subparagraph if each applicable individual who— (i) is a participant who has completed at least 3 years of service, or (ii) is a beneficiary of a participant described in clause (i) or of a deceased participant, may elect to direct the plan to divest any such securities and to reinvest an equivalent amount in other investment options meeting the requirements of subparagraph (D). (D) Investment options.— (i) In general .—The requirements of this subparagraph are met if the plan offers not less than 3 investment options, other than employer securities, to which an applicable individual may direct the proceeds from the divestment of employer securities pursuant to this paragraph, each of which is diversified and has materially different risk and return characteristics. (ii) Treatment of certain restrictions and conditions.— (I) Time for making investment choices .—A plan shall not be treated as failing to meet the requirements of this subparagraph merely because the plan limits the time for divestment and reinvestment to periodic, reasonable opportunities occurring no less frequently than quarterly. (II) Certain restrictions and conditions not allowed .—Except as provided in regulations, a plan shall not meet the requirements of this subparagraph if the plan imposes restrictions or conditions with respect to the investment of employer securities which are not imposed on the investment of other assets of the plan. This subclause shall not apply to any restrictions or conditions imposed by reason of the application of securities laws. (E) Applicable defined contribution plan .—For purposes of this paragraph— (i) In general .—The term "applicable defined contribution plan" means any defined contribution plan which holds any publicly traded employer securities. (ii) Exception for certain esops .—Such term does not include an employee stock ownership plan if— (I) there are no contributions to such plan (or earnings thereunder) which are held within such plan and are subject to subsection (k) or (m), and (II) such plan is a separate plan for purposes of section 414(l) with respect to any other defined benefit plan or defined contribution plan maintained by the same employer or employers. (iii) Exception for one participant plans .—Such term does not include a one-participant retirement plan. (iv) One-participant retirement plan .—For purposes of clause (iii), the term "one-participant retirement plan" means a retirement plan that on the first day of the plan year— (I) covered only one individual (or the individual and the individual's spouse) and the individual (or the individual and the individual's spouse) owned 100 percent of the plan sponsor (whether or not incorporated), or (II) covered only one or more partners (or partners and their spouses) in the plan sponsor. (F) Certain plans treated as holding publicly traded employer securities.— (i) In general .—Except as provided in regulations or in clause (ii), a plan holding employer securities which are not publicly traded employer securities shall be treated as holding publicly traded employer securities if any employer corporation, or any member of a controlled group of corporations which includes such employer corporation, has issued a class of stock which is a publicly traded employer security. (ii) Exception for certain controlled groups with publicly traded securities .—Clause (i) shall not apply to a plan if— (I) no employer corporation, or parent corporation of an employer corporation, has issued any publicly traded employer security, and (II) no employer corporation, or parent corporation of an employer corporation, has issued any special class of stock which grants particular rights to, or bears particular risks for, the holder or issuer with respect to any corporation described in clause (i) which has issued any publicly traded employer security. (iii) Definitions .—For purposes of this subparagraph, the term— (I) "controlled group of corporations" has the meaning given such term by sec tion 1563(a), except that "50 percent" shall be substituted for "80 percent" each place it appears, (II) "employer corporation" means a corporation which is an employer maintaining the plan, and (III) "parent corporation" has the meaning given such term by section 424(e). (G) Other definitions .—For purposes of this paragraph— (i) Applicable individual .—The term "applicable individual" means— (I) any participant in the plan, and (II) any beneficiary who has an account under the plan with respect to which the beneficiary is entitled to exercise the rights of a participant. (ii) Elective deferral .—The term "elective deferral" means an employer contribution described in section 402(g)(3)(A). (iii) Employer security .—The term "employer security" has the meaning given such term by section 407(d)(1) of the Employee Retirement Income Security Act of 1974. (iv) Employee stock ownership plan .—The term "employee stock ownership plan" has the meaning given such term by section 4975(e)(7). (v) Publicly traded employer securities .—The term "publicly traded employer securities" means employer securities which are readily tradable on an established securities market. (vi) Year of service .—The term "year of service" has the meaning given such term by section 411(a)(5). (H) Transition rule for securities attributable to employer contributions.— (i) Rules phased in over 3 years.— (I) In general .—In the case of the portion of an account to which subparagraph (C) applies and which consists of employer securities acquired in a plan year beginning before January 1, 2007, subparagraph (C) shall only apply to the applicable percentage of such securities. This subparagraph shall be applied separately with respect to each class of securities. (II) Exception for certain participants aged 55 or over .—Subclause (I) shall not apply to an applicable individual who is a participant who has attained age 55 and completed at least 3 years of service before the first plan year beginning after December 31, 2005. (ii) Applicable percentage .—For purposes of clause (i), the applicable percentage shall be determined as follows: Plan year to which subparagraph (C) applies: The applicable percentage is: 1st 33 2d 66 3d and following 100. (36) Distributions during working retirement.— (A) In general .—A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section solely because the plan provides that a distribution may be made from such trust to an employee who has attained age 59½ and who is not separated from employment at the time of such distribution. (B) Certain employees in the building and construction industry .—Subparagraph (A) shall be applied by substituting "age 55" for "age 59½" in the case of a multiemployer plan described in section 4203(b)(1)(B)(i) of the Employee Retirement Income Security Act of 1974, with respect to individuals who were participants in such plan on or before April 30, 2013, if— (i) the trust to which subparagraph (A) applies was in existence before January 1, 1970, and (ii) before December 31, 2011, at a time when the plan provided that distributions may be made to an employee who has attained age 55 and who is not separated from employment at the time of such distribution, the plan received at least 1 written determination from the Internal Revenue Service that the trust to which subparagraph (A) applies constituted a qualified trust under this section. (37) Death benefits under userra-qualified active military service .—A trust shall not constitute a qualified trust unless the plan provides that, in the case of a participant who dies while performing qualified military service (as defined in section 414(u)), the survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the plan had the participant resumed and then terminated employment on account of death. (38) Portability of lifetime income.— (A) In general .—Except as may be otherwise provided by regulations, a trust forming part of a defined contribution plan shall not be treated as failing to constitute a qualified trust under this section solely by reason of allowing— (i) qualified distributions of a lifetime income investment, or (ii) distributions of a lifetime income investment in the form of a qualified plan distribution annuity contract, on or after the date that is 90 days prior to the date on which such lifetime income investment is no longer authorized to be held as an investment option under the plan. (B) Definitions .—For purposes of this subsection— (i) the term "qualified distribution" means a direct trustee-to-trustee transfer described in paragraph (31)(A) to an eligible retirement plan (as defined in section 402(c)(8)(B)), (ii) the term "lifetime income investment" means an investment option which is designed to provide an employee with election rights— (I) which are not uniformly available with respect to other investment options under the plan, and (II) which are to a lifetime income feature available through a contract or other arrangement offered under the plan (or under another eligible retirement plan (as so defined), if paid by means of a direct trustee-to-trustee transfer described in paragraph (31)(A) to such other eligible retirement plan), (iii) the term "lifetime income feature" means— (I) a feature which guarantees a minimum level of income annually (or more frequently) for at least the remainder of the life of the employee or the joint lives of the employee and the employee's designated beneficiary, or (II) an annuity payable on behalf of the employee under which payments are made in substantially equal periodic payments (not less frequently than annually) over the life of the employee or the joint lives of the employee and the employee's designated beneficiary, and (iv) the term "qualified plan distribution annuity contract" means an annuity contract purchased for a participant and distributed to the participant by a plan or contract described in subparagraph (B) of section 402(c)(8) (without regard to clauses (i) and (ii) thereof). 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.
Certain plan amendments
(1) 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. (2) Adoption of plan If an employer adopts a stock bonus, pension, profit-sharing, or annuity plan after the close of a taxable year but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year. In the case of an individual who owns the entire interest in an unincorporated trade or business, and who is the only employee of such trade or business, any elective deferrals (as defined in section 402(g)(3)) under a qualified cash or deferred arrangement to which the preceding sentence applies, which are made by such individual before the time for filing the return of such individual for the taxable year (determined without regard to any extensions) ending after or with the end of the plan's first plan year, shall be treated as having been made before the end of such first plan year. (3) Retroactive plan amendments that increase benefit accruals If— (A) an employer amends a stock bonus, pension, profit-sharing, or annuity plan to increase benefits accrued under the plan effective as of any date during the immediately preceding plan year (other than increasing the amount of matching contributions (as defined in subsection (m)(4)(A))), (B) such amendment would not otherwise cause the plan to fail to meet any of the requirements of this subchapter, and (C) such amendment is adopted before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof) which includes the date described in subparagraph (A), the employer may elect to treat such amendment as having been adopted as of the last day of the plan year in which the amendment is effective.
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 subparagraph (A), (C), or (D) of section 3121(d)(3), without regard to section 1402(c)(2), (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).
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.
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.
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.
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. For purposes of this subsection, the term "dependent" shall include any individual who is a child (as defined in section 152(f)(1)) of a retired employee who as of the end of the calendar year has not attained age 27.
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 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).
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 59½, (IV) subject to the provisions of paragraph (14), upon hardship of the employee, (V) in the case of a qualified reservist distribution (as defined in section 72(t)(2)(G)(iii)), the date on which a period referred to in subclause (III) of such section begins, or (VI) except as may be otherwise provided by regulations, with respect to amounts invested in a lifetime income investment (as defined in subsection (a)(38)(B)(ii)), the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the arrangement, (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, and (iii) except as may be otherwise provided by regulations, in the case of amounts described in clause (i)(VI), will be distributed only in the form of a qualified distribution (as defined in subsection (a)(38)(B)(i)) or a qualified plan distribution annuity contract (as defined in subsection (a)(38)(B)(iv)), (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 close of the earlier of— (i) the period permitted under section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof), or (ii) subject to the provisions of paragraph (15), the first period of 2 consecutive 12-month periods during each of which the employee has at least 500 hours of service. (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) Governmental plan .—A governmental plan (within the meaning of section 414(d)) 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 (other than a de minimis financial incentive (not paid for with plan assets) provided to employees who elect to have the employer make contributions under the arrangement in lieu of receiving cash) 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),, 2 (iii), or (iv). (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 59½. 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 through the end of such year) 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 or permissible withdrawal 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), a permissible withdrawal under section 414(w), 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) (after the application of any election under section 408(p)(2)(E)(i)(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, (III) the employer may make nonelective contributions of a uniform percentage (up to 10 percent) of compensation, but not to exceed the amount in effect under section 408(p)(2)(A)(iv) in any year, 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, and (IV) no other contributions may be made other than contributions described in subclause (I), (II), or (III). (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. (E) Employers electing increased contributions In the case of an employer which applies an election under section 408(p)(2)(E)(i)(II) for purposes of the contribution requirements of this paragraph under subparagraph (B)(i)(I), rules similar to the rules of subparagraphs (B)(iii), (C)(ii)(IV), and (G) of section 408(p)(2) shall apply for purposes of subparagraphs (B)(i)(II) and (B)(ii) of 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) and the notice requirements of subparagraph (D), or (ii) meets the contribution requirements of subparagraph (C). (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 contribu tions 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) Timing of plan amendment for employer making nonelective contributions (i) In general Except as provided in clause (ii), a plan may be amended after the beginning of a plan year to provide that the requirements of subparagraph (C) shall apply to the arrangement for the plan year, but only if the amendment is adopted— (I) at any time before the 30th day before the close of the plan year, or (II) at any time before the last day under paragraph (8)(A) for distributing excess contributions for the plan year. (ii) Exception where plan provided for matching contributions Clause (i) shall not apply to any plan year if the plan provided at any time during the plan year that the requirements of subparagraph (B) or paragraph (13)(D)(i)(I) applied to the plan year. (iii) 4-percent contribution requirement Clause (i)(II) shall not apply to an arrangement unless the amount of the contributions described in subparagraph (C) which the employer is required to make under the arrangement for the plan year with respect to any employee is an amount equal to at least 4 percent of the employee's compensation. (G) Other plans An arrangement shall be treated as meeting the contribution requirements under subparagraph (B) or (C) if any other plan maintained by the employer meets such requirements with respect to employees eligible under the arrangement. (13) Alternative method for automatic contribution arrangements to meet nondiscrimination requirements (A) In general A qualified automatic contribution arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii). (B) Qualified automatic contribution arrangement For purposes of this paragraph, the term "qualified automatic contribution arrangement" means a cash or deferred arrangement— (i) which is described in subparagraph (D)(i)(I) and meets the applicable requirements of subparagraphs (C) through (E), or (ii) which is described in subparagraph (D)(i)(II) and meets the applicable requirements of subparagraphs (C) and (D). (C) Automatic deferral (i) In general The requirements of this subparagraph are met if, under the arrangement, each employee eligible to participate in the arrangement is treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation. (ii) Election out The election treated as having been made under clause (i) shall cease to apply with respect to any employee if such employee makes an affirmative election— (I) to not have such contributions made, or (II) to make elective contributions at a level specified in such affirmative election. (iii) Qualified percentage For purposes of this subparagraph, the term "qualified percentage" means, with respect to any employee, any percentage determined under the arrangement if such percentage is applied uniformly, does not exceed 15 percent (10 percent during the period described in subclause (I)), and is at least— (I) 3 percent during the period ending on the last day of the first plan year which begins after the date on which the first elective contribution described in clause (i) is made with respect to such employee, (II) 4 percent during the first plan year following the plan year described in subclause (I), (III) 5 percent during the second plan year following the plan year described in subclause (I), and (IV) 6 percent during any subsequent plan year. (iv) Automatic deferral for current employees not required Clause (i) may be applied without taking into account any employee who— (I) was eligible to participate in the arrangement (or a predecessor arrangement) immediately before the date on which such arrangement becomes a qualified automatic contribution arrangement (determined after application of this clause), and (II) had an election in effect on such date either to participate in the arrangement or to not participate in the arrangement. (D) Matching or nonelective contributions (i) In general The requirements of this subparagraph are met if, under the arrangement, the employer— (I) makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to the sum of 100 percent of the elective contributions of the employee to the extent that such contributions do not exceed 1 percent of compensation plus 50 percent of so much of such contributions as exceed 1 percent but do not exceed 6 percent of compensation, or (II) 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. (ii) Application of rules for matching contributions The rules of clauses (ii) and (iii) of paragraph (12)(B) shall apply for purposes of clause (i)(I). (iii) Withdrawal and vesting restrictions An arrangement shall not be treated as meeting the requirements of clause (i) unless, with respect to employer contributions (including matching contributions) taken into account in determining whether the requirements of clause (i) are met— (I) any employee who has completed at least 2 years of service (within the meaning of section 411(a)) has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from such employer contributions, and (II) the requirements of subparagraph (B) of paragraph (2) are met with respect to all such employer contributions. (iv) Application of certain other rules The rules of subparagraphs (E)(ii) and (G) of paragraph (12) shall apply for purposes of subclauses (I) and (II) of clause (i). (E) Notice requirements (i) In general The requirements of this subparagraph are met if, within a reasonable period before each plan year, each employee eligible to participate in the arrangement for such year receives 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 to whom the arrangement applies. (ii) Timing and content requirements A notice shall not be treated as meeting the requirements of clause (i) with respect to an employee unless— (I) the notice explains the employee's right under the arrangement to elect not to have elective contributions made on the employee's behalf (or to elect to have such contributions made at a different percentage), (II) in the case of an arrangement under which the employee may elect among 2 or more investment options, the notice explains how contributions made under the arrangement will be invested in the absence of any investment election by the employee, and (III) the employee has a reasonable period of time after receipt of the notice described in subclauses (I) and (II) and before the first elective contribution is made to make either such election. (F) Timing of plan amendment for employer making nonelective contributions (i) In general Except as provided in clause (ii), a plan may be amended after the beginning of a plan year to provide that the requirements of subparagraph (D)(i)(II) shall apply to the arrangement for the plan year, but only if the amendment is adopted— (I) at any time before the 30th day before the close of the plan year, or (II) at any time before the last day under paragraph (8)(A) for distributing excess contributions for the plan year. (ii) Exception where plan provided for matching contributions Clause (i) shall not apply to any plan year if the plan provided at any time dur ing the plan year that the requirements of subparagraph (D)(i)(I) or paragraph (12)(B) applied to the plan year. (iii) 4-percent contribution requirement Clause (i)(II) shall not apply to an arrangement unless the amount of the contributions described in subparagraph (D)(i)(II) which the employer is required to make under the arrangement for the plan year with respect to any employee is an amount equal to at least 4 percent of the employee's compensation. (14) Special rules relating to hardship withdrawals For purposes of paragraph (2)(B)(i)(IV)— (A) Amounts which may be withdrawn The following amounts may be distributed upon hardship of the employee: (i) Contributions to a profit-sharing or stock bonus plan to which section 402(e)(3) applies. (ii) Qualified nonelective contributions (as defined in subsection (m)(4)(C)). (iii) Qualified matching contributions described in paragraph (3)(D)(ii)(I). (iv) Earnings on any contributions described in clause (i), (ii), or (iii). (B) No requirement to take available loan A distribution shall not be treated as failing to be made upon the hardship of an employee solely because the employee does not take any available loan under the plan. (C) Employee certification In determining whether a distribution is upon the hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is— (i) on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need, and (ii) not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy such financial need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee's certification, and for procedures for addressing cases of employee misrepresentation. (15) Special rules for participation requirement for long-term, part-time workers For purposes of paragraph (2)(D)(ii)— (A) Age requirement must be met Paragraph (2)(D)(ii) shall not apply to an employee unless the employee has met the requirement of section 410(a)(1)(A)(i) by the close of the last of the 12-month periods described in such paragraph. (B) Nondiscrimination and top-heavy rules not to apply (i) Nondiscrimination rules In the case of employees who are eligible to participate in the arrangement solely by reason of paragraph (2)(D)(ii), or by reason of such paragraph and section 202(c)(1)(B) of the Employee Retirement Income Security Act of 1974— (I) notwithstanding subsection (a)(4), an employer shall not be required to make nonelective or matching contributions on behalf of such employees even if such contributions are made on behalf of other employees eligible to participate in the arrangement, and (II) an employer may elect to exclude such employees from the application of subsection (a)(4), paragraphs (3), (12), and (13), paragraphs (2), (11), and (12) of subsection (m), and section 410(b). (ii) Top-heavy rules An employer may elect to exclude all employees who are eligible to participate in a plan maintained by the employer solely by reason of paragraph (2)(D)(ii) from the application of the vesting and benefit requirements under subsections (b) and (c) of section 416. (iii) Vesting For purposes of determining whether an employee described in clause (i) has a nonforfeitable right to employer contributions (other than contributions described in paragraph (3)(D)(i)) under the plan, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service, and section 411(a)(6) shall be applied by substituting "at least 500 hours of service" for "more than 500 hours of service" in subparagraph (A) thereof. (iv) Employees who become full-time employees This subparagraph (other than clause (iii)) shall cease to apply to any employee as of the first plan year beginning after the plan year in which the employee meets the requirements of paragraph (2)(D) without regard to paragraph (2)(D)(ii). (C) Exception for employees under collectively bargained plans, etc. Paragraph (2)(D)(ii) shall not apply to employees described in section 410(b)(3). (D) Special rules (i) Time of participation The rules of section 410(a)(4) shall apply to an employee eligible to participate in an arrangement solely by reason of paragraph (2)(D)(ii). (ii) 12-month periods 12-month periods shall be determined in the same manner as under the last sentence of section 410(a)(3)(A). (16) Starter 401(k) deferral-only plans for employers with no retirement plan (A) In general A starter 401(k) deferral-only arrangement maintained by an eligible employer shall be treated as meeting the requirements of paragraph (3)(A)(ii). (B) Starter 401(k) deferral-only arrangement For purposes of this paragraph, the term "starter 401(k) deferral-only arrangement" means any cash or deferred arrangement which meets— (i) the automatic deferral requirements of subparagraph (C), (ii) the contribution limitations of subparagraph (D), and (iii) the requirements of subparagraph (E) of paragraph (13). (C) Automatic deferral (i) In general The requirements of this subparagraph are met if, under the arrangement, each eligible employee is treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation. (ii) Election out The election treated as having been made under clause (i) shall cease to apply with respect to any employee if such employee makes an affirmative election— (I) to not have such contributions made, or (II) to make elective contributions at a level specified in such affirmative election. (iii) Qualified percentage For purposes of this subparagraph, the term "qualified percentage" means, with respect to any employee, any percentage determined under the arrangement if such percentage is applied uniformly and is not less than 3 or more than 15 percent. (D) Contribution limitations (i) In general The requirements of this subparagraph are met if, under the arrangement— (I) the only contributions which may be made are elective contributions of employees described in subparagraph (C), and (II) the aggregate amount of such elective contributions which may be made with respect to any employee for any calendar year shall not exceed $6,000. (ii) Cost-of-living adjustment In the case of any calendar year beginning after December 31, 2024, the $6,000 amount under clause (i) shall be adjusted in the same manner as under section 402(g)(4), except that "2023" shall be substituted for "2005". (iii) Catch-up contributions for individuals age 50 or over In the case of an individual who has attained the age of 50 before the close of the taxable year, the limitation under clause (i)(II) shall be increased by the applicable amount determined under section 219(b)(5)(B)(ii) (after the application of section 219(b)(5)(C)(iii)). (E) Eligible employer For purposes of this paragraph— (i) In general The term "eligible employer" means any employer if the employer does not maintain a qualified plan with respect to which contributions are made, or benefits are accrued, for service in the year for which the determination is being made. If only individuals other than employees described in subparagraph (A) of section 410(b)(3) are eligible to participate in such arrangement, then the preceding sentence shall be applied without regard to any qualified plan in which only employees described in such subparagraph are eligible to participate. (ii) Relief for acquisitions, etc. Rules similar to the rules of section 408(p)(10) shall apply for purposes of clause (i). (iii) Qualified plan The term "qualified plan" means a plan, contract, pension, account, or trust described in subparagraph (A) or (B) of paragraph (5) of section 219(g) (determined without regard to the last sentence of such paragraph (5)). (F) Eligible employee For purposes of this paragraph— (i) In general The term "eligible employee" means any employee of the employer who meets the minimum age and service conditions described in section 410(a)(1). (ii) Exclusions The employer may elect to exclude from such definition any employee described in paragraph (3) or (4) of section 410(b).
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 compensa tion 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, ¾ of a percentage point, and (ii) in the case of total benefits, ¾ 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, ¾ percent of the participant's final average compensation, and (ii) in the case of total benefits, ¾ 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 ¾ 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.
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, (ii) any employer contribution made to a defined contribution plan on behalf of an employee on account of an employee's elective deferral, and (iii) subject to the requirements of paragraph (14), any employer contribution made to a defined contribution plan on behalf of an employee on account of a qualified student loan payment. (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. (D) Qualified student loan payment The term "qualified student loan payment" means a payment made by an employee in repayment of a qualified education loan (as defined in section 221(d)(1)) incurred by the employee to pay qualified higher education expenses, but only— (i) to the extent such payments in the aggregate for the year do not exceed an amount equal to— (I) the limitation applicable under section 402(g) for the year (or, if lesser, the employee's compensation (as defined in section 415(c)(3)) for the year), reduced by (II) the elective deferrals made by the employee for such year, and (ii) if the employee certifies annually to the employer making the matching contribution under this paragraph that such payment has been made on such loan. For purposes of this subparagraph, the term "qualified higher education expenses" means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution (as defined in section 221(d)(2)). (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 through the end of such year) 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) Alternative method for automatic contribution arrangements A defined contribution plan shall be treated as meeting the requirements of paragraph (2) with respect to matching contributions if the plan— (A) is a qualified automatic contribution arrangement (as defined in subsection (k)(13)), (B) meets the notice requirements of subsection (k)(13)(E), and (C) meets the requirements of paragraph (11)(B). (13) Matching contributions for qualified student loan payments (A) In general For purposes of paragraph (4)(A)(iii), an employer contribution made to a defined contribution plan on account of a qualified student loan payment shall be treated as a matching contribution for purposes of this title if— (i) the plan provides matching contributions on account of elective deferrals at the same rate as contributions on account of qualified student loan payments, (ii) the plan provides matching contributions on account of qualified student loan payments only on behalf of employees otherwise eligible to receive matching contributions on account of elective deferrals, (iii) under the plan, all employees eligible to receive matching contributions on account of elective deferrals are eligible to receive matching contributions on account of qualified student loan payments, and (iv) the plan provides that matching contributions on account of qualified student loan payments vest in the same manner as matching contributions on account of elective deferrals. (B) Treatment for purposes of nondiscrimination rules, etc. (i) Nondiscrimination rules For purposes of subparagraph (A)(iii), subsection (a)(4), and section 410(b), matching contributions described in paragraph (4)(A)(iii) shall not fail to be treated as available to an employee solely because such employee does not have debt incurred under a qualified education loan (as defined in section 221(d)(1)). (ii) Student loan payments not treated as plan contribution.— Except as provided in clause (iii), a qualified student loan payment shall not be treated as a contribution to a plan under this title. (iii) Matching contribution rules Solely for purposes of meeting the requirements of paragraph (11)(B), (12), or (13) of this subsection, or paragraph (11)(B)(i)(II), (12)(B), (13)(D), or (16)(D) of subsection (k), a plan may treat a qualified student loan payment as an elective deferral or an elective contribution, whichever is applicable. (iv) Actual deferral percentage testing In determining whether a plan meets the requirements of subsection (k)(3)(A)(ii) for a plan year, the plan may apply the requirements of such subsection separately with respect to all employees who receive matching contributions described in paragraph (4)(A)(iii) for the plan year. (C) Employer may rely on employee certification The employer may rely on an employee certification of payment under paragraph (4)(D)(ii). (14) Cross reference For excise tax on certain excess contributions, see section 4979.
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.
Special rules for applying nondiscrimination rules to protect older, longer service and grandfathered participants
(1) Testing of defined benefit plans with closed classes of participants (A) Benefits, rights, or features provided to closed classes A defined benefit plan which provides benefits, rights, or features to a closed class of participants shall not fail to satisfy the requirements of subsection (a)(4) by reason of the composition of such closed class or the benefits, rights, or features provided to such closed class, if— (i) for the plan year as of which the class closes and the 2 succeeding plan years, such benefits, rights, and features satisfy the requirements of subsection (a)(4) (without regard to this subparagraph but taking into account the rules of subparagraph (I)), (ii) after the date as of which the class was closed, any plan amendment which modifies the closed class or the benefits, rights, and features provided to such closed class does not discriminate significantly in favor of highly compensated employees, and (iii) the class was closed before April 5, 2017, or the plan is described in subparagraph (C). (B) Aggregate testing with defined contribution plans permitted on a benefits basis (i) In general For purposes of determining compliance with subsection (a)(4) and section 410(b), a defined benefit plan described in clause (iii) may be aggregated and tested on a benefits basis with 1 or more defined contribution plans, including with the portion of 1 or more defined contribution plans which— (I) provides matching contributions (as defined in subsection (m)(4)(A)), (II) provides annuity contracts described in section 403(b) which are purchased with matching contributions or nonelective contributions, or (III) consists of an employee stock ownership plan (within the meaning of section 4975(e)(7)) or a tax credit employee stock ownership plan (within the meaning of section 409(a)). (ii) Special rules for matching contributions For purposes of clause (i), if a defined benefit plan is aggregated with a portion of a defined contribution plan providing matching contributions— (I) such defined benefit plan must also be aggregated with any portion of such defined contribution plan which provides elective deferrals described in subparagraph (A) or (C) of section 402(g)(3), and (II) such matching contributions shall be treated in the same manner as nonelective contributions, including for purposes of applying the rules of subsection (l). (iii) Plans described A defined benefit plan is described in this clause if— (I) the plan provides benefits to a closed class of participants, (II) for the plan year as of which the class closes and the 2 succeeding plan years, the plan satisfies the requirements of section 410(b) and subsection (a)(4) (without regard to this subparagraph but taking into account the rules of subparagraph (I)), (III) after the date as of which the class was closed, any plan amendment which modifies the closed class or the benefits provided to such closed class does not discriminate significantly in favor of highly compensated employees, and (IV) the class was closed before April 5, 2017, or the plan is described in subparagraph (C). (C) Plans described A plan is described in this subparagraph if, taking into account any predecessor plan— (i) such plan has been in effect for at least 5 years as of the date the class is closed, and (ii) during the 5-year period preceding the date the class is closed, there has not been a substantial increase in the coverage or value of the benefits, rights, or features described in subparagraph (A) or in the coverage or benefits under the plan described in subparagraph (B)(iii) (whichever is applicable). (D) Determination of substantial increase for benefits, rights, and features In applying subparagraph (C)(ii) for purposes of subparagraph (A)(iii), a plan shall be treated as having had a substantial increase in coverage or value of the benefits, rights, or features described in subparagraph (A) during the applicable 5-year period only if, during such period— (i) the number of participants covered by such benefits, rights, or features on the date such period ends is more than 50 percent greater than the number of such participants on the first day of the plan year in which such period began, or (ii) such benefits, rights, and features have been modified by 1 or more plan amendments in such a way that, as of the date the class is closed, the value of such benefits, rights, and features to the closed class as a whole is substantially greater than the value as of the first day of such 5-year period, solely as a result of such amendments. (E) Determination of substantial increase for aggregate testing on benefits basis In applying subparagraph (C)(ii) for purposes of subparagraph (B)(iii)(IV), a plan shall be treated as having had a substantial increase in coverage or benefits during the applicable 5-year period only if, during such period— (i) the number of participants benefitting under the plan on the date such period ends is more than 50 percent greater than the number of such participants on the first day of the plan year in which such period began, or (ii) the average benefit provided to such participants on the date such period ends is more than 50 percent greater than the average benefit provided on the first day of the plan year in which such period began. (F) Certain employees disregarded For purposes of subparagraphs (D) and (E), any increase in coverage or value or in coverage or benefits, whichever is applicable, which is attributable to such coverage and value or coverage and benefits provided to employees— (i) who became participants as a result of a merger, acquisition, or similar event which occurred during the 7-year period preceding the date the class is closed, or (ii) who became participants by reason of a merger of the plan with another plan which had been in effect for at least 5 years as of the date of the merger, shall be disregarded, except that clause (ii) shall apply for purposes of subparagraph (D) only if, under the merger, the benefits, rights, or features under 1 plan are conformed to the benefits, rights, or features of the other plan prospectively. (G) Rules relating to average benefit For purposes of subparagraph (E)— (i) the average benefit provided to participants under the plan will be treated as having remained the same between the 2 dates described in subparagraph (E)(ii) if the benefit formula applicable to such participants has not changed between such dates, and (ii) if the benefit formula applicable to 1 or more participants under the plan has changed between such 2 dates, then the average benefit under the plan shall be considered to have increased by more than 50 percent only if— (I) the total amount determined under section 430(b)(1)(A)(i) for all participants benefitting under the plan for the plan year in which the 5-year period described in subparagraph (E) ends, exceeds (II) the total amount determined under section 430(b)(1)(A)(i) for all such participants for such plan year, by using the benefit formula in effect for each such participant for the first plan year in such 5-year period, by more than 50 percent. In the case of a CSEC plan (as defined in section 414(y)), the normal cost of the plan (as determined under section 433(j)(1)(B)) shall be used in lieu of the amount determined under section 430(b)(1)(A)(i). (H) Treatment as single plan For purposes of subparagraphs (E) and (G), a plan described in section 413(c) shall be treated as a single plan rather than as separate plans maintained by each employer in the plan. (I) Special rules For purposes of subparagraphs (A)(i) and (B)(iii)(II), the following rules shall apply: (i) In applying section 410(b)(6)(C), the closing of the class of participants shall not be treated as a significant change in coverage under section 410(b)(6)(C)(i)(II). (ii) 2 or more plans shall not fail to be eligible to be aggregated and treated as a single plan solely by reason of having different plan years. (iii) Changes in the employee population shall be disregarded to the extent attributable to individuals who become employees or cease to be employees, after the date the class is closed, by reason of a merger, acquisition, divestiture, or similar event. (iv) Aggregation and all other testing methodologies otherwise applicable under subsection (a)(4) and section 410(b) may be taken into account. The rule of clause (ii) shall also apply for purposes of determining whether plans to which subparagraph (B)(i) applies may be aggregated and treated as 1 plan for purposes of determining whether such plans meet the requirements of subsection (a)(4) and section 410(b). (J) Spun-off plans For purposes of this paragraph, if a portion of a defined benefit plan described in subparagraph (A) or (B)(iii) is spun off to another employer and the spun-off plan continues to satisfy the requirements of— (i) subparagraph (A)(i) or (B)(iii)(II), whichever is applicable, if the original plan was still within the 3-year period described in such subparagraph at the time of the spin off, and (ii) subparagraph (A)(ii) or (B)(iii)(III), whichever is applicable, the treatment under subparagraph (A) or (B) of the spun-off plan shall continue with respect to such other employer. (2) Testing of defined contribution plans (A) Testing on a benefits basis A defined contribution plan shall be permitted to be tested on a benefits basis if— (i) such defined contribution plan provides make-whole contributions to a closed class of participants whose accruals under a defined benefit plan have been reduced or eliminated, (ii) for the plan year of the defined contribution plan as of which the class eligible to receive such make-whole contributions closes and the 2 succeeding plan years, such closed class of participants satisfies the requirements of section 410(b)(2)(A)(i) (determined by applying the rules of paragraph (1)(I)), (iii) after the date as of which the class was closed, any plan amendment to the defined contribution plan which modifies the closed class or the allocations, benefits, rights, and features provided to such closed class does not discriminate significantly in favor of highly compensated employees, and (iv) the class was closed before April 5, 2017, or the defined benefit plan under clause (i) is described in paragraph (1)(C) (as applied for purposes of paragraph (1)(B)(iii)(IV)). (B) Aggregation with plans including matching contributions (i) In general With respect to 1 or more defined contribution plans described in subparagraph (A), for purposes of determining compliance with subsection (a)(4) and section 410(b), the portion of such plans which provides make-whole contributions or other nonelective contributions may be aggregated and tested on a benefits basis with the portion of 1 or more other defined contribution plans which— (I) provides matching contributions (as defined in subsection (m)(4)(A)), (II) provides annuity contracts described in section 403(b) which are purchased with matching contributions or nonelective contributions, or (III) consists of an employee stock ownership plan (within the meaning of section 4975(e)(7)) or a tax credit employee stock ownership plan (within the meaning of section 409(a)). (ii) Special rules for matching contributions Rules similar to the rules of paragraph (1)(B)(ii) shall apply for purposes of clause (i). (C) Special rules for testing defined contribution plan features providing matching contributions to certain older, longer service participants In the case of a defined contribution plan which provides benefits, rights, or features to a closed class of participants whose accruals under a defined benefit plan have been reduced or eliminated, the plan shall not fail to satisfy the requirements of subsection (a)(4) solely by reason of the composition of the closed class or the benefits, rights, or features provided to such closed class if the defined contribution plan and defined benefit plan otherwise meet the requirements of subparagraph (A) but for the fact that the make-whole contributions under the defined contribution plan are made in whole or in part through matching contributions. (D) Spun-off plans For purposes of this paragraph, if a portion of a defined contribution plan described in subparagraph (A) or (C) is spun off to another employer, the treatment under subparagraph (A) or (C) of the spun-off plan shall continue with respect to the other employer if such plan continues to comply with the requirements of clauses (ii) (if the original plan was still within the 3-year period described in such clause at the time of the spin off) and (iii) of subparagraph (A), as determined for purposes of subparagraph (A) or (C), whichever is applicable. (3) Definitions and special rule For purposes of this subsection— (A) Make-whole contributions Except as otherwise provided in paragraph (2)(C), the term "make-whole contributions" means nonelective allocations for each employee in the class which are reasonably calculated, in a consistent manner, to replace some or all of the retirement benefits which the employee would have received under the defined benefit plan and any other plan or qualified cash or deferred arrangement under subsection (k)(2) if no change had been made to such defined benefit plan and such other plan or arrangement. For purposes of the preceding sentence, consistency shall not be required with respect to employees who were subject to different benefit formulas under the defined benefit plan. (B) References to closed class of participants References to a closed class of participants and similar references to a closed class shall include arrangements under which 1 or more classes of participants are closed, except that 1 or more classes of participants closed on different dates shall not be aggregated for purposes of determining the date any such class was closed. (C) Highly compensated employee The term "highly compensated employee" has the meaning given such term in section 414(q).
Cross reference
For exemption from tax of a trust qualified under this section, see section 501(a).
Source: official text