MODEL AMENDMENTS PROVIDE FOR COMPLIANCE WITH ACCRUED BENEFIT RULES WHILE TERMINATING OR CONTINUING A QUALIFIED PLAN.

Notice 88-131

I. PURPOSE AND BACKGROUND

The purpose of this notice is to provide relief to sponsors of qualified pension, profit-sharing and stock bonus plans under section 401(a) and annuity plans under section 403(a) of the Internal Revenue Code, including sponsors and adopting employers of master and prototype plans, in order to provide time to review regulations and make decisions about benefit program redesign without incurring impractical costs in order to comply with the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1986 and the Omnibus Budget Reconciliation Act of 1987 (collectively, TRA '86).

Regulations issued pursuant to section 401(b) of the Code have been amended to include provisions of TRA '86 within the definition of disqualifying provisions, thus permitting plan sponsors an extended remedial amendment period in which to amend their plans to comply retroactively with TRA '86. See Income Tax Regulations 1.401(b)-1(b)(2)(ii). Section 401(b), however, does not permit plan sponsors to retroactively reduce or eliminate benefits protected by section 411(d)(6).

Although plan sponsors will be able to comply with newly effective qualification provisions by raising the benefits of nonhighly compensated employees, the Internal Revenue Service anticipates that, in some situations, because of the interaction of section 411(d)(6) with new or revised requirements of several sections of the Code, in particular, sections 401(a)(4), (5), (17), and (26), 401(1), 404, 410(a) and (b), 411(a), 414(n), (q) and (s), and 415, plan sponsors may want to act to preserve their flexibility to modify benefit or contribution levels before benefits begin to accrue in the first plan year beginning after December 31, 1988. Furthermore, the regulations proposed under a number of these qualification provisions may affect a plan sponsor's decisions with respect to plan merger, redesign or termination.

The Service invites comments with respect to the alternatives described in this notice and any other solutions for dealing with the TRA '86 amendment process as it relates to nondiscrimination and benefits protected by section 411(d)(6). All comments should be submitted in writing, referencing the number of this notice, and addressed to:

     Commissioner of Internal Revenue

A. BACKGROUND

Section 411(d)(6) of the Code provides, in general, that a plan amendment (other than an amendment described in section 412(c)(8)) may not decrease a participant's accrued benefit determined as of the later of the date of adoption or the effective date of the amendment. Because neither section 1140 of TRA '86 nor section 401(b) provide an exception to section 411(d)(6), the prohibition applies with respect to plan amendments made to comply with TRA '86 after the first accruals of the 1989 plan year. Compliance with section 411(d)(6) requires that a participant's accrued benefit immediately after the later of the adoption or effective date of an amendment not be less than the greater of (1) the participant's accrued benefit calculated without regard to the amendment or (2) the participant's accrued benefit calculated in accordance with the amendment.

The accrual rules applicable under a particular plan and the timing of plan amendments to comply with TRA '86 may result in certain participants accruing 411(d)(6) protected benefits in excess of the benefits they would have accrued if the plan had been amended to comply with TRA '86 by the first day of the first plan year beginning on or after January 1, 1989. Accordingly, absent the relief provided below, certain plans may not satisfy both the TRA '86 nondiscrimination requirements and the requirements of section 411(d)(6) of the Code.

B. RELIEF

In order to provide sufficient time for employers and their advisers to study new regulations and other interpretive guidance requisite to their decisions with respect to plan design and benefit structure, and in view of the requirements of section 411(d)(6) of the Code and the nondiscrimination requirements of TRA '86, the following alternatives and Model Amendments are available.

This notice should not be interpreted as limiting the availability of any other permissible approaches to compliance with the new qualification requirements of TRA '86.

C. MODEL AMENDMENTS CEASING ACCRUALS

(1) ALTERNATIVE ONE -- COMPENSATION LIMIT

Section 401(a)(17) of the Code provides that a trust is not a qualified trust unless, under the plan of which it is a part, the annual compensation of each employee taken into account for any year (including years before section 401(a)(17) is effective) does not exceed $200,000, as adjusted in accordance with section 415(d). Section 404(l) provides that in determining the deductibility of employer contributions to a qualified plan, the amount of annual compensation taken into account under the plan for any year shall not exceed $200,000 as adjusted in accordance with section 415(d). The limit under section 401(a)(17) is $200,000 for plan years beginning in 1989 and will be adjusted in accordance with section 415(d) for plan years beginning in 1990.

The following model amendment limits compensation in compliance with section 401(a)(17) and 404(1) of the Code. It does not, by itself, limit benefit accruals that may exceed those permitted by other qualification requirements amended by TRA '86. This model amendment is adequate for plan sponsors that anticipate no changes in benefit or allocation formulas or are willing to increase the benefits or allocations of some or all nonhighly compensated employees in order to prevent discriminatory benefits or contributions that may result from accruals under the plan before its amendment for TRA '86, other than those permitted by Alternative IID of this notice which is described below. If Model Amendment 1 is adopted before June 1, 1989, 411(d)6) protected benefits may be reduced without violating section 411(d)(6) to the extent that participants have 1989 benefit accruals based on compensation in excess of $200,000.

Model Amendment 1 may be adopted by itself or in combination with Model Amendments 2 or 3.

MODEL AMENDMENT 1 -- Compensation Limit Only

"In addition to other applicable limitations which may be set forth in the plan and notwithstanding any other contrary provision of the plan, compensation taken into account under the plan shall not exceed $200,000, adjusted for changes in the cost of living as provided in section 415(d) of the Internal Revenue Code, for the purpose of calculating a plan participant's accrued benefit (including the right to any optional benefit provided under the plan) for any plan year commencing after December 31, 1988. However, the accrued benefit determined in accordance with this provision shall not be less than the accrued benefit determined on [insert the effective date of this model amendment, which shall be no earlier than the date this amendment is adopted] without regard to this provision.

"Notwithstanding the preceding sentence, the accrued benefit of any plan participant who is a highly compensated employee, within the meaning of section 414(q) of the Code, is reduced to the extent a benefit has accrued with respect to compensation in excess of $200,000 during the 1989 plan year before the later of the adoption or effective date of this provision." [This second paragraph should not be adopted if this model amendment is effective before the first day of the first plan year commencing in 1989, and may not be adopted if the effective date of this model amendment is after May 31, 1989.]

(2) ALTERNATIVE TWO -- CESSATION OF BENEFIT ACCRUALS FOR HIGHLY COMPENSATED EMPLOYEES ONLY

The model amendment provided by this alternative, which is designed for plan sponsors that anticipate complying with TRA '86 requirements by reducing future benefit accruals for highly compensated employees, limits additional benefit accruals with respect to highly compensated employees after the later of the adoption or effective date of the amendment until the plan is amended to comply with TRA '86. The plan must be further amended to conform to the qualification requirements changed by TRA '86 before the last day of the remedial amendment period for such plan or, in the case of a master or prototype plan, the last date that amendments are permitted with respect to such plan under a procedure for continued reliance on a previous opinion letter. Model Amendment 2 will generally be effective only with respect to benefit accruals after the later of the adoption or effective date of the amendment. However, if such amendment is adopted on or after the first day of the first plan year commencing in 1989 and on or before May 31, 1989, any resulting reduction of accrued benefits of highly compensated employees will not violate section 411(d)(6) of the Code as long as the accrued benefit of any highly compensated employee is not less than what that employee had accrued as of the last day of the last plan year beginning before January l, 1989.

MODEL AMENDMENT 2

"Notwithstanding any other contrary provision of the plan, in calculating the accrued benefit (including the right to any optional benefit provided under the plan) of any plan participant who is a highly compensated employee within the meaning of section 414(q) of the Internal Revenue Code, such highly compensated employee shall accrue no additional benefit under the plan on or after [insert the effective date of this model amendment which shall be no earlier than the date this amendment is adopted] to the extent that such additional benefit accrual exceeds the benefit which would otherwise accrue in accordance with the terms of the plan as subsequently amended to comply with those qualification requirements described in Income Tax Regulations section 1.401(b)-1(b)(2)(ii)(TRA '86).

"This provision shall be effective until the last day by which the plan may be amended retroactively to comply with TRA '86 for its first plan year beginning in 1989 in order to remain qualified under the Code and shall be effective for such period if and only if the subsequent plan amendment to comply with TRA '86 is made on or before the last day by which the plan may be amended retroactively to comply with TRA '86 for its first plan year commencing in 1989 in order to remain qualified under the Code.

"In addition, the benefit accrued by any highly compensated employee, within the meaning of section 414(q) of the Code, shall in no event exceed the benefit accrual provided during the 1989 plan year with respect to such participant under the terms of the plan as subsequently amended to comply with the terms of TRA '86. However, such highly compensated employee's benefit shall not be less than what that participant had accrued as of the last day of the last plan year beginning before January 1, 1989." [This last paragraph should not be adopted if the model amendment is effective before the first day of the first plan year commencing in 1989, and may not be adopted if the effective date of this model amendment is after May 31, 1989.]

(3) ALTERNATIVE THREE -- CESSATION OF BENEFIT ACCRUALS FOR ALL PARTICIPANTS

The model amendment provided by this alternative, which is designed for plan sponsors that anticipate substantially revising the plan's provisions, limits additional benefit accruals of all participants from the effective date of the amendment until the end of the 1989 plan year. Model Amendment 3 will generally be effective only with respect to benefit accruals after the later of the adoption or effective date of the amendment. However, if such amendment is adopted on or after the first day of the first plan year commencing in 1989 and on or before March 31, 1989 (in the case of a plan that credits service under the elapsed time method) or on or before May 31, 1989 (in the case of plan that credits service under the hours- of-service method), any resulting reduction of accrued benefits will not violate section 411(d)(6) of the Code as long as the accrued benefit of each employee is not less than what the employee had accrued as of the last day of the last plan year beginning before January 1, 1989. Notwithstanding the remedial amendment dates provided under section 401(b), a plan that uses this model amendment must be further amended to conform to the qualification requirements of TRA '86 before the first day of the first plan year beginning after December 31, 1989.

MODEL AMENDMENT 3

"Notwithstanding any other contrary provision of the plan, in calculating the accrued benefit (including the right to any optional benefit provided under the plan) of any participant, such participant shall accrue no additional benefit under the plan on or after [insert the effective date of this model amendment, which shall be no earlier than the date this amendment is adopted] to the extent that such additional benefit accrual exceeds the benefit which would otherwise accrue in accordance with the terms of the plan as subsequently amended to comply with those qualification requirements described in Income Tax Regulations section 1.401(b)-1(b)(2)(ii) (TRA '86).

"This provision shall be effective until the last day of the first plan year commencing in 1989 and shall be effective for such period if and only if the subsequent TRA '86 amendment is made on or before the last day of the first plan year commencing in 1989.

"In addition the benefit accrued by any participant during the 1989 plan year shall in no event exceed the benefit accrual provided during the 1989 plan year with respect to such participant under the terms of the plan as subsequently amended to comply with TRA '86. However, such participant's accrued benefit shall not be less than what the participant had accrued as of the last day of the last plan year beginning before January 1, 1989." [This last paragraph should not be adopted if the model amendment is effective before the first day of the first plan year commencing in 1989, and may not be adopted if the effective date of this model amendment is after March 31, 1989 (elapsed time plan) or May 31, 1989 (hours-of-service plan).]

D. ACCRUALS UNDER PRE-TRA '86 PROVISIONS FOR 1989 PLAN YEAR

This Alternative IID is available for plans with respect to which benefit accruals will continue at more than a de minimis level after the plan is amended to comply with TRA '86. Benefit accruals arising on or after the first day of the first plan year beginning in 1989 under provisions of a plan that satisfied the requirements for qualification immediately before the 1989 plan year (prior plan provisions) will not cause the plan to fail to meet the requirements of sections 401(a)(4) and 401(a)(26) of the Code for the 1989 plan year provided the following are met:

1. Benefit accruals for nonhighly compensated employees must continue at more than a de minimis level under the plan as amended for TRA '86.

2. A plan participant who is a highly compensated employee described in section 414(q)(1)(A) or (B) of the Code may not receive a distribution after January 31, 1989 of a benefit that exceeds the benefit that the participant had accrued as of the last day of the 1988 plan year until such time as the benefit accrued for that participant under the plan as amended for TRA '86 exceeds that participant's 411(d)(6) protected benefits as of the last day of the 1988 plan year.

3. Any plan participant other than a participant described in item 2 shall be entitled to the greater of the benefit accrued in the 1989 plan year under prior plan provisions or the benefit accrued under the plan as amended to comply with TRA '86.

4. There have been no amendments decreasing benefit accruals of nonhighly compensated employees that do not correspondingly affect highly compensated employees or amendments increasing benefit accruals under the plan adopted after December 12, 1988.

Thus, for example, assume that a defined benefit plan provides benefits that would fail to satisfy the requirements of TRA '86, and such plan is amended after the first day of the plan year beginning in 1989, retroactive to the first day of the plan year beginning in 1989, to provide benefits that comply with the requirements of TRA '86. In this case, a plan participant described in item 2 who separates from service after the plan is amended for TRA '86 may receive a distribution of his benefit only to the extent that such benefit does not exceed the benefit the participant has accrued under the plan provisions as amended to comply with TRA '86. Any participant not described in item 2 shall be entitled to the greater of the benefit accrued immediately prior to the amendment or the accrued benefit determined under the plan as amended.

This alternative does not afford relief with respect to accruals arising in a plan year beginning after December 31, 1989. Thus, if the plan is not amended for TRA '86 or Model Amendment 2 is not adopted before the first benefits accrue in the 1990 plan year, the requirements of section 411(d)(6) must be met when the plan is amended to comply with TRA '86, and any benefits accruing on or after the first day of the plan year beginning in 1990 must meet the requirements of TRA '86.

Employers who prefer to amend their plans to reflect their use of this alternative in the 1989 plan year may do so by adopting Model Amendments 1 and 2 by the end of the 1989 plan year, modified by limiting its application to any plan participant who is a highly compensated employee within the meaning of section 414(q)(1)(A) or (B) of the Code.

E. EFFECT OF AMENDMENTS ON MINIMUM FUNDING AND DEDUCTIONS

Section 412 of the Code provides minimum funding standards applicable to pension plans that are or were qualified plans under section 401. Section 1.412(c)(3)-1 of the Income Tax Regulations provides rules concerning the reasonable funding methods for defined benefit pension plans. Section 1.412(c)(3)-1(d)(1) of the regulations provides that, except as provided by the Commissioner, a reasonable funding method does not anticipate changes in plan benefits that become effective, whether or not retroactively, in a future plan year or that become effective during a plan year but after the first day thereof. Rev. Rul. 77-2, 1977-1 C.B. 120, provides that if a plan is amended during the plan year to change the benefits, the amendment is taken into account for the part of the plan year for which it is effective and is disregarded for the part of the year it is not in effect. Rev. Rul. 77-2 also provides that an amendment made during the year, but after the valuation date for the year, is not required to be taken into account until the following plan year.

Thus, pursuant to section 412 of the Code and section 1.412(c)(3)-1 of the regulations, with respect to defined benefit plans, Model Amendments 1, 2, and 3 above are to be taken into account for purposes of section 412 in the following manner. Model Amendment 1 is to be taken into account for the entire plan year commencing in 1989, if it is timely adopted as specified above. Model Amendment 2 is not to be taken into account for the 1989 plan year and the minimum funding requirements are to be determined without regard to that amendment. Consequently, until the plan is subsequently amended during the remedial amendment period, the minimum funding standards are not affected by the adoption of Model Amendment 2. With respect to Model Amendment 3, the plan is required to be subsequently amended by the end of the plan year commencing in 1989 in order to obtain the relief provided by this notice. If both Model Amendment 3 and the subsequent TRA '86 amendments are timely made during the 1989 plan year, both amendments may be taken into account for the entire 1989 plan year or both amendments may be disregarded until the subsequent plan year. The minimum funding standard must either reflect both amendments or neither amendment for the 1989 plan year. If the plan is not timely amended for both Model Amendment 3 and the subsequent amendment, the 1989 funding requirements are to be determined without regard to Model Amendment 3.

Contributions to a defined benefit plan will be deductible as provided in section 404, with the section 412 minimum funding standards determined as provided in the preceding paragraph. Whether or not Model Amendment 1 is adopted, however, in accordance with section 404(l), compensation will be limited to $200,000 (as adjusted) for purposes of determining the deductibility of contributions in plan years beginning after 1988.

F. EFFECT OF AMENDMENTS ON PLAN DISTRIBUTIONS

For plan years commencing during 1989, the determination of the accrued benefit of any highly compensated employee after the adoption of Model Amendment 2, or highly compensated employees described in section 414(q)(1)(A) or (B) under Alternative IID above, may not be ultimately established until the plan is amended for TRA '86. Similarly, although the benefit accrued by a participant prior to the adoption of Model Amendment 3 will be known, the participant's total 1989 accrued benefit may not be established until the plan is amended for TRA '86. Consequently, for purposes of determining the accrued benefit distributable to any highly compensated employee after the adoption of Model Amendment 2, to certain highly compensated employees under Alternative IID above, or to any participant after the adoption of Model Amendment 3, the initial determination of such participant's accrued benefit will be the benefit determined after the adoption of the respective model amendment or the use of Alternative IID above. Thus, for example, the amount required to be distributed under sections 401(a)(9) and 401(a)(14) of the Code will be based upon the accrued benefit determined after the adoption of the model amendment or the use of Alternative IID above. For purposes of section 402(e) (tax on lump sum distributions) and section 402(a)(5) (rollovers), determination of the balance to the credit of the participant may be made with reference to the accrued benefit determined after the adoption of the model amendment with respect to a participant who is receiving or has received a distribution of benefits which commenced in 1989 or 1990. Any additional accruals as a result of the subsequent plan amendments to comply with TRA '86 may be distributed in the same form as the initial distribution, and, if such additional subsequent distribution occurs in a later taxable year, such distribution will not be eligible for the special tax on lump sum distributions, but may qualify for rollover under section 402(a)(5).

III. QUALIFICATION REQUIREMENTS OF PLANS TERMINATING AFTER FIRST DAY OF 1989 PLAN YEAR AND BEFORE JUNE 1, 1989

Notice 87-57, 1987-2 C.B. 368, provides that terminating plans must be amended to comply with the qualification requirements of the Code that are in effect on the date of the plan's termination in order for the termination of the plan not to adversely affect its qualified status and that the Service will review such plans for compliance with all requirements in effect with respect to the plan on the date of its termination. Rev. Proc. 88-9, 1988-4 I.R.B. 28, contains special procedures that apply to determination letter applications relating to plans that terminate before the date they must be amended for TRA '86.

Generally, under these procedures, a plan terminating after the first day of its 1989 plan year must be in compliance with all qualification provisions of TRA '86 effective for plan years beginning after December 31, 1988. However, if a plan sponsor adopts the following model amendment on or before May 31, 1989, and terminates the plan after the first day of the plan year beginning in 1989 and before June 1, 1989, the plan will be deemed to be in compliance with those qualification requirements of the Code that become effective with respect to the plan as of the first day of the first plan year beginning on or after January 1, 1989, provided the plan is in compliance with the plan qualification requirements in effect with respect to the plan during the last plan year beginning before January 1, 1989, and no amendments increasing benefit accruals for highly compensated employees under the plan have been adopted after December 13, 1988. Model Amendment 4 ceases benefit accruals with respect to highly compensated employees as of the first day of the 1989 plan year and ceases benefit accruals with respect to all other participants on the later of the adoption or effective date of the amendment. Model Amendment 4 also operates to reduce the 411(d)(6) protected benefits of highly compensated employees, without violating section 411(d)(6), to the extent that highly compensated employees have accrued benefits in the 1989 plan year.

MODEL AMENDMENT 4

"Notwithstanding any other contrary provision of the plan, in calculating the accrued benefit (including the right to any optional benefit provided under the plan) of any participant, such participant shall accrue no additional benefit under the plan on or after (insert the effective date of the model amendment which shall be no earlier than the date this amendment is adopted] except to the extent a benefit accrual is required to comply with section 416 of the Code. This provision shall be in effect until (insert the plan's termination date which shall be no later than May 31, 1989], the termination date of the plan.

"In addition, the accrued benefit of any highly compensated employee, within the meaning of section 414(q) of the Internal Revenue Code, shall not exceed what such highly compensated employee had accrued as of the last day of the last plan year beginning before January 1, 1989."

IV. SECTION 415 - LIMITATION ON CONTRIBUTIONS AND BENEFITS

Notice 87-21, 1987-1 C.B. 458, provides guidance with respect to the effect of certain provisions of TRA '86 dealing with new limitations on contributions and benefits under section 415 of the Code. Q&A-9 of Notice 87-21 applies the principles of section 1140 of TRA '86 to the section 415 changes and provides that, although the changes became effective with respect to plans for limitation years beginning after December 31, 1986, immediate plan amendments conforming the plan terms to those changes were not required. Q&A-10 of Notice 87-21 further provides that if a plan satisfies the requirements of section 1140 of TRA '86, the new 415 limits rather than the terms of the plan determine the benefit accruals under the plan. Thus, there will be no impermissible reduction of accrued benefits as a result of operational compliance with the new limitations, and the deduction limits under section 404 and minimum funding requirements under section 412 of the Code will be determined under the new limitations rather than the terms of the plan.

Among other things, section 1140 of TRA '86 requires plan amendments to be made no later than the last day of the first plan year beginning on or after January 1, 1989. This notice extends the treatment provided in Q&A-10 of Notice 87-21 through the remedial amendment period of section 401(b) of the Code. In addition, subparagraph (3) of Q&A-9 of Notice 87-21 is amended as follows:

"The plan is amended to comply with the required changes no later than the earlier of (1) plan termination, or (2) the last day of the remedial amendment period of section 401(b) of the Code or in the case of a master or prototype plan, the last date that amendments are permitted with respect to such plan under the procedures for continued reliance on a previous opinion letter."

V. RELIANCE

Employers may rely on the relief from section 411(d)(6) of the Code provided in Alternatives One, Two and Three of this notice with respect to benefit accruals occurring in the plan year commencing in 1989 only if the model amendment is adopted on or before May 31, 1989 (or March 31, 1989 if Model Amendment 3 is adopted with respect to a plan that uses the elapsed time method of crediting service), and the plan is further amended to conform to the qualification requirements of TRA '86 by the last day of the remedial amendment period for such plan (in the case of Alternative Two), or before the first day of the first plan year commencing after December 31, 1989 (in the case of Alternative Three). Information is provided below on the application of this relief to master and prototype plans. Employers may rely on the relief from the discrimination requirements and from section 411(d)(6) with respect to distributions to certain highly compensated employees provided in Alternative IID above if the conditions of Alternative IID are met.

If the employer fails to adopt subsequent amendments to conform the plan to the qualification requirements of by TRA '86 [sic] by the applicable date, the reliance provided by this notice shall cease to apply and any model amendment adopted by the employer with respect to the plan shall be considered retroactively null and void.

Employers may rely on the relief from section 411(d)(6) and certain qualification requirements of the Code effective in 1989 provided with Model Amemdment 4 with respect to benefit accruals occurring in the plan year commencing in 1989 only if Model Amendment 4 is adopted and the plan terminated on or before May 31, 1989, the plan meets the qualification requirements applicable with respect to the plan's 1988 plan year, and no amendments increasing benefits have been adopted after December 13, 1988.

Although the model amendments provided by this notice do not satisfy the definitely determinable requirements of section 401(a) of the Code and section 1.401-1(b)(1)(i) of the Income Tax Regulations, the Service will not raise this issue with respect to an employer's adoption of such amendments.

Separate benefit structures within the meaning of section 401(a)(26) of the Code will not be created in a plan merely by the adoption and operation of Model Amendments 1, 2, or 3 or by the use of Alternative IID above. Furthermore, the adoption of Model Amendments 1, 2, or 3 will not be regarded as causing the plan to fail to meet the requirements of section 401(1) of the Code even though, with respect to certain non-highly compensated employees, the disparity permitted under section 401(1) may be exceeded. No partial termination shall be deemed to occur solely by reason of the adoption of Model Amendments 1, 2, or 3 of this notice or any other amendment ceasing accruals during the 1989 plan year provided benefit accruals are not permanently ceased and will continue after the plan amendments to comply with TRA '86 at a level that would not otherwise result in a partial termination.

Adoption of a model amendment by a plan sponsor, including a sponsor of a master or prototype plan, or an adopting employer of a master or prototype plan, will not adversely affect the qualified status of the plan or the right of the adopting employer to rely on a prior determination or opinion letter issued with respect to the qualification of the plan. The Service will not issue a determination or opinion letter with respect to these model amendments. Model Amendments 1, 2 and 3 may be used only until a plan is amended to comply with TRA '86.

Furthermore, in accordance with section 5.01 of Rev. Proc. 84-23, 1984-1 C.B. 457, Model Amendment 1 may be adopted by the sponsor of a master or prototype plan on a group basis. Model Amendment 2 may not be adopted by the sponsor but may be offered as an option by the sponsor for adoption by the adopting employer, either by amending the adoption agreement to provide Model Amendment 2 as a new option or by permitting adopting employers to adopt Model Amendment 2 directly, thus precluding the need to amend the adoption agreement. Adoption of Model Amendments 1 or 2 by adopting employers will not result in the plan being considered individually designed. In order to use Model Amendment 3, the TRA '86 plan amendments must be adopted by the end of the 1989 plan year, consequently Model Amendment 3 is not available for adoption by plan sponsors. In accordance with section 5.02 of Rev. Proc. 84-23, if Model Amendment 3 is adopted by the adopting employer, the plan will be considered individually designed. Model Amendment 4 may only be adopted by an adopting employer and may not be adopted by master or prototype plan sponsors. Except as provided in Alternative IID above, if neither the plan sponsor nor the adopting employer takes timely action with respect to the cessation of accruals in the plan year commencing in 1989, there may be no relief from section 411(d)(6), and to comply with the qualification requirements effective in 1989, the adopting employer may have to amend the plan to retroactively increase the benefits of sufficient numbers of nonhighly compensated employees to a nondiscriminatory level. In accordance with section 9.07 of Rev. Proc. 84-23, the plan sponsor must furnish each adopting employer with any amendment made to the master or prototype plan.

Model Amendments 1, 2 and 3 are not subject to the notice requirements of section 204(h) of the Employee Retirement Income Security Act of 1974. The notice to participants required by section 204(h) may be required with respect to the subsequent TRA '86 amendment if such subsequent amendments of the plan result in a significant reduction in the rate of the future benefit accruals (determined by disregarding the model amendments). Model Amendment 4 will result in a significant reduction in the rate of future benefit accruals.

To the extent the adoption of any model amendment results in a reduction of the account balance of any participant in a defined contribution plan, future guidance will be provided with respect to the amount and treatment of such reduction. Guidance will also be forthcoming with respect to the funding requirements applicable to a defined contribution plan subject to section 412 of the Code if Model Amendments 1, 2, 3 or 4 are adopted with respect to such plan.

VI. EXAMPLES

The following examples illustrate some of the issues referred to in this notice.

EXAMPLE 1 : Limitation on Compensation in Excess of $200,000.

Assume a participant in a defined benefit plan receives $400,000 of compensation from the employer during the 1989 plan year, which is the calendar year, and that benefit accruals are based on this compensation. Assume further that the plan is timely amended to comply with TRA '86 in March 1990. On the one hand, the participant's 1989 benefit accrual takes compensation in excess of $200,000 into account in violation of the requirements of section 401(a)(17) of the Code. On the other hand, section 411(d)(6) requires that the participant be credited with the greater of (1) the benefit calculated without regard to the TRA '86 amendment or (2) the benefit calculated in accordance with the TRA '86 amendmemt. Thus, either the participant's 1989 accrued benefit is calculated taking into account compensation in excess of $200,000, in violation of section 401(a)(17) but in compliance with section 411(d)(6), or the participant's accrued benefit for 1989 is calculated not taking into account compensation in excess of $200,000, in compliance with section 401(a)(17) but in violation of section 411(d)(6).

Furthermore, in accordance with section 404(1) of the Code, any amount contributed to the plan for the 1989 plan year or subsequent plan years that takes into account compensation in excess of $200,000 will not be currently deductible by the employer in the year for which it is contributed. Moreover, the employer is subject to the 10% excise tax on nondeductible contributions set forth in section 4972. Even though such contributions are not currently deductible and subject to a 10% excise tax, these employer contributions may be required to satisfy the minimum funding standards of section 412.

In order to deal with this problem, the plan sponsor may adopt Model Amendment 1 during the 1989 plan year.

EXAMPLE 2: Permitted Disparity in Plan Contributions or Benefits

Effective for plan years which commence after December 31, 1988, section 401(1) of the Code sets forth new requirements for pension, profit-sharing and stock bonus plans with respect to disparity in allocations or benefits. Under the new rules, a plan generally will not be considered discriminatory merely because of disparity in the rate of allocations or benefits permitted under section 401(1).

With respect to defined benefit plans, section 401(1) sets forth ratio limits and percentage limits on the maximum disparity permitted under an excess plan and on the maximum offset permitted under an offset plan. In the case of an excess plan, the excess benefit percentage may not exceed the base benefit percentage by more than the maximum excess allowance. With respect to any year of service, the maximum excess allowance is the lesser of the base benefit percentage or 3/4 of one percent.

Assume an employer has maintained a defined benefit excess plan that met the qualification requirements in effect before the 1989 plan year. The plan's benefit formula provides that a participant will accrue a benefit for each year of service with the employer equal to 2% of average compensation in excess of covered compensation. With respect to compensation below that level, a participant accrues a benefit for each year of service with the employer in an amount equal to 1% of compensation. The plan does not meet the requirements of section 401(1) of the Code as of the first day of the 1989 plan year because the excess benefit percentage exceeds the base benefit percentage by more than the maximum excess allowance.

To meet the requirements of section 401(1) of the Code, the plan sponsor generally has three options: (1) increase the benefit provided with respect to compensation below the integration level, (2) lower the benefit provided with respect to compensation above the integration level, or (3) restructure the plan. The first option, (1) above, may be the only option available to a plan sponsor who does not adopt either Model Amendment 2 or 3, above, and has not otherwise amended the plan before benefits accrue in the 1989 plan year. The plan sponsor may, however, wish to amend the plan's benefit formula to provide that with respect to compensation in excess of the integration level, the benefit per year of service will be reduced. Finally, the plan sponsor could restructure the plan's benefit formula.

EXAMPLE 3: Plan Terminating in the 1989 Plan Year

Assume that a plan sponsor has maintained a defined benefit pension plan that has met the requirements for plan qualification as of the last day of the 1988 plan year. However, the plan does not benefit 50 employees or 40% of all employees in satisfactiom of the minimum participation requirements of section 401(a)(26) of the Code. The plan sponsor adopts Model Amendment 4 provided in this notice after the first day of the plan year commencing in 1989 (but before June 1, 1989), properly notifies all participants, and terminated the plan before June 1, 1989. At the time of plan termination the plan meets all qualification requirements that were effective for its 1988 plan year, and no benefit increases have been adopted on or after December 13, 1988. Because the plan sponsor adopted Model Amendment 4 and terminated the plan before June 1, 1989, the plan sponsor will not be required to amend its plan to meet the qualification requirements that become effective with respect to the plan in 1989, including the requirements of section 401(a)(26), in order to preserve its qualified status upon termination.

VII. ADMINISTRATIVE PRONOUNCEMENT

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

VIII. DRAFTING INFORMATION

The principal author of this notice [is] Carol Gold of the Employee Plans Technical and Actuarial Division. For further information regarding this notice, please contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service between the hours of 1:30 and 4 p.m. Eastern time, Monday through Friday on (202) 566-6783/6784 (not a toll-free telephone number). Ms. Gold's telephone number is (202) 343-0729 (also not a toll-free telephone number).