Rev. Rul. 79-5

The purpose of this Revenue Ruling is to modify the rules contained in Rev. Rul. 75-481, 1975-2 C.B. 188, concerning limitation years and to clarify the computation of the defined contribution plan fraction in the case where an employer maintains several plans with different limitation years. This Revenue Ruling is designed to provide relief in the case of two or more large plans maintained by an employer which have (1) accounting systems based on different plan years and (2) few, if any, participants covered by more than one plan. The relief enables the employer to use a different limitation year for each of the plans. In order to preclude a tax advantage, the rules are both complex and somewhat more restrictive. Although the rules are usually applicable, it is advised that these rules only be used in the case described in the second sentence where the cost of changing the accounting system for everyone is significantly higher than the cost of satisfying these rules with respect to the few participants covered by more than one plan.

Sec. 2. Background Information.

Rev. Rul. 75-481 establishes the concept of a limitation year as the twelve month period during which the maximum benefit and contribution limitations of section 415 of the Internal Revenue Code must be satisfied.

Section 2.01 of Rev. Rul. 75-481 provides that unless the employer elects otherwise, the limitation year with respect to an employer shall be the calendar year. Although the employer may elect another twelve month period as the limitation year, the ruling requires that the one limitation year adopted by the employer apply for all plans of the employer.

The Service has reconsidered the rules in section 2.01 of Rev. Rul. 75-481 and is providing rules which allow an employer to maintain several plans with different limitation years.

Sec. 3. Election of Multiple Limitation Years.

In lieu of using the same limitation year for all plans of the employer, an employer may elect in accordance with section 2.01(2) of Rev. Rul. 75-481 to use different limitation years for different plans. The election must specify the limitation year for each of the plans maintained by the employer. The election shall be made by the adoption of a written resolution by the employer. The election may be made prospectively or retroactively. Any retroactive election shall not be considered a change in limitation year if the resolution is adopted or modified on or before December 31, 1979. Sections 4, 5, 6, and 7 provide guidelines solely with respect to plans of an employer who makes the election, whether prospectively or retroactively.

Sec. 4. Limitations for Defined Contribution Plans.

.01 Section 415(f)(1)(B) of the Code requires that all defined contribution plans (whether or not terminated) of an employer shall be treated as one defined contribution plan. This Section 4 provides guidelines for aggregating defined contribution plans with differing limitation years.

.02 If a participant is credited with annual additions or employee contributions in only one plan, in determining whether the requirements of section 415(c) are satisfied, only the limitation year applicable to that plan is considered. However, if a participant is credited with annual additions or employee contribution in more than one plan, each plan limitation year with respect to the participant which receives an addition or employee contribution must be considered in determining whether the requirements of section 415(c) are satisfied. Thus, the limitations for defined contribution plans described in Section 4 of Rev. Rul. 75-481 must be satisfied for a participant with respect to the limitation year of a plan if and only if such participant is deemed credited with an annual addition or an employee contribution with respect to that plan as of any date within that limitation year.

.03 For purposes of determining whether the requirements of Section 4 of Rev. Rul. 75-481 are satisfied with respect to any limitation year described in subsection .02, the annual additions taken into account shall be all annual additions allocated to an account of the participant under any plan (regardless of the limitation year of such plan) as of any date within such limitation year.

Sec. 5. Limitations for Combination of Defined Contribution and Defined Benefit Plans.

.01 Section 415(e) of the Code provides that, if an individual is a participant in both a defined benefit plan and a defined contribution plan of the same employer, the sum of the defined benefit plan fraction and the defined contribution plan fraction for any year may not exceed 1.4.

.02 Section 6.01 of Rev. Rul. 75-481 says that the combined fractions "for any limitation year" may not exceed 1.4.

.03 For a participant who has at any time participated in both a defined benefit plan and a defined contribution plan of the employer (whether or not that participation was simultaneous) when such plans had differing limitation years, the combined fractions as of the end of any limitation period (whether a full or partial limitation year) of the defined contribution plan(s) may not exceed 1.4.

Sec. 6. Defined Contribution Plan Fraction.

.01 For a participant who has at any time participated in several defined contribution plans of the employer (whether or not that participation was simultaneous) when such plans had differing limitation years, the defined contribution fraction shall be computed in accordance with this section.

.02 The limitation periods included in the computation shall be-- (1) any full limitation year of a plan if

(a) the participant's account in that plan is deemed credited with an annual addition or an employee contribution as of any date within the limitation year, and (b) no annual additions or employee contributions are deemed credited to an account of the participant under another plan of the employer in a limitation year having any days in common with the limitation year,

(2) any full limitation year of any plan of the employer which does not include a day of any other full limitation year in this subsection, and

(3) any partial limitation year covering a period not included in (1) or (2) above, where such partial years begin on the first day of the limitation year of one plan in which the individual is (or was) a participant and end on the day before the first day of the next beginning limitation year of a plan in which the individual is (or was) a participant.

.03 For any limitation period, the numerator of the defined contribution fraction shall be the sum of the annual additions to the participant's accounts as of any date on or before the close of such limitation period, and the denominator shall be the maximum amount of annual additions for such limitation period and for all prior limitation periods.

Sec. 7. Computation of Maximum Additions in a Limitation Year.

For purposes of sections 4 and 6 of this Revenue Ruling, the maximum annual addition with respect to a limitation year or limitation period shall be based on the compensation paid or made available to a participant within such limitation year or limitation period (or the compensation accrued during the period if the election in section 2.02(3) of Rev. Rul. 75-481 has been made). The dollar limitation with respect to a limitation period shall be the product of (1) the dollar limitation for the calendar year in which the limitation period ends and (2) the fraction whose numerator is the number of months (including fractions) in the limitation period and whose denominator is 12.

Sec. 8. Example.

M Corporation maintains two defined contribution plans (Plan 1 and Plan 2). M Corporation elects an October 1 to September 30 limitation year for Plan 2, and a calendar year limitation year for Plan 1.

Employee A is hired by M Corporation on January 1, 1975, begins participation in Plan 1 on January 1, 1976, and switches participation to Plan 2 on July 1, 1977. A's compensation and annual additions to the plans were as follows:

    Date(s) Compensation Annual Addition

(a) For Plan 1, the 1976 and 1977 calendar limitation years within which A was credited with an annual addition by Plan 1.

     Limitation Annual

                                                           Annual

As of 9/30/78, A's defined contribution plan fraction would be computed in accordance with Section 6 as illustrated below.

(a) The relevant limitation periods are,

(1) no full limitation years are included under section 6.02(1), (2) the full limitation years from 1/1/75 to 12/31/75, from 1/1/76 to 12/31/76, and from 10/1/77 to 9/30/78, as specified by section 6.02(2), (alternative selections are available as long as those selected satisfy section 6.02(2)).

(3) the partial limitation year from 1/1/77 to 9/30/77 as specified by section 6.02(3).

(b) The numerator and denominator for each period are

     Limitation 1/1/75- 1/1/76- 1/1/77- 10/1/77- Total