SERVICE ISSUES CHANGES TO REMEDIAL AMENDMENT PERIOD RULES.

Rev. Proc. 89-65

SECTION 1. PURPOSE

The purpose of this revenue procedure is to: (1) extend the expiration date of the remedial amendment period under section 401(b) of the Internal Revenue Code until the end of the first plan year beginning after December 31, 1990 for certain disqualifying provisions; (2) extend the expiration date of the remedial amendment period for plans adopted or amended after December 31, 1987; (3) provide that certain collectively bargained plans that were not otherwise eligible for the remedial amendment period will now be eligible for the remedial amendment period; (4) extend the application of Model Amendment 3 under Notice 88-131, 1988-2 C.B. 546, to allow plan sponsors to continue the suspension of benefit accruals for all participants beyond the end of the 1989 plan year; (5) extend the application of the transitional rules under sections 1.401(a)(26)-8(b)(1) of the proposed regulations and 1.414(s)-1T of the temporary regulations and the use of the special definition of compensation under Notice 88-127, 1988-2 C.B. 538, until the later of the beginning of the 1992 plan year or the first plan year commencing on or after the date that is 60 days after the publication of final regulations; (6) modify the multiple use rules under section 1.401(m)-2(b) of the proposed regulations for plan years beginning before the later of January 1, 1992 or the date that is 60 days after publication of the final regulations; (7) announce that the Service will begin accepting applications for determination letters early in 1990 (concurrent with the Office of Management and Budget's (OMB) approval of the revised Form 5300 series); and (8) announce that the Service will provide an extended reliance period for certain new plans and for most plans that have been amended to comply with the requirements of the Tax Reform Act of 1986, Pub. L. No. 99-514, 1986- 3 (Vol. 1) C.B. 1 (TRA '86), the Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509 (OBRA '86), and the Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, 1987-3 C.B. 1, (OBRA '87), and the Technical and Miscellaneous Revenue Act of 1988 (TAMRA).

SEC. 2. BACKGROUND

01 Section 1140 of TRA '86 provides that amendments required to comply with the requirements of Subtitles A and C of Title XI of TRA '86 need not be made before the end of the first plan year beginning on or after January 1, 1989, provided the plan complies in operation with such TRA '86 requirements as of their applicable effective dates with respect to the plan and the plan is amended retroactively to comply with such requirements as of their effective dates.

02 A plan maintained pursuant to one or more collective bargaining agreements described in section 1140(c) need not be amended to comply with TRA '86 until the end of the first plan year beginning after the later of: (1) December 31, 1988, or (2) the earlier of December 31, 1990 or the date on which the last of such collective bargaining agreements terminate (determined without regard to any extension thereof after February 28, 1986). Such plans must also comply with the requirements of section 1140(a) which require that the plan be operated in compliarice with such TRA '86 requirements as of their applicable effective dates with respect to the plan and the plan is amended for such requirements retroactive to their effective dates.

03 Section 1.401(b)-1 of the Income Tax Regulations provides that a plan that fails to satisfy the requirements of section 401(a) solely as a result of a disqualifying provision defined under section 1.401(b)-1(b)(2)(ii) need not be amended to comply with such requirements until the later of the due date (including extensions) for filing the employer's tax return for the taxable year in which the 1989 plan year begins or the last day of the 1989 plan year, or, in the case of a plan maintained by more than one employer, the last day of the tenth month following the end of the 1989 plan year. A disqualifying provision is defined in section 1.401(b)-1(b)(2)(ii) as a plan provision (or the absence of a plan provision) that causes a plan to fail to satisfy the qualification requirements of the Code because of changes made in such requirements by TRA '86, OBRA '86, or OBRA '87 which are effective before the first day of the first plan year beginning after December 31, 1989; a plan provision that is not required, but is integral to a qualification requirement changed by TRA '86, OBRA '86, or OBRA '87; or a plan provision that fails to satisfy any requirement which is treated, directly or indirectly, by the Service as if section 1140 of TRA '86 applied to it (hereinafter collectively referred to as "Tax Reform requirements").

04 Section 1.401(b)-1(b)(2)(iii) of the regulations also defines as a disqualifying provision any plan provision (or the absence of any plan provision) which results in the failure of the plan to satisfy the qualification requirements of the Code by reason of a change in such requirements effected by amendments to the Code that are designated by the Commissioner, at his discretion, as disqualifying provisions described in section 1.401(b)-1(b)(2).

05 Section 1.401(b)-1 also provides that in the case of a new plan which contains (or fails to contain) a provision that causes such plan, to fail to satisfy the requirements of section 401(a) as of the date such plan is put into effect, such plan need not be amended to comply with such requirements until the later of the due date (including extensions) for filing the employer's tax return for the taxable year in which the plan is put into effect or the last day of the plan year in which the plan is put into effect. In the case of a new plan maintained by more than one employer, such plan need not be amended until the last day of the tenth month following the last day of the plan, year in which falls the date the plan is put into effect.

06 Section 1.401(b)-1 also provides that in the case of an amendment to an existing plan which causes such plan to fail to satisfy the requirements of section 401(a) as of the date such amendment is adopted or effective (whichever is earlier), such plan need not be amended to correct the amendment until the later of the due date for filing the employer's tax return (including extensions) for the taxable year in which the amendment is adopted or effective (whichever is later) or the last day of the plan year in which the amendment is adopted or effective (whichever is later). In the case of an amendment to an existing plan maintained by more than one employer, such plan need not be amended until the last day of the tenth month following the last day of the plan year in which the amendment is adopted or effective (whichever is later).

07 Notice 89-8, 1989-3 I.R.B. 15, provides that for purposes of determining the expiration date of the section 401(b) remedial amendment period, an individual, corporate, or partnership employer will be treated as having obtained an automatic extension of time for filing its tax return. Notice 89-8 also provides guidance for determining the expiration date of the section 401(b) period for tax exempt-organizations and other entities not required to file an employer's tax return.

SEC. 3. EXTENSION OF THE SECTION 401(b) REMEDIAL AMENDMENT PERIOD

01 Section 1.401(b)-1(e) of the regulations grants the Commissioner the discretion to extend the section 401(b) remedial amendment period. Pursuant to that grant of authority, the remedial amendment period is extended for disqualifying provisions described in section 1.401(b)-l(b)(2)(ii) until the last day of the first plan year beginning after December 31, 1990. This extension will provide sponsors of qualified pension, profit-sharing and stock bonus plans under section 401(a) of the Code and annuity plans under section 403(a) of the Code with additional time to review proposed regulations and make decisions as to how to redesign their plans to comply with the Tax Reform requirements. Thus, plans that do not satisfy the requirements of section 401(a) or 403(a) because of a disqualifying provision described in section 1.401(b)-1(b)(2)(ii) may be retroactively amended to meet such requirements at any time up to and including the last day of the 1991 plan year.

02 In addition, pursuant to the authority of section 1.401(b)- 1(b)(2)(iii), this revenue procedure provides that the definition of disqualifying provision under section 1.401(b)-1(b)(2)(ii) includes a plan provision (or the absence of a plan provision) that causes a plan to fail to satisfy the qualification requirements of the Code because of changes made in such requirements by TAMRA or a plan provision that is not required, but is integral to a qualification requirement changed by TAMRA. Thus, plans that do not satisfy the requirements of section 401(a) or 403(a) because of such a disqualifying provision may also be retroactively amended to meet such requirements at any time up to and including the last day of the 1991 plan year.

03 This revenue procedure also extends the remedial amendment period for new plans adopted after December 31, 1987, that do not satisfy the qualification requirements of sections 401(a) or 403(a) as of the date such plan is put into effect, and for existing plans that are amended after December 31, 1987, so that they fail to satisfy the qualification requirements of sections 401(a) or 403(a) as of the date such amendment is adopted or effective (whichever is earlier). The remedial amendment period as extended will expire on the last day of the first plan year beginning after December 31, 1990. Thus, new plans adopted after December 31, 1987, that fail to satisfy sections 401(a) or 403(a) as of the date the plan is put into effect, and existing plans that are amended after December 31, 1987, so that they fail to satisfy sections 401(a) or 403(a) as of the date the plan amendment is adopted or effective (whichever is earlier), may be amended to comply retroactively with such requirements at any time up to and including the last day of the 1991 plan year.

04 Many provisions of TRA '86 may not be effective for collectively bargained plans described in section 1140(c) until after the last day of the 1989 plan year. Such plans were not eligible for the section 401(b) remedial amendment period which applied only to disqualifying provisions effective before the 1990 plan year. This revenue procedure provides that, pursuant to the authority of section 1.401(b)-1(b)(2)(iii) of the regulations, such collectively bargained plans will be eligible for the extended remedial amendment period by including as disqualifying provisions defined under section 1.401(b)- 1(b)(2)(ii) those provisions that have heretofore not been considered as disqualifying provisions because they become effective for plan years beginning on or after January 1, 1990. Thus, collectively bargained plans that do not satisfy the requirements of section 401(a) or 403(a) because of a provision that is not a disqualifying provision solely because it is effective with respect to the plan for plan years beginning after December 31, 1989, may be amended to comply retroactively with such requirements at any time up to and including the last day of the 1991 plan year.

05 In order to be eligible for this extended remedial amendment period, a plan described in sections 3.01, 3.02, and 3.03, above, must continue to meet the requirements of section 1140 of TRA '86. Thus, with respect to requirements subject to section 1140 (i.e., TRA '86 requirements that are effective for plan years beginning before January 1, 1989), the plan sponsor must operate the plan in accordance with such requirements from the applicable effective dates with respect to the plan. In the case of changed plan provisions that are not required but are integral to a qualification requirement changed by TRA '86, OBRA '86, or OBRA '87, or any requirement which is treated, directly or indirectly, by the Service as if section 1140 applied to it, the plan will be eligible for the extended remedial amendment period only if the plan is operated in accordance with such changed provisions from the effective date of such changes under the plan. In addition, the plan sponsor must amend the plan for all Tax Reform requirements (including those effective after the 1988 plan year) retroactively to the date the applicable requirements became effective.

06 If a plan is not amended within the remedial amendment period the period for which retroactive qualifying amendments may be made is governed by Rev. Rul. 82-66, 1982-1 C.B. 61. Under Rev. Rul. 82-66, a plan which is amended after the expiration of the remedial amendment period may only be retroactively amended to qualify for the plan year in which a request for a determination letter is made and the preceding plan year provided certain requirements are met. Thus, a plan which is amended retroactively for plan years prior to the plan year preceding the plan year in which the request for a determination letter is made will not be qualified for such prior years as a result of the retroactive amendments if such retroactive amendments are made after the expiration of the remedial amendment period.

SEC. 4. EXTENSION OF TREATMENT PURSUANT TO MODEL AMENDMENT 3

01 Notice 88-131, as modified by Notice 89-92, 1989-33 I.R.B. 21, provides that plan sponsors that timely adopted what was described in both notices as Model Amendment 3 (Model 3) may, to a limited extent, retroactively reduce and prospectively suspend benefit accruals for all plan participants. Model 3 may also be adopted by plan sponsors at any time to freeze benefit accruals for all participants on a prospective basis. In general, the relief afforded pursuant to Model 3 applies only to the 1989 plan year. In addition, plan sponsors are required to adopt certain plan amendments before the end of the 1989 plan year as a condition of using Model 3.

02 EXTENSION OF MODEL 3.

(1) Pursuant to this revenue procedure, the treatment afforded to plan sponsors that adopt Model 3 is extended until the last day of the 1990 plan year, except as provided in section 4.02(2), below.

(2) A plan sponsor may continue the suspension of benefit accruals for all plan participants under Model 3 beyond the last day of the 1990 plan year and until the last day of the remedial amendment period provided the notice described in section 204(h) of the Employee Retirement Income Security Act of 1974 (ERISA) is provided no later than the end of the 1990 plan year to all participants employed as of such date. In general, section 204(h) of ERISA requires that advance notice be given if a defined benefit plan or an individual account plan that is subject to section 302 of ERISA is amended to provide for a significant reduction in the rate of future benefit accruals. A plan sponsor that continues to suspend benefit accruals beyond the end of the 1990 plan year and who provides the 204(h) notice by the end of the 1990 plan year will be deemed to satisfy the requirements of section 204(h) even if such notice is provided after benefit accruals have been suspended under Model 3.

(3) Accordingly, plan amendments that are required to be adopted by a plan sponsor before the last day of the 1989 plan year in accordance with the provisions of Notices 88-131 and 89-92 need not be adopted in 1989. Instead, the plan must be amended to comply with all applicable Tax Reform requirements by the later of the last day of the 1990 plan year or, if the conditions of section 4.02(2) are met, the end of the remedial amendment period.

(4) If a plan sponsor continues the suspension of benefit accruals under Model 3 beyond the last day of the 1989 plan year, the determination of the accrued benefit of participants may, not be established until the plan is ultimately amended to comply with the Tax Reform requirements. Therefore, to ensure that participants are aware that they may be entitled to additional benefits once the plan is amended to comply with TRA '86, participants who terminate from employment after the end of the 1989 plan year and while Model 3 is in effect and who receive a distribution of the present value of their entire nonfortfeitable benefit at the time of distribution must be given notice that they may be entitled to additional plan benefits. Such notice must be provided before the expiration of a reasonable period after the participant terminates employment and must advise the participant that he or she should keep the plan administrator informed as to any change in address. The following is an example of language that may be used to satisfy this notice requirement:

This notice is to inform you that you may be entitled to additional benefits once the plan is amended to meet the requirements of the new tax laws. Your benefits under the plan are only calculated through 19__. Your entitlement to benefits based on years after 19__, if any, will not be determined until the plan is amended to comply with the new laws. At that time, if you are entitled to any additional benefits, you will be so informed. Please keep us advised of any changes in your address so that we may write to you regarding any additional benefits you may have earned. Changes in address should be sent to the following address:______________________________________.

(5) A plan sponsor may elect, through a plan amendment, to discontinue the suspension of benefit accruals pursuant to Model 3 at any time before the later of the last day of the 1990 plan year or, if the conditions of section 4.02(2) are met, the end of the section 401(b) remedial amendment period. Suspension of benefit accruals pursuant to Model 3 may continue until the date specified in a plan amendment that (1) establishes new benefit or allocation levels that satisfy the Tax Reform requirements (an interim amendment), or (2) that satisfies all applicable Tax Reform requirements (a final amendment), but not later than the later of the last day of the 1990 plan year or, if the conditions of section 4.02(2) are met, the end of the section 401(b) remedial amendment period.

(6) A plan sponsor may change, on a prospective or retroactive basis, from Model 3 to Model 2 or, alternatively, from Model 3 to Alternative IID (provided the requirements of Alternative IID are satisfied) at any time before the plan is amended in accordance with subsection .02(5). (Notices 88-131 and 89-92 provide a detailed description of Model 2 and Alternative IID.) A plan sponsor that changes from Model 3 to Model 2 should adopt Model 2 and provide an effective date for Model 2 that is no later than the last day of the section 401(b) remedial amendment period.

(7) For plan sponsors that continue the suspension of benefit accruals for all participants pursuant to Model 3 beyond the last day of the 1989 plan year, the second paragraph in the text of Model 3, which indicates that the amendment expires in 1989 and is conditioned on the adoption of certain amendments, will be treated by the Service as having been revised in accordance with the provisions of this revenue procedure.

03 MINIMUM FUNDING STANDARDS.

(1) Notice 88-131 explains the effect of the plan sponsor's adoption of Model 3 with respect to the 1989 plan year on the minimum funding requirements for a defined benefit plan. With respect to such plan year, if both Model 3 and certain TRA '86 amendments are timely made during the 1989 plan year, both amendments may be taken into account for the 1989 plan year or both amendments may be disregarded until the subsequent plan year.

(2) Pursuant to this revenue procedure, a plan sponsor that elects to continue the application of Model 3 with respect to a defined benefit plan beyond the 1989 plan year must disregard Model 3 for minimum funding purposes until the plan year in which the plan sponsor adopts an amendment that (a) establishes new benefit levels and any provisions on which the determination of benefits is based and (b) such benefit levels satisfy the Tax Reform requirements. With respect to the plan year in which such amendment is adopted, the plan sponsor may take into account or disregard the provisions of both such amendments.

(3) With respect to a defined contribution plan subject to the minimum funding standards of section 412 of the Code (including a target benefit plan) for which Model 3 has been adopted, Model 3 must be disregarded for minimum funding purposes until the plan year in which the plan sponsor adopts an amendment that (a) establishes new allocation provisions and any other provisions on which the determination of allocations is based and (b) such allocation levels satisfy the Tax Reform requirements. With respect to the plan year in which such amendment is adopted, the plan sponsor may take into account or disregard the provisions of both such amendments.

04 Contributions and Deductions -- Defined Contribution Plan

(1) Notice 89-92 explains the treatment of employer contributions and allocations made prior to the adoption of a model amendment with respect to a defined contribution plan. Notice 89-92 provides for the reduction of account balances by rescission of allocations. It further provides that the resulting unallocated amounts will not cause the plan to cease to be a qualified plan provided that no further employer contributions are made to the plan (with the exception of required quarterly contributions, if any) after October 13, 1989, until the unallocated amounts are reallocated to participant accounts in accordance with the terms and conditions of the plan.

(2) Pursuant to this revenue procedure, employers may make employer contributions to a define contribution plan for which Model 3 has been adopted after October 13, 1989, provided the conditions of this section 4.04 are met. This section 4.04 applies to define contribution plans, regardless of whether they are subject to the minimum funding standards of section 412 of the Code.

(3) Employer contributions to a defined contribution plan for plan years for which Model 3 is still in effect on the last day of the plan year may not be allocated to participant accounts unless the allocation is in accordance with the Tax Reform requirements. Prior to such allocation, employer contributions (other than elective deferrals and matching contributions) ("employer contributions") and forfeitures must be held in an unallocated suspense account. The maintenance of this suspense account will not cause a plan to cease to be a qualified plan. Amounts in the suspense account must share in investment performance in the same manner as amounts held in a participant's account. Amounts timely contributed for the 1989 plan year and forfeitures for the 1989 plan year may be retroactively allocated as of a date in the 1989 plan year. Similarly, amounts timely contributed for the 1990 plan year and forfeitures for the 1990 plan year may be retroactively allocated as of a date in the 1990 plan year. Generally, the amount to be allocated to a participant's account for a plan year is the product of (a) the amount in the suspense account for that plan year, adjusted for investment performance and (b) the ratio of the participant's share of the employer -contributions and forfeitures for the plan year to the total employer contributions timely made for that plan year and the total forfeitures for that plan year. If unallocated amounts remain in the suspense account after retroactive allocations are made pursuant to new allocation levels under plan amendments meeting the Tax Reform requirements, no further employer contributions can be made until the unallocated amounts are subsequently allocated to participant accounts.

(4) Amounts contributed with respect to plan years beginning on or after January 1, 1989 that are held in a suspense account when the tax return is filed for the tax year for which they are timely contributed, may not be deducted for that tax year until they have been allocated. When the contributions are retroactively allocated in a manner that meets the Tax Reform requirements, the employer may claim the amount of contributions allocated as a deduction on the income tax return for the applicable tax year or, if an income tax return for such year has already been filed, on an amended income tax return. If all amounts contributed for a plan year are not allocated as of a date in that plan year under plan provisions that meet the Tax Reform requirements, the plan sponsor will be liable for the excise tax on nondeductible contributions in accordance with section 4972 of the Code.

(5) Allocated employer contributions and forfeitures (without adjustment for investment performance) from the suspense account are annual additions for purposes of section 415 of the Code in the limitation year containing the date as of which the contributions are allocated.

05 The provisions of section 4.03(3) and section 4.04 apply to defined contribution plans for which Model 2 has been adopted with respect to employer contributions and forfeitures for highly compensated individuals. Subsequent reallocation of the amounts from suspense accounts pursuant to section 4.04 may be made to other than a highly compensated individual's account.

06 Plan distributions.

(1) Notices 88-131 (section II.F) and 89-92 (section II.J.) prescribe the treatment to be afforded to plan distributions with respect to participants whose accrued benefit or portion of an accrued benefit may not be known because of the adoption of Model 3.

(2) If a plan sponsor elects to continue the application of Model 3 beyond the last day of the 1989 plan year, the procedures described in Notices 88-131 and 89-92 will apply to any participant who is entitled to receive a distribution during any plan year that Model 3 is in effect.

07 Coverage.

(1) A participant, whose employment is terminated in a plan year during which benefit accruals under the plan are suspended pursuant to Model 3 may not be excluded from benefitting under the plan under a coverage classification (for a plan year during which the individual was employed by the employer) merely on account of such individual's termination of employment in a subsequent plan year.

(2) For example, assume a plan of the employer, in which all employees participate, uses Model 3 with respect to the 1989 and 1990 plan years. The employer may not amend the plan with respect to the 1989 plan year to exclude from receiving benefit accruals all participants whose employment terminated during the 1990 plan year. Thus, a participant whose employment terminated in the 1990 plan year and who satisfied the plan's benefit accrual requirements applicable to the 1989 plan year, may not be denied a benefit accrual for the 1989 plan year as provided under the plan as amended for Tax Reform requirements merely because such participant terminated employment in 1990. If, however, the plan had been amended to retroactively reduce to zero the 1989 accrual for all salaried employees effective as of the first day of the 1989 plan year, those employees whose employment terminated during the 1990 plan year and who were salaried employees could have their benefits computed under the plan in this manner because the group receiving a zero accrual consists of all salaried participants, not just those who terminated during the 1990 plan year.

SEC. 5. EXTENSION OF CERTAIN TRANSITIONAL RULES

01 Simplified definition of separate benefit structures under section 401(a)(26).

(1) The proposed regulations under section 401(a)(26) provide, in general, that for purposes of determining whether a plan benefits at least 50 employees or 40% of all employees, each separate benefit structure must be tested separately. Section 1.401(a)(26)-2(d) of the proposed regulations provides that a separate current benefit structure will exist for purposes of section 401(a)(26) with respect to each portion of a uniform benefit formula to the extent that subsidies, optional forms of benefits, rights or features are not provided in a uniform manner to all employees eligible to participate under such formula. Section 1.401(a)(26)-8(b)(1) provides a simplified method for identifying current benefit structures under section 401(a)(26) which is available during the 1989 plan year. Under section 1.401(a)(26)-8(b)(1), the only rights and features to be taken into account are the bases and conditions applicable to the determination of an employee's contribution allocation under a defined contribution plan and the bases and conditions applicable to an employee's normal retirement benefit, early retirement benefit (to the extent such benefit is reduced by less than 3% for each year of early commencement), or joint and survivor annuity benefit, and any accrual, availability, and eligibility conditions related to these normal retirement, early retirement, or joint and survivor annuity benefits.

(2) This revenue procedure provides that for plan years beginning before the later of January 1, 1992 or the date that is 60 days following the publication of final regulations, a plan is only required to meet the transitional rule of section 1.401(a)(26)- 8(b)(1) of the proposed regulations with regard to current benefit structures.

02 Modification of sections 401(k) and 401(m) multiple use rules.

(1) Sections 401(k)(3))(A)(ii)(II) and 401(m)(2)(A)(ii) of the Code provide alternative limits on the actual deferral percentage (ADP) test under section 401(k)(3) and the actual contribution percentage (ACP) test under section 401(m)(2) for eligible highly compensated employees. In each case, the alternative limit is the lesser of 200 percent of, or 2 percentage points more than, the applicable percentage for eligible non-highly compensated employees. Section 401(m)(9)(A) of the Code directs the Secretary to prescribe regulations to prevent the multiple use of these alternative limitations. Section 1.401(m)-2 of the proposed regulations sets forth rules prohibiting the multiple use of these alternative limitations, generally effective beginning with the 1989 plan year. Multiple use occurs only if a highly compensated employee is eligible under both a cash or deferred arrangement subject to section 401(k) and a plan subject to section 401(m), and only if the sum of the ADP for the highly compensated employees in the section 401(k) plan and the ACP for the highly compensated employees in the section 401(m) plan exceeds the aggregate limit. The aggregate limit is described in section 1.402(m)-2(b)(3)(i) and is calculated by adding two percentages determined by reference to the ADP and ACP for the non- highly compensated employees in these plans.

(2) This revenue procedure provides that for plan years beginning before the later of January 1, 1992 or the date that is 60 days after publication of final regulations, this aggregate limit is increased to the greater of the aggregate limit in section 1.402(m)- 2(b)(3)(i) or the following new aggregate limit. The new aggregate limit is the sum of:

(A) 125 percent of the lesser of (1) the actual deferral percentage of the group of non-highly compensated employees eligible under the arrangement subject to section 401(k) for the plan year, or (2) the actual contribution percentage of the group of non-highly compensated employees eligible under the plan subject to section 401(m) for the plan year beginning with or within the plan year of the arrangement subject to section 401(k), and

(B) Two plus the greater of (1) or (2) above. In no event, however, shall this amount exceed 200 percent of the greater of (1) or (2) above.

03 Definition of compensation under sections 401(k) and 401(m) of the code.

(1) Section 1.401(k)-1(g)(9)(ii) provides that, for plan years beginning after December 31, 1988, or on or after the later date provided in section 1.401(k)-1(h), a plan must take into account all compensation received by a participant for the plan year in which the plan is being tested for compliance with the nondiscrimination tests of section 401(k)(3). Section 1.401(k)-1(g)(9)(ii) of the proposed regulations clarifies that, in the case of an employee who begins, resumes, or ceases to be eligible to make elective contributions during a plan year, all compensation received by the employee during the entire plan year must be taken into account. In addition, for the first plan year of the cash or deferred arrangement, the compensation to be taken into account in computing the actual deferral ratio of an employee includes compensation received by the employee during the 12-month period ending on the last day of such plan year Similar rules are contained in section 1.401(m)-1(f)(l4) of the proposed regulations. Section VI of Notice 88-127 provides that final regulations will be amended to provide that, for plan years beginning before January 1, 1990, or before the later date provided in section 1.401(k)-1(h), if applicable, a plan may limit, if it chooses, the compensation taken into account to compensation received by an employee while the employee is a plan participant.

(2) This revenue procedure modifies section VI of Notice 88-127 to provide that, for plan years beginning before the later of January 1, 1992 or the date that is 60 days after publication of final regulations, a plan may limit the compensation taken into account to compensation received by an employee while the employee is a plan participant.

04 Definition of compensation under section 414(s) of the Code.

(1) Section 1.414(s)-1T, Q&A-1(a), of the temporary regulations provides the basic definition of compensation generally applicable to nondiscrimination rules under sections 401 through 419A of the Code. Section 1.414(s)-1T, Q&A-4(a), provides that employers may elect, for applicable periods beginning in 1987 and 1988, to use specified alternative definitions of compensation provided certain conditions are met.

(2) Pursuant to this revenue procedure, an employer may, for applicable periods beginning before the later of January 1, 1992 or the date that is 60 days after the publication of final regulations, use the alternative definitions of compensation provided for in section 1.414(s)-1T, Q&A-4(a), provided the conditions set forth for using those alternatives are met.

05 Return of mandatory contributions.

(1) Notice 89-92 provides guidance with respect to the return of mandatory contributions received in the 1989 plan year prior to their retroactive discontinuance pursuant to Model Amendment 2, 3, or 4. Notice: 89-92 limited these rules to mandatory contributions received before the later of the adoption date or the effective date of the Model Amendment.

(2) Pursuant to this revenue procedure, mandatory contributions received on or after the first day of the 1989 plan year and before December 31, 1989 may be returned in accordance with the provisions of Notice 89-92.

06 The Service is currently reviewing other transitional rules to determine if they should also be extended. The Service invites comments with respect to any additional transitional relief that may be needed. All comments should be submitted in writing, referencing the number of this revenue procedure, and addressed to:

     Commissioner of Internal Revenue

01 Many sponsors and adopting employers will want to amend their plans prior to the end of the remedial amendment period. Therefore, the Service will begin accepting applications for determination letters in early 1990 (concurrent with OMB's approval of the revised Form 5300 (which will combine current Forms 5300 and 5301), Form 5303, and Form 5307) for most plans that have been amended to comply with the Tax Reform requirements. Additional guidance will be issued by the Service concerning the requirements for submission of applications for determination letters.

02 It is anticipated that individually designed plans (including volume submitter plans) will be eligible for a special reliance procedure similar to the extended reliance procedure contained in Rev. Proc. 89-13, 1989-7 I.R.B. 25. Under this special reliance procedure, individually designed plans for which an application is submitted prior to July 1, 1991, that satisfy all the conditions for such special reliance, will generally be able to rely on their favorable determination letter until the end of the 1994 plan year, absent statutory changes. Plans for which an application is submitted after June 30, 1991, but prior to the expiration of the remedial amendment period, that satisfy all the conditions for special reliance will be able to rely on their favorable determination letter until the end of the 1993 plan year, absent statutory changes. The Service will provide additional guidance with respect to this special reliance procedure and the conditions necessary to qualify for such extended reliance.

SEC. 7. EFFECT ON OTHER DOCUMENTS

01 Notices 88-127, 88-131, and 89-92 are modified.

02 Notice 89-8 is superseded.

DRAFTING INFORMATION

The principal author of this revenue ruling is Charles D. Lockwood of the Employee Plans Technical and Actuarial Division. For further information regarding this revenue ruling, please contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service or Mr. Lockwood between the hours of 1:30 p.m. and 4 p.m. Eastern Time, Monday through Thursday by calling (202) 566- 6783/ 6784 or (202) 343-0729, respectively. (These telephone numbers are not toll-free numbers).