Final Nondescrimination Regs for Qualified Plans

 DEPARTMENT OF THE TREASURY

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations relating to the permitted disparity in employer contributions to, and employer- derived benefits under, qualified plans. They reflect changes to the applicable tax law made by the Tax Reform Act of 1986 and the Technical and Miscellaneous Revenue Act of 1988. These regulations provide guidance needed to comply with the law and affect sponsors of, and participants in, tax-qualified retirement plans.

 EFFECTIVE DATE: These regulations are effective for plan years beginning after December 31, 1988, and applied to those plan years except as set forth in section 1.401(l)-6.

 FOR FURTHER INFORMATION CONTACT: Patricia McDermott at 202-377-9372 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

Proposed regulations under section 401(l) were published in the Federal Register on November 15, 1988 (53 FR 45917). The November 1988 proposed regulations were supplemented and modified by proposed regulations published in the Federal Register on May 14, 1990 (55 FR 19947), and September 14, 1990 (55 FR 37888).

 Written comments were received from the public on the proposed regulations. In addition, public hearings on the proposed regulations were held June 29, 1989, and September 26, 27, and 28, 1990. After consideration of all the written comments received and the statements made at the hearings, the proposed regulations under section 401(l) are adopted as modified by this Treasury Decision.

EXPLANATION OF PROVISIONS:

Organization of Regulation

These final regulations have been generally modified to reflect final regulations under section 401(a)(4). They have also been reorganized in certain respects to improve their readability other changes in style and organization have been made in order to improve, clarify and resolve areas that commentators noted as ambiguous.

1. COORDINATION WITH FINAL SECTION 401(a)(4) REGULATIONS

 Regulations under section 401(l) were proposed prior to the issuance of proposed regulations under section 401(a)(4). Because these final regulations have been developed in conjunction with the final section 401(a)(4) regulations that are being issued simultaneously, it has been possible to eliminate unnecessary duplication and provide for better coordination of the rules under the two sections. For example, some provisions contained in proposed regulations under section 401(l) apply to plans generally under section 401(a)(4). To the extent possible, these provisions have been moved to the regulations under section 401(a)(4), while retaining a reference in the section 401(l) regulations.

 Certain definitions in the permitted disparity regulations now cross-refer to the definitions in the final regulations under sections 401(a)(4) and section 410(b). For example, terms such as "average annual compensation," "employee," "plan year compensation," and "plan" are defined in section 1.401(a)(4)-12. In response to comments, the concept of "plan" under section 401(a)(4), including aggregated plans and component plans, has been extended for purposes of section 401(l). Thus, although a plan as a whole might not satisfy section 401(l), the plan may be restructured into component plans under section 1.401(a)(4)-9(c), some or all of which satisfy section 401(l) and qualify for safe harbor treatment under section 401(a)(4).

 Some of the deemed uniformity rules originally contained in the proposed regulations under section 401(l), such as the multiple formula rule, have been consolidated with the safe harbor uniformity rules in sections 1.401(a)(4)-2(b) and 1.401(a)(4)-3(b). In addition, the final regulations under section 401(l) now provide that the special rules under the final section 401(a)(4) regulations enumerating those plan provisions that will not cause a plan to be nonuniform under the safe harbors apply also for purposes of section 401(l), thus allowing the same flexibility in designing safe harbor plans under section 401(l) as under section 401(a)(4). For example, a plan may limit each employee's benefit to a specified dollar amount without violating the uniformity rule.

 Special rules for target benefit plans and certain insurance contract plans (section 412(i) plans) that use the permitted disparity rules, originally contained in the proposed regulations under section 401(l), are now contained in sections 1.401(a)(4)- 8(b)(3) and 1.401(a)(4)-3(b)(7), respectively.

 Safe harbor rules for cash balance plans have also been added to the final section 401(a)(4) regulations. Many comments on the section 401(l) proposed regulations requested that cash balance plans, which are a hybrid type of defined benefit plan, be allowed to use the permitted disparity rules for defined contribution plans. They stated that the permitted disparity rules for defined benefit plans were incompatible with the basic design of a cash balance plan. In response to those comments, the cash balance plan safe harbor adopted in the final section 401(a)(4) regulations allows a plan to satisfy section 401(l) on the basis of the defined contribution plan rules.

 The rules in the proposed regulations under section 401(l) relating to employee contributions under a defined benefit plan have been consolidated with the regulations under section 401(a)(4) to provide a single set of rules under section 1.401(a)(4)-6. The preamble to the final section 401(a)(4) regulations discusses changes in the employee contribution rules under the final regulations.

 Finally, the transition rules in the proposed regulations under both section 401(l) and section 401(a)(4) provided rules for determining employees' accrued benefits after amendment of a defined benefit plan to comply with the Tax Reform Act of 1986 ("TRA '86") and rules relating to increases in an employee's benefit accrued before the effective date of the new rules under section 401(l) and section 401(a)(4) to reflect pay increases after the effective date. These rules have been combined into a single set of "fresh start" rules under section 1.401(a)(4)-13(c), with a single set of examples, that apply to plan amendments made to comply with TRA '86. In addition, under the final regulations, the fresh-start rules will also apply to later plan amendments, including an amendment to bring the plan within one of the design-based safe harbors under the final section 401(a)(4) regulations. Thus, an employer that chooses to not comply to with section 401(l) as of the original effective date, now has the option of amending the plan to comply with section 401(l) at a later date. Since complying with section 401(l) in form is a prerequisite to satisfying the nondiscriminatory amounts test under the final section 401(a)(4) regulations on a safe harbor basis, this will permit use of the safe harbors by additional plans.

 The rules for increasing a pre-effective date accrued benefit to reflect pay increases after the effective date have been consolidated in section 1.401(a)(4)-13(d). The proposed regulations allowed increases in preeffective date accrued benefits under a plan using section 401(l) only if the plan satisfied section 401(l) as of the 1989 plan year. The final regulations remove that restriction, allowing the increases for any plan that satisfies section 401(l) as of the 1992 plan year, the effective date of the final regulations under section 401(a)(4).

2. REORGANIZATION OF THE FINAL SECTION 401(l) REGULATIONS

 The final regulations under section 401(l) have also been reorganized to eliminate unnecessary internal duplication in order to improve their readability. For example, the proposed regulations contained separate rules for defined benefit excess plans and for defined benefit offset plans. The two sets of rules have been combined in the final regulations into a single set of rules that apply to both types of plans. Only in those cases where a different rule applies to each type of plan has a separate rule been set forth. The defined contribution plan rules have also been reorganized in a parallel manner.

 New terms have been added to the definitions in section 1.401(l)-1(c) to make a single set of rules possible. For offset plans, the new terms "gross benefit percentage," "offset percentage," and "offset level" serve functions similar to the defined benefit excess plan terms "excess benefit percentage," "base benefit percentage," and "integration level." Another new term, "disparity," means, in the case of an excess plan, the amount by which the excess percentage exceeds the base percentage and means, in the case of an offset plan, the offset percentage. Except as discussed below, use of those new terms has not generally modified the substance of the rules.

 The final regulations have also been revised to add the amendments made by Notice 89-70, 1989-1 C.B. 730. Those amendments generally expanded the proposed regulations in response to comments by providing more flexibility in determining integration (or offset) levels, covered compensation, average annual compensation, and early retirement reductions. Notice 89-70 also required that, in the case of early retirement under an offset plan, the rate of the gross benefit be reduced as well as the rate of the offset.

 Finally, comments on the proposed regulations under section 401(l) requested clarification of the permitted disparity rules, particularly in the form of examples. Thus, a number of examples have been added to the regulations at various points to illustrate their application.

SECTION 401(l) PERMITTED DISPARITY

1. PLANS NOT ELIGIBLE TO USE SECTION 401(l).

 The proposed regulations under section 401(l) provided that section 401(l) does not apply to a plan maintained by an employer not subject to the tax under section 3111(a) (the Federal Insurance Contributions Act or "FICA") or section 3221 (the Railroad Retirement Tax Act or "RRTA"). Similarly, the proposed regulations provided that section 401(l) does not apply to an employee stock ownership plan. In addition, the proposed regulations under section 401(a)(4) indicated that section 401(l) does not apply to contributions subject to section 401(k) or (m). The final regulations under section 401(l) make it clear that disparity is not permitted with respect to elective contributions under a qualified cash or deferred arrangement, or with respect to employee or matching contributions, as those terms are defined under the final section 401(k) and (m) regulations. Nor is disparity permitted with respect to contributions to a simplified employee pension made under a salary reduction arrangement described in section 408(k)(6).

 Under section 3121(b)(7), the FICA (and the tax under section 3111(a)) generally does not apply to service performed in the employ of a state, a political subdivision of a state, or an instrumentality of a state or political subdivision. Section 401(l) therefore does not apply to a plan maintained by a state or local government employer not subject to the tax under section 3111(a). Comments indicated that there was some confusion on this provision and requested that the final regulations extend section 401(l) to a state or local government employer that makes social security contributions under an agreement with the Social Security Administration under section 218 of the Social Security Act (a "218 agreement"). This was not necessary because section 3121(b)(7)(E) provides that employment for FICA purposes includes service performed for an employer covered by a 218 agreement. Thus, that employer is subject to the tax under section 3111(a) and is eligible to use the permitted disparity rules under section 401(l).

 The final regulations clarify that, for purposes of section 401(l), an individual subject to the tax on self-employment income under section 1401 ("SECA") is deemed to be subject to the tax under section 3111(a). The final regulations also allow an employer not to provide disparity in contributions or benefits for an employee not covered by FICA, RRTA, or SICA by deeming disparity for that employee to be uniform.

2. PERMITTED DISPARITY UNDER DEFINED CONTRIBUTION PLANS

 Few changes to the disparity rules for defined contribution plans have been made in the final regulations under section 401(l). As permitted under Notice 89-70, a defined contribution plan may use an integration level below the taxable wage base and make specified adjustments in the disparity provided under the plan. Final regulations also allow a plan that has a short plan year and bases allocations on employees' compensation for that short plan year to pro-rate the integration level for the year.

 The proposed regulations under section 401(l) required a defined contribution plan to provide uniform disparity for all employees. In contrast, the safe harbor rules under section 1.401(a)(4)-2(b) of the proposed section 401(a)(4) regulations specifically required a plan relying on section 401(l) to use the same base and excess contribution percentages for all employees. Because that requirement directly relates to section 401(l), the uniformity requirement under section 401(l) has been revised to require the plan to use same base and excess contribution percentages for all employees. The final regulations also allow disparity to be adjusted for an employee who has reached the cumulative disparity limit without violating the uniformity requirement.

 The maximum excess allowance for a defined contribution plan is the lesser of (1) the base contribution percentage or (2) the greater of (a) 5.7 percent or (b) the portion of the tax under section 3111(a) that is attributable to "old-age" or retirement benefits. A number of practitioners have contacted the Service to ask for the current rate of the retirement portion of the tax under section 3111(a). At this point the retirement portion of the tax is well below 5.7 percent and is not expected to exceed 5.7 percent for many years. den it does exceed 5.7 percent, thus increasing the maximum excess allowance, the Commissioner will publish the new rate.

3. PERMITTED DISPARITY FOR DEFINED BENEFIT PLANS

a. UNIFORM AND MAXIMUM DISPARITY

The proposed regulations under section 401(l) required that the disparity provided under a defined benefit plan be uniform for all employees and that it not exceed the maximum permitted disparity. In response to comments, final regulations clarify those requirements and revise them to provide greater flexibility to accommodate existing plan designs.

 The final regulations make it clear that the permitted disparity limits and uniformity apply not just to the disparity provided in the plan formula, but also to the rate of disparity provided in the benefit that accrues. After publication of the supplemental proposed regulations under section 401(a)(4) in September 1990, it became apparent that some practitioners had not recognized that the permitted disparity limits and uniformity were affected by the accrual method used under the plan. Accordingly, the final regulations clarify this point.

 The proposed regulations defined the maximum excess allowance and maximum offset allowance to include an annual disparity limit and a cumulative limit on the disparity provided for an employee's total years of service. The final regulations define maximum excess and offset allowance only as an annual limit. The cumulative limit has been added to the overall permitted disparity rules discussed below.

 The proposed regulations also defined the maximum offset allowance as a dollar amount. New terminology for offset plans, as discussed above, has made it possible to define the maximum offset allowance, like the maximum excess allowance, as a percentage.

 The proposed regulations limited the offset to the lesser of (1) 0.75 percent of an employee's final average compensation up to covered compensation or (2) one-half of the benefit provided the employee with respect to average annual compensation up to covered compensation or, if lower, final average compensation up to covered compensation. Many commentators criticized the offset limit as inconsistent with the statutory limit of one-half the total benefit provided the employee. After consideration of those comments, the offset limit from the proposed regulations has been retained. One purpose of the legislative changes to the integration rules was to achieve parity between defined benefit excess plans and offset plans. To do this, it is necessary to define the maximum excess allowance in terms of the benefit provided with respect to the lesser of average annual compensation or final average compensation up to covered compensation.

 Many commentators asked for clarification of the uniformity rules and expansion of the deemed uniformity rules. In response to those comments, a number of modifications have been made to the final regulations. Thus, the final regulations clarify that uniformity applies on the basis of employees with the same number of years of service, permitting a plan formula to vary the rate of disparity for employees with different years of service without violating uniformity. The proposed regulations also provided that a plan could adjust the rate of disparity for employees with different social security retirement ages without violating uniformity. The final regulations clarify that those adjustments must be made by increasing the base benefit percentage or reducing the offset percentage.

 Commentators asked that the uniformity rules be revised to allow an offset plan to provide the same gross benefit for an employee's years of service up to 35, but to stop applying an offset after 25 years of service. Such a benefit design violates the 133 1/3% accrual rule under section 411(b)(1)(B) and thus must be accrued fractionally. However, under the proposed regulations, fractional accrual of such a benefit would violate uniformity because the rate of disparity varies for employees with the same service. Thus, the final regulations deem such a plan design to be uniform. In order to provide parity, the deemed uniformity rule allows a similar plan design in a defined benefit excess plan. The deemed uniformity rules also allow a defined benefit plan, like a defined contribution plan, to adjust the disparity provided for an employee who has reached the cumulative disparity limit.

b. REDUCTIONS IN THE PERMITTED DISPARITY

Commentators suggested changes to the adjustments required in the rate of disparity if a plan uses an integration or offset level other than covered compensation or if benefits commence at an age other than social security retirement age or in a form other than a straight life annuity. A number of those suggestions are reflected in final regulations.

 Commentators asked that final regulations under section 401(a)(4) provide a safe harbor for "PIA offset plans." Under a PIA offset plan, benefits are offset by a portion of the employee's primary insurance amount ("PIA") under the Social Security Act. Be the final section 401(a)(4) regulations do not include an explicit safe harbor for PIA offset plans, the final regulations under section 401(l) have been modified to allow certain reductions in the maximum permitted disparity to be determined on an individual basis, as described in more detail below. This change will enable plans to meet section 401(l), while providing benefit levels generally comparable to those under a PIA offset formula. This, in turn, will allow the plans access to the safe harbors provided under the final section 401(a)(4) regulations.

 Under the proposed section 401(l) regulations, the 0.75 percent maximum offset allowance prescribed in section 401(l)(4)(B) was required to be reduced equally for all employees if any employee's offset was based on final average compensation including amounts above covered compensation. The amount of the reduction was determined by comparing the highest amount of final average compensation that could be used in the calculation of the permitted disparity to the covered compensation of an employee currently at the social security retirement age, using a table in the regulations.

 The reduction in the maximum offset allowance implemented section 401(l)(4)(C)(i)(II), which requires reductions in the maximum permitted disparity for any participant in an offset plan with final average compensation in excess of covered compensation. Commentators noted, however, that the approach taken in the proposed regulations reduced the permitted disparity factors for all employees, including those with final average compensation that did not exceed covered compensation. They suggested that the reduction was therefore inconsistent with section 401(l)(4)(C)(ii), which provides that the reduction for participants whose compensation exceeds covered compensation is to be based on the replacement ratio, or percentage of compensation replaced by the employer-derived portion of primary insurance amounts under the Social Security Act.

 Two changes were suggested in the method for determining the reduced maximum offset allowance, which have been adopted in the final regulations. First, the reduction may be determined on an individual-by-individual basis by comparing each employee's final average compensation to the employee's covered compensation. Thus, the reduction will be made only with respect to employees with final average compensation in excess of covered compensation. Second, the reduction may be made by interpolating the adjustments in the table in the regulations. To retain parity, these changes also apply to defined benefit excess plans.

 The use of individual disparity reductions under the final regulations will allow plans to define an offset that generally parallels replacement ratios for employer-provided social security benefits for each employee whose final average compensation exceeds covered compensation. At the same time, there will be no reduction in the permitted disparity for employees whose final average compensation does not exceed covered compensation. Plans designed in this manner should be able to approximate the replacement ratios for a PIA offset plan within the structure of section 401(l) and should therefore be able to use the existing safe harbors under the final section 401(a)(4) regulations.

 Section 401(l) also requires the rate of permitted disparity to be reduced if benefits commence before an employee's social security retirement age. This is because social security benefits before social security retirement age are paid at a reduced rate. Under the regulations, the disparity reduction is based on the age at which benefits commence, using tables under section 1.401(l)-3(e). Many commentators requested that the regulations be revised to take into account social security supplements. They noted a common distribution option that (1) provides an employee with a temporary supplement at early retirement, thus "filling in" the disparity in an employee's benefit until the employee begins collecting social security benefits, and (2) applies the permitted disparity rate applicable at the age the supplement ends, rather than the lower rate applicable at the age benefits originally commenced. That plan design allows an employee to delay commencement of social security benefits until social security retirement age (thus avoiding a reduction in social security benefits) and, in combination with social security benefits, provides an employee with a level stream of retirement income. The final section 401(l) regulations have been modified to allow such a plan design, provided the supplement is a "qualified social security supplement" as defined in section 1.401(a)(4)-12, by treating benefits as commencing at the age the supplement ends.

 Because the maximum permitted disparity of 0.75 percent applies at social security retirement age, the disparity provided at normal retirement age of 65 must be reduced to 0.70 percent or 0.65 percent for employees with social security retirement ages of 66 or 67 respectively. For simplicity, some plans use a disparity rate of 0.65 percent for all employees at age 65, thus providing less than the maximum disparity for some employees. Commentators asked that such a plan be permitted to apply the early retirement reduction factors under section 401(l) on the basis of 0.65 percent without regard to the employees' different social security retirement ages. Accordingly, the final regulations provide a simplified table of early retirement factors for those plans.

 Commentators also requested that a plan be permitted to provide an increased rate of disparity for an employee who continues working beyond social security retirement age to parallel increases under the Social Security Act if benefit commencement is delayed beyond social security retirement age. Final regulations allow a plan to increase the rate of disparity to reflect benefit commencement after social security retirement age. Increased disparity rates are included in the tables under section 1.401(l)-3(e) and are based on the increases under the Social Security Act.

 Generally, section 401(l) requires the rate of disparity to be reduced if benefits are paid in a form more valuable than a straight life annuity. Commentators asked that a plan be permitted to provide cost-of-living increases after retirement without having to reduce the disparity provided in the benefit commencing at retirement. In response to these comments, the final regulations allow the permitted disparity limit to be applied at retirement without regard to automatic post-retirement cost-of-living increases that do not exceed the rate of increase in social security benefits for the period since retirement. Similarly, the final section 401(a)(4) regulations also contain a special safe harbor for ad hoc post-retirement cost-of- living increases under section 1.401(a)(4)-10.

4. RAILROAD PLANS

 Section 401(l) authorizes special permitted disparity rules for plans maintained by railroad employers to reflect differences between the social security and railroad retirement systems. The proposed regulations therefore provided special rules for railroad plans. Commentators asked that the final regulations provide (1) a special definition of "covered compensation" for railroad plans and (2) special rules for disparity reductions if a plan uses an integration level other than covered compensation or if benefits commence at an age other than social security retirement age.

 Consistent with those requests, the final regulations in section 1.401(l)-4 defined "railroad covered compensation" based on the compensation taken into account to determine benefits under the RRTA and allow disparity reductions based on a comparison of the integration level to railroad covered compensation. In addition, the final regulations provide special tables of reduced disparity factors applicable to early retirement benefits under a railroad plan.

5. OVERALL PERMITTED DISPARITY

 Because social security benefits are based on an employee's earnings for 35 years, section 401(l) limits the disparity that may be provided for an employee's total years of service to 35 times the annual permitted disparity. Section 401(l) also requires the publication of regulations preventing the multiple use of permitted disparity if an employee participates in more than one plan maintained by the employer. The proposed section 401(l) regulations therefore contained a cumulative limit on the disparity provided for an employee's total years of service and contained basis overall permitted disparity rules for an employee in more than one plan.

 Since publication of the proposed regulations, questions from practitioners indicated that further guidance was needed. Accordingly, section 1.401(l)-5 of the final regulations provides greater detail concerning the overall permitted disparity limits. Those rules deal with the disparity that may be provided if an employee benefits under more than one plan for the plan year(the "annual overall permitted disparity limit") and the disparity that may be provided for an employee's total years of service under all plans (the "cumulative overall permitted disparity limit"). The overall permitted disparity rules take into account plans that satisfy section 401(l) and plans that impute permitted disparity under section 1.401(a)(4)-7.

 The annual overall permitted disparity limit requires the determination of a fraction based on the disparity provided an employee for the plan year under each plan. The annum overall permitted disparity limit is met if the sum of those fractions does not exceed one. The cumulative overall permitted disparity limit provides generally that the total of an employee's annual disparity fractions for all years cannot exceed 35. A special rule deems the cumulative overall permitted disparity limit to be met if an employee has not benefited under a defined benefit plan for any plan year beginning after December 31, 1991. Special rules are also provided for plans that contain multiple formulas and plans under which benefits or allocations are offset by benefits or allocations under another plan.

6. FINAL PAY PLANS UNDER SECTION 40l(a)(5)(D)

 Section 401(a)(5)(D) provides special rules for plans that limit an employee's benefit to the total of the employee's final pay and the employee's employer-provided primary insurance amount ("PIA"). The proposed section 401(a)(5)(D) regulations required that the employee's employer-provided PIA be reduced in accordance with section 1.401(l)-3(e) if benefits commence before an employee's social security retirement age. Commentators requested guidance on how the reductions in section 1.401(l)-3(e) are applied. Thus, the final regulations under section 1.401(a)(5)-1(e) provide that the reduction is made by multiplying the employee's employer-provided PIA by the ratio of the factor under section 1.401(l)-3(e) to 0.75.

7. PLANS MAINTAINED BY MORE THAN ONE EMPLOYER

 Multiple employer plans must satisfy section 401(l) on an employer-by-employer basis rather than on the basis of participating employers in the aggregate. Any non-collectively bargained portion of a multiemployer plan is tested as a multiple employer plan. The consequences of failure to satisfy section 401(l) with respect to any component of this testing process may affect the plan for all participating employers. The final regulations, like the proposed regulations, do not provide an exception to this rule. However, where a multiemployer plan or a multiple employer plan fails to satisfy section 401(l), in a proper case, the Commissioner could treat the plan as satisfying section 401(l) for innocent employers by requiring corrective and remedial action with respect to the plan, such as allowing the withdrawal of an offending employer, allowing a disqualifying defect to be cured within a reasonable period of time after the plan administrator has or should have knowledge of the disqualifying event or was otherwise notified by the Service of the disqualifying defects, or requiring plan amendments to prevent future disqualifying events.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C chapter 6) do not apply to these regulations and, therefore, a final Regulatory Flexibility analysis is not required. Pursuant to section 7805(f) of the Code, the proposed regulations published after November 20, 1988, were submitted to the Administrator of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

The principal author of these regulations is Patricia McDermott of the Office of the Assistant Chief Counsel (Employee Benefits and Exempt Organizations), Internal Revenue Service. However, personnel from other offices of the Treasury and the Service participated in their development.

LIST OF SUBJECTS IN 26 CFR 1.401-0 THROUGH 1.419A-2T

Bonds, Employee benefit plans, Income taxes, Pensions, Reporting and recordkeeping requirements, Securities, Trusts and Trustees.

Treasury Decision 8359

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority for part 1 is amended by adding the following citations:

Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805 * * * section 1.401(a)(5)-1 also issued under 26 U.S.C. 401(a)(5); sections 1.401(l)-0 through 1.401(l)-6 also issued under 26 U.S.C. 401(l).

Par. 2. Section 1.401-3 is amended by adding a new paragraph(e)(6) to read as follows:

SECTION 1.401-3. REQUIREMENTS AS TO COVERAGE.

* * *

(e) * * *

(6) This paragraph (e) does not apply to plan years beginning on or after January 1, 1989.

Par. 3. A new section 1.401(a)(5)-1 is added to read as follows:

SECTION 1.401(a)(5)-1. SPECIAL RULES RELATING TO NONDISCRIMINATION REQUIREMENTS.

(a) IN GENERAL. Section 401(a)(5) sets out certain provisions that will not of themselves be discriminatory within the meaning of section 410(b)(2)(A)(i) or section 401(a)(4). The exceptions specified in section 401(a)(5) are not an exclusive enumeration, but are merely a recital of provisions frequently encountered that will not of themselves constitute prohibited discrimination in contributions or benefits. See section 401(a)(4) and the regulations thereunder for the basic nondiscrimination rules. See section 1.410(b)-4 for the rule of section 410(b)(2)(A)(i)(relating to the nondiscriminatory classification test that is part of the minimum coverage requirements) referred to in section 401(a)(5)(A). See paragraphs (b) through (f) of this section for special rules used in applying the section 401(a)(4) nondiscrimination requirements under the remaining provisions of section 401(a)(5).

(b) SALARIED OR CLERICAL EMPLOYEES. A plan does not fail to satisfy the nondiscrimination requirements of section 401(a)(4) merely because contributions or benefits provided under the plan are limited to salaried or clerical employees.

(c) UNIFORM RELATIONSHIP TO COMPENSATION. A plan does not fail to satisfy the nondiscrimination requirements of section 401(a)(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 those employees.

(d) CERTAIN DISPARITY PERMITTED. (1) Under section 401(a)(5)(C), a plan does not discriminate in favor of highly compensated employees (as defined in section 414(q)), within the meaning of section 401(a)(4), in the amount of employer-provided contributions or benefits solely because --

(i) In the case of a defined contribution plan, employer contributions allocated to the accounts of employees favor highly compensated employees in a manner permitted by section 401(l) (relating to permitted disparity in plan contributions and benefits), and

(ii) In the case of a defined benefit plan, employer-provided benefits favor highly compensated employees in a manner permitted by section 401(l) (relating to permitted disparity in plan contributions and benefits).

See sections 1.401(l)-1 through 1.401(l)-6 for rules under which a plan may satisfy section 401(l) for purposes of the safe harbors of sections 1.401(a)(4)-2(b)(3) and 1.401(a)(4)-3(b).

(e) DEFINED BENEFIT PLANS INTEGRATED WITH SOCIAL SECURITY -- (1) IN GENERAl. Under section 401(a)(5)(D), a defined benefit plan does not discriminate in favor of highly compensated employees(as defined in section 414(q)) with respect to the amount of employer-provided contributions or benefits solely because the plan provides that, with respect to each employee, the employer-provided accrued retirement benefit under the plan is limited to the excess (if any) of--

(i) The employee's final pay from the employer, over

(ii) The employer-provided retirement benefit created under the Social Security Act and attributable to service by the employee for the employer.

(2) FINAL PAY. For purposes of paragraph (e)(1)(i) of this section, an employee's final pay from the employer as of a plan year is the employee's compensation(as defined in section 414(q)(7)) for the year(ending with or within the 5-plan-year period ending with the plan year in which the employee terminates from employment with the employer) in which the employee receives the highest compensation from the employer. Notwithstanding the preceding sentence, final pay for each employee under the plan may be determined with reference to the 5-plan-year period ending with the plan year before the plan year in which the employee terminates from employment with the employer. In determining an employee's final pay, the plan may specify any 12-month period(ending with or within the applicable 5-plan-year period) as a year provided the specified 12-month period is uniformly and consistently applied with respect to all employees. In determining an employee's final pay, compensation for any year in excess of the applicable limit under section 401(a)(17) for the year may not be taken into account.

(3) RULES FOR DETERMINING AMOUNT OF EMPLOYER-PROVIDED SOCIAL SECURITY RETIREMENT BENEFIT. For purposes of paragraph (e)(1)(ii) of this section, the following rules apply.

(i) The employer-provided retirement benefit on which any reduction or offset in the employee's accrued retirement benefit is based is limited solely to the employer-provided primary insurance amount payable under section 215 of the Social Security Act attributable to service by the employee for the employer.

(ii) The employer-provided primary insurance amount attributable to service by the employee for the employer is determined by multiplying the employer-provided portion of the employee's projected primary insurance amount by a fraction (not exceeding 1), the numerator of which is the employee's number of complete years of covered service for the employer under the Social Security Act, and the denominator of which is 35.

(4) PROJECTED PRIMARY INSURANCE AMOUNT. (i) As of a plan year, an employee's projected primary insurance amount is the primary insurance amount; determined as of the close of the plan year (the determination date"), payable to the employee upon attainment of the employee's social security retirement age (as determined under section 415(b)(8)), assuming the employee's annual compensation from the employer that is treated as wages for purposes of the Social Security Act remains the same from the plan year until the employee's attainment of social security retirement age. With respect to service by the employee for the employer before the determination date, the actual compensation paid to the employee by the employer during all periods of service of the employee for the employer covered by the Social Security Act must be used in determining an employee's projected primary insurance amount. With respect to years before the employee's commencement of service for the employer, in determining the employee's projected primary insurance amount, it may be assumed that the employee received compensation in an amount computed by using a six-percent salary scale projected backwards from the determination date to the employee's 21st birthday. However, if the employee provides the employer with satisfactory evidence of the employee's actual past compensation for the prior years treated as wages under the Social Security Act at the time the compensation was earned and the actual past compensation results in a smaller projected primary insurance amount, the plan must use the actual past compensation. The plan administrator must give clear written notice to each employee of the employee's right to supply actual compensation history and of the financial consequences of failing to supply the history. The notice must be given each time the summary plan description is provided to the employee and must also be given upon the employee's separation from service. The notice must also state that the employee can obtain the actual compensation history from the Social Security Administration. In determining the employee's projected primary insurance amount, the employer may not take into account any compensation from any other employer while the employee is employed by the employer.

(ii) As of a plan year, the employer-provided portion of the employee's projected primary insurance amount under the Social Securit Act is 50 percent of the employee's projected primary insurance amount (as determined under paragraph (e)(4)(i) of this section).

(5) EMPLOYER-PROVIDED ACCRUED RETIREMENT BENEFIT. For purposes of this section, the employee's employer-provided accrued retirement benefit as of a plan year is the employee's accrued retirement benefit under the plan (determined on an actual basis and not on a projected basis) attributable to employer contributions under the plan. With respect to plans that provide for employee contributions, see section 411(c) for rules relating to the allocation of accrued benefits between employer contributions and employee contributions.

(6) ADDITIONAL RULES. (i) As of a plan year, paragraph (e)(1) of this section does not apply to the extent that its application would result in a decrease in an employee's accrued benefit. See sections 411(b)(1)(G) and 411(d)(6).

(ii) Section 401(a)(5)(D) and this paragraph (e) do not apply to a plan maintained by an employer, determined for purposes of the Federal Insurance Contributions Act or the Railroad Retirement Tax Act, as applicable, that does not pay any wages within the meaning of section 3121(a) or compensation within the meaning of section 3231(e). For this purpose, a plan maintained for a self-employed individual within the meaning of section 401(c)(1), who is also subject to the tax under section 1401, is deemed to be a plan maintained by an employer that pays wages within the meaning of section 3121(a).

(iii) If a plan provides for the payment of an employee's accrued retirement benefit (whether or not subsidized) commencing before an employee's social security retirement age, the projected employer-provided primary insurance amount attributable to service by the employee for the employer (as determined under paragraphs (e)(3) and (e)(4) of this section) that may be applied as an offset to limit the employee's accrued retirement benefit must be reduced in accordance with section 1.401(l)-3(e)(1). The reduction is made by multiplying the employee's projected employer-provided primary insurance amount by a fraction, the numerator of which is the appropriate factor under section 1.401(l)-3(e)(1), and the denominator of which is 0.75 percent.

(iv) The Commissioner may, in revenue rulings, notices or other documents of general applicability, prescribe additional rules that may be necessary or appropriate to carry out the purposes of this section, including rules relating to the determination of an employee's projected primary insurance amount attributable to the employee's service for former employers and rules applying section 401(a)(5)(D) with respect to an employer that pays wages within the meaning of section 3121(a) or compensation within the meaning of section 3231(e) for some years and not for other years.

(7) EFFECTIVE DATE. This paragraph (e) is effective for plan years beginning after December 31, 1988.

(8) EXAMPLES. The following examples illustrate this paragraph (e).

EXAMPLE 1. Employer Z maintains a noncontributory defined benefit plan that uses the calendar year as its plan year. The plan provides a normal retirement benefit, commencing at age 65, equal to $500 a year, multiplied by the employee's years of service for Z, limited to the excess of the amount of the employee's final pay from Z (as determined in accordance with paragraph (e)(2) of this section) over the employee's employer- provided primary insurance amount attributable to the employee's service for Z. If an employee's social security retirement age is greater than 65, the plan provides for reduction of the employee's employer-provide primary insurance amount in accordance with paragraph (e)(6)(iii) of this section. The plan provides no limitation on the number of years of service taken into account in determining benefits under the plan. Employee A retires on July 6, 1995, at A's social security retirement age of 65 with 35 years of service for Z. The plan uses the plan year as the 12 month period for determining an employee's year of final highest pay from the employer. A's compensation for A's final 5 plan years is as follows:

 1995 plan year - $10,500

EXAMPLE 2. Assume the same facts as in EXAMPLE 1, except that A has 32 years of service and service for Z when A reiires at A's social security retirement age. Under the plan's benefit formula (disregarding the final pay limitation), A would be entitled to receive an annual normal retirement benefit of $16,000 ($500 x 32 years). However, the plan provides that A's normal retirement benefit of $16,000 will be limited to $15,500 ($20,000 (the amount of A's final pay from Z) less $4,500 (1/2 of A's primary insurance amount under the Social Security Act)). The final pay limitation does not satisfy this paragraph (e). The portion of A's employer-provided primary insurance amount under the Social Security Act attributable to A's service for Z is 32/35 x $4,500, or $4,114. Therefore, to satisfy this paragraph (e), the final pay provision in Z's plan may not limit A's otherwise determined normal retirement benefit of $16,000 to less than $15,886 ($20,000 (the amount of X's final pay) - $4,114 (the portion of A's employer-provided primary insurance amount attributable to A's service for Z)).

EXAMPLE (3). (a) Employer X maintains a noncontributory defined benefit plan that uses the calendar year as its plan year. The formula for determining benefits under the plan provides a normal retirement benefit at age 65 equal to 90 percent of an employee's final average compensation, with the benefit reduced by 1/30th for each year of the emplovee's service less than 30 and limited to the employee's final pay (as determined in accordance with paragraph (e)(2) of this section) less the employee's employer-provided primary insurance amount under social security attributable to the employee's service for X. The plan determines an employee's employer-provided projected primary insurance amount under social security attributable to the employee's service for X in accordance with paragraph (e)(3) of this section and applies the reductions applicable under paragraph (e)(6)(iii) of this section if benefits commence before social security retirement age. The plan determines an employee's accrued benefit under the fractional accrual method of section 411(b)(1)(C).

(b) Employee A commences participation in the plan on January 1, 1990, when A is 35 years of age. A's social security retirement age is age 67. As of the close of the 2014 plan year, A's final average compensation from X is $15,000; A's final pay from X is $15,400, and A's projected employer-provided annual primary insurance amount under social security attributable to A's service for X is $4,000 (after the reduction applicable under paragraph (e)(6)(iii) of this section). Under the plan formula, A's accrued benefit as of the close of the 2014 plan year is $11,250 (90 percent x $15,000 x 25/30). As of the close of the 2014 plan year, the plan's final pay limitation does not affect A's benefit because A's accrued benefit under the plan as of the close of the plan year ($11,250) does not exceed A's final pay of $15,400 from X, determined as of the close of the plan year, less A's employer-provided projected primary insurance amount under social security attributable to A's service for X ($4,000).

(c) Assume that, as of the close of the 2015 plan year, A's final average compensation from X is $14,500 and A's final pay from X is $15,400. Assume also that as of the close of the 2015 plan year, A's employer-provided primary insurance amount attributable to A's service for X is $4,200 (after the reduction applicable under paragraph (e)(6)(iii) of this section). Accordingly, A's accrued benefit as of the close of the 2015 plan year is $11,310 (90 percent x $14,500 x 26/30). Under the plan's final pay limitation, A's accrued benefit of $11,310 would be limited to $11,200, the amount of A's final pay from X ($15,400), less A's employer-provided projected primary insurance amount under social security attributable to A's service for X ($4,200). However, the plan's final pay limitation may not be applied to limit A's accrued benefit for the 2015 plan year to an amount below $11,250, which was A's accrued benefit under the plan at the close of the prior plan year. The foregoing is further illustrated in the following table for the plan years presented above and for additional years of service performed by A for X.

 1      2         3          4           5         6         7

(g) MORE THAN ONE PLAN TREATED AS SINGLE PLAN. [Reserved]

Par. 4. There is added the following new sections 1.401(l)-0 through 1.401(l)-6 after section 1.401(k)-1 to read as follows:

SECTION 1.401(l)-0 TABLE OF CONTENTS.

This section contains a listing of the headings of sections 1.401(l)-1 through 1.401(l)-6.

SECTION 1.401(l)-1 PERMITTED DISPARITY WITH RESPECT TO EMPLOYER- PROVIDED CONTRIBUTIONS OR BENEFITS.

(a) Permitted disparity. (1) In general. (2) Overview. (3) Exclusive rules. (4) Exceptions. (5) Additional rules. (b) Relationship to other requirements. (1) In general. (2) Determination of accrued benefit to avoid reduction. (c) Definitions. (1) Accumulation plan. (2) Average annual compensation. (3) Base benefit percentage. (4) Base contribution percentage. (5) Benefit formula. (6) Benefits, rights, and features. (7) Covered compensation. (i) In general. (ii) Special rules. (A) Rounded table. (B) Proposed regulation definition. (iii) Period for using covered compensation amount. (8) Defined benefit plan. (9) Defined contribution plan. (10) Disparity. (11) Employee. (12) Employer. (13) Employer contributions. (14) Excess benefit percentage. (15) Excess contribution percentage. (16) Excess plan. (i) Defined benefit excess plan. (ii) Defined contribution excess plan. (17) Final average compensation. (i) In general. (ii) Limitations. (iii) Determination of section 414(s) compensation. (18) Gross benefit percentage. (19) Highly compensated employee. (20) Integration level. (21) Nonexcludable employee. (22) Offset level. (23) Offset percentage. (24) Offset plan. (25) Plan. (26) Plan year compensation. (27) Qualified plan. (28) Section 401(l) plan. (29) Section 414(s) compensation. (30) Social security retirement age. (31) Straight life annuity. (32) Taxable wage base. (33) Year of service.

SECTION 1.401(l)-2 PERMITTED DISPARITY FOR DEFINED CONTRIBUTION PLANS.

(a) Requirements. (1) In general. (2) Excess plan requirement. (3) Maximum disparity. (4) Uniform disparity. (5) Integration level. (b) Maximum permitted disparity. (1) In general. (2) Maximum excess allowance. (c) Uniform disparity. (1) In general. (2) Deemed uniformity. (i) In general. (ii) Overall permitted disparity. (iii) Non-FICA employees. (d) Integration level. (1) In general. (2) Taxable wage base. (3) Single dollar amount. (4) Intermediate amount. (5) Prorated integration level for short plan year. (e) Examples.

SECTION 1.401(l)-3 PERMITTED DISPARITY FOR DEFINED BENEFIT PLANS.

(a) Requirements. (1) In general. (2) Excess or offset plan requirement. (3) Maximum disparity. (4) Uniform dispanty. (5) Integration or offset level. (6) Benefits, rights, and features. (b) Maximum permitted disparity. (1) In general. (2) Maximum excess allowance. (3) Maximum offset allowance. (4) Rules of application. (i) Disparity provided for the plan year. (ii) Reductions in disparity rate. (iii) Normal and optional forms of benefit. (A) In general. (B) Level annuity forms. (C) Other forms. (D) Post-retirement cost-of-living adjustments. (1) In general. (2) Requirements. (E) Section 417(e) exception. (5) Examples. (c) Uniformity disparity. (1) In general. (2) Deemed uniformity. (i) In general. (ii) Use of fractional accrual and disparity for 35 years. (iii) Use of fractional accrual and disparity for fewer than 35 years. (iv) Different social security retirement ages. (v) Reduction for integration level. (vi) Overall permitted disparity. (vii) Non-FICA employees. (viii) Average annual compensation adjustment for offset plan. (3) Examples. (d) Requirements for integration level or offset compensation. (1) In general. (2) Covered compensation. (3) Uniform percentage of covered compensation. (4) Single dollar amount. (5) Intermediate amount. (6) Intermediate amount safe harbor. (7) Prorated integration level for short plan year. (8) Demographic requirements. (i) In general. (ii) Attained age requirement. (iii) Nondiscrimination requirement. (A) Minimum percentage test. (B) Ratio test. (C) High dollar amount test. (9) Reduction in the 3/4 of 1 percent factor if integration or offset level exceeds covered compensation. (i) In general. (ii) Uniform percentage of covered compensation. (iii) Single dollar amount. (A) Plan-wide reduction. (B) Individual reductions. (iv) Reductions. (A) Table. (B) Interpolation. (10) Examples. (c) Adjustments to the 0.75-percent factor for benefits commencing at ages other than social security retirement age. (1) In general. (2) Adjustments. (i) Benefits commencing on or after age 55 and before social security retirement age. (ii) Benefits commencing after social security retirement age on or before age 70. (iii) Benefits commencing before age 55. (iv) Benefits commencing after age 70. (3) Tables. (4) Exception for certain disability benefits. (5) Benefit commencement date. (i) In general. (ii) Qualified social security supplement. (6) Examples. (f) Benefits, rights, and features. (1) Defined benefit excess plan. (2) Offset plan. (3) Examples. (g) No reductions in 0.75-percent factor for death benefits. (h) Benefits attributable to employee contributions not taken into account. (i) Multiple integration levels. [Reserved] (j) Additional rules.

SECTION 1.401(l)-4 SPECIAL RULES FOR RAILROAD PLANS.

(a) In general. (b) Defined contribution plans. (1) In general. (2) Single integration level method. (i) In general. (ii) Definitions. (3) Two integration level method. (i) In general. (ii) Total disparity requirement. (iii) Intermediate disparity requirement. (iv) Definition. (c) Defined benefit excess plans. (1) In general. (2) Single integration level method. (i) In general. (ii) Definitions. (3) Two integration level method. (i) In general. (ii) Employee with lower covered compensation. (iii) Employee with lower railroad retirement covered compensation. (iv) Definitions. (d) Offset plans. (1) In general. (2) Maximum tier 2 and supplementary annuity offset allowance. (e) Additional rules. (1) Definitions. (2) Adjustments to 0.75-percent factor. (3) Adjustments to 0.56-percent factor. (4) Overall permitted disparity.

SECTION 1.401(l)-5 OVERALL PERMITTED DISPARITY LIMITS.

(a) Introduction. (1) In general. (2) Plan requirements. (3) Plans taken into account. (b) Annual overall permitted disparity limit. (1) In general. (2) Total annual disparity fraction. (3) Annual defined contribution plan disparity fraction. (4) Annual defined benefit excess plan disparity fraction. (5) Annual offset plan disparity fraction. (6) Annual imputed disparity fraction. (7) Annual nondisparate fraction. (8) Determination of fraction. (i) General rule. (ii) Multiple formulas. (iii) Offset arrangements. (A) In general. (B) Defined benefit plans. (C) Defined contribution plans. (iv) Applicable percentages. (9) Examples. (c) Cumulative permitted disparity limit. (1) In general. (i) Employees who benefit under defined benefit plans. (ii) Employees who do not benefit under defined benefit plans. (iii) Certain plan years disregarded. (iv) Determination of type of plan. (2) Cumulative disparity fraction. (3) Determination of total annual disparity fractions for prior years. (i) Pre-effective date years. (ii) Option for any prior year. (4) Examples. (d) Additional rules.

SECTION 1.401(l)-6 EFFECTIVE DATES AND TRANSITION RULES.

(a) In general. (b) Defined contribution plans. (c) Defined benefit plans. (d) Collectively bargained plans.

SECTION 1.401(l)-1 PERMITTED DISPARITY IN EMPLOYER-PROVIDED CONTRIBUTIONS OR BENEFITS.

(a) PERMITTED DISPARITY -- (1) IN GENERAL. Section 401(a)(4) provides that a plan is a qualified plan only if the amount of contributions or benefits provided under the plan does not discriminate in favor of highly compensated employees. See section 1.401(a)(4)-1(b)(2). Section 401(a)(5)(C) provides that a plan does not discriminate in favor of highly compensated employees merely because of disparities in employer-provided contributions or benefits provided to, or on behalf of, employees under the plan that are permitted under section 401(l). Thus, if a plan satisfies section 401(l), permitted disparities in employer-provided contributions or benefits under a plan are disregarded, by reason of section 401(a)(5)(C), in determining whether the plan satisfies any of the safe harbors under sections 1.401(a)(4)-2(b)(3) and 1.401(a)(4)-3(b). However, even if disparities in employer-provided contributions or benefits under a plan are permitted under section 401(l) and thus do not cause the plan to fail to satisfy section 1.401(a)(4)-1(b)(2), the plan may still fail to satisfy section 401(a)(4) for other reasons. Similarly, even if disparities in employer-provided contributions or benefits under a plan are not permitted under section 401(l) and thus may not be disregarded under section 401(a)(4) by reason of section 401(l), the plan may still be found to be nondiscriminatory under the tests of section 401(a)(4), including the rules for imputing permitted disparity under section 1.401(a)(4)- 7.

(2) OVERVIEW. Rules relating to disparities in employer-provided contributions under a defined contribution plan are provided in section 1.401(l)-2. For rules relating to disparities in employer- provided benefits under a defined benefit plan, see section 1.401(l)- 3. For rules relating to the application of section 401(l) to a plan maintained by a railroad employer, see section 1.401(l)-4. For rules relating to the overall permitted disparity limits, see section 1.401(l)-5. For rules relating to the effective date of section 401(l), see section 1.401(l)-6.

(3) EXCLUSIVE RULES. The rules provided in sections 1.401(l)-1 through 1.401(l)-6 are the exclusive means for a plan to satisfy sections 401(l) and 401(a)(5)(C). Accordingly, a plan that provides disparities in employer-provided contributions or benefits that are not permitted under sections 1.401(l)-1 through 1.401(l)-6 does not satisfy section 401(l) or 401(a)(5)(C). For example, a defined benefit plan that reduces an employee's employer-provided benefit by an offset based on the employee's benefits under the Social Security Act does not satisfy section 401(l) and may not rely on section 401(l) to satisfy section 401(a)(4).

(4) EXCEPTIONS. Sections 401(a)(5)(C) and 401(l) are not available in the following arrangements --

(i) A plan maintained by an employer, determined for purposes of the Federal Insurance Contributions Act or the Railroad Retirement Tax Act, as applicable, that does not pay any wages within the meaning of section 3121(a) or compensation within the meaning of section 3231(e). For this purpose, a plan maintained for a self- employed individual within the meaning of section 401(c)(1), who is also subject to the tax under section 1401, is deemed to be a plan maintained by an employer that pays wages within the meaning of section 3121(a).

(ii) A plan, or the portion of a plan, that is an employee stock ownership plan described in section 4975(e)(7) (an ESOP) or a tax credit employee stock ownership plan described in section 409(a) (a TRASOP), except as provided in section 54.4975-11(a)(7)(ii) of this chapter, which contains a limited exception to this rule for certain ESOPs in existence on November 1, 1977.

(iii) With respect to elective contributions as defined in section 1.401(k)-1(g)(3) under a qualified cash or deferred arrangement as defined in section 1.401(k)-1(a)(4)(i) or with respect to employee or matching contributions defined in section 1.401(m)- 1(f)(6) or (f)(12), respectively.

(iv) With respect to contributions to a simplified employee pension made under a salary reduction arrangement described in section 408(k)(6) (SARSEP).

(5) ADDITIONAL RULES. The Commissioner may, in revenue rulings, notices, or other documents of general applicability, prescribe additional rules that may be necessary or appropriate to carry out the purposes of section 401(l), including rules applying section 401(l) with respect to an employer that pays wages within the meaning of section 3121(a) or compensation within the meaning of section 3231(e) for some years and not other years.

(b) RELATIONSHIP TO OTHER REQUIREMENTS -- (1) IN GENERAL. Unless explicitly provided otherwise, section 401(l) does not provide an exception to any other requirement under section 401(a). Thus, for example, even if the plan complies with section 401(l), the plan may not adjust benefits in any manner that results either in a decrease in any employee's accrued benefit in violation of section 411(d)(6) and section 411(b)(1)(G) or in a benefit lower than the minimum benefit required under section 416. Similarly, see section 401(a)(15) for additional rules relating to circumstances under which plan benefits may not be decreased because of increases in social security benefits. A plan does not fall to satisfy section 401(l) merely because, in order to comply with section 411, an employee's accrued benefit under the plan is not reduced, even though a strict application of the plan's benefit formula and accrual method would otherwise result in a reduced benefit.

(2) DETERMINATION OF ACCRUED BENEFIT TO AVOID REDUCTION. If a strict application of the plan's benefit formula and accrual method would otherwise result in a benefit lower than the employee's accrued benefit (for example, as a result of an increase in covered compensation), the employee's accrued benefit for later years must be determined under the formula contained in section 1.401(a)(4)- 13(c)(3) (formula with wear-away). In applying that formula, the plan must use the last day of the plan year immediately before the potential reduction in accrued benefit as the fresh-start date and the plan's benefit formula as the formula applicable to benefit accruals in the current plan year.

(c) DEFINITIONS. In applying sections 1.401(l)-1 through 1.401(l)-6, the definitions in this paragraph (c) govern unless otherwise provided.

(1) ACCUMULATION PLAN. "Accumulation plan" means an accumulation plan within the meaning of section 1.401(a)(4)-12.

(2) AVERAGE ANNUAL COMPENSATION. "Average annual compensation "means average annual compensation within the meaning of section 1.401(a)(4)-3(e)(2), taking into account the special optional rules under section 1.401(a)(4)-3(b)(8)(x).

(3) BASE BENEFIT PERCENTAGE. "Base benefit percentage" means the rate at which employer-provided benefits are determined under a defined benefit excess plan with respect to an employee's average annual compensation at or below the integration level (expressed as a percentage of such average annual compensation).

(4) BASE CONTRIBUTION PERCENTAGE. "Base contribution percentage" means the rate at which employer contributions are allocated to the account of an employee under a defined contribution excess plan with respect to the employee's plan year compensation at or below the integration level (expressed as a percentage of such plan year compensation).

(5) BENEFIT FORMULA. "Benefit formula" means benefit formula within the meaning of section 1.401(a)(4)-12.

(6) BENEFITS, RIGHTS, AND FEATURES. "Benefits, rights, and features" means benefits, rights, and features within the meaning of section 1.401(a)(4)-12.

(7) COVERED COMPENSATION -- (i) IN GENERAL. "Covered compensation" for an employee means the average (without indexing) of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the employee attains (or will attain) social security retirement age. A 35-year period is used for all individuals regardless of the year of birth of the individual. In determining an employee's covered compensation for a plan year, the taxable wage base for all calendar years beginning after the first day of the plan year is assumed to be the same as the table wage base in effect as of the beginning of the plan year. An employee's covered compensation for a plan year beginning after the 35-year period applicable under this paragraph (c)(7)(i) is the employee's covered compensation for the plan year during which the 35-year period ends. An employee's covered compensation for a plan year beginning before the 35-year period applicable under this paragraph (c)(7)(i) is the taxable wage base in effect as of the beginning of the plan year.

(ii) SPECIAL RULES -- (A) ROUNDED TABLE. For purposes of determining the amount of an employee's covered compensation under paragraph (c)(7)(i) of this section, a plan may use tables, provided by the Commissioner, that are developed by rounding the actual amounts of covered compensation for different years of birth.

(B) PROPOSED REGULATION DEFINITION. For plan years beginning before January 1, 1995, in lieu of the definition of covered compensation contained in paragraph (c)(7)(i) of this section, a plan may define covered compensation as the average (without indexing) of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year preceding the calendar year in which the employee attains (or will attain) social security retirement age.

(iii) PERIOD FOR USING COVERED COMPENSATION AMOUNT. A plan must generally provide that an employee's covered compensation is automatically adjusted for each plan year. However, a plan may use an amount of covered compensation for employees equal to each employee's covered compensation (as defined in paragraph (c)(7)(i) or (c)(7)(ii) of this section) for a plan year earlier than the current plan year, provided the earlier plan year is the same for all employees and is not earlier than the later of --

(A) the plan year that begins 5 years before the current plan year, and

(B) the plan year beginning in 1989.

In the case of an accumulation plan, the benefit accrued for an employee in prior years is not affected by changes in the employee's covered compensation that occur in later years.

(8) DEFINED BENEFIT PLAN. "Defined benefit plan" means a defined benefit plan within the meaning of section 1.410(b)-9.

(9) DEFINED CONTRIBUTION PLAN. "Defined contribution plan" means a defined contribution plan within the meaning of section 1.410(b)-9.

(10) DISPARITY. "Disparity" means --

(i) In the case of a defined contribution excess plan, the amount by which the excess contribution percentage exceeds the base contribution percentage,

(ii) In the case of a defined benefit excess plan, the amount by which the excess benefit percentage exceeds the base benefit percentage, and

(iii) In the case of an offset plan, the offset percentage.

(11) EMPLOYER. "Employee" means employee within the meaning of section 1.401(a)(4)-12.

(12) EMPLOYER. "Employer" means the employer within the meaning of section 1.410(b)-9.

(13) EMPLOYER CONTRIBUTIONS. "Employer contributions" means all amounts taken into account with respect to an employee under a plan under section 1.401(a)(4)-2(c)(2)(ii).

(14) EXCESS BENEFIT PERCENTAGE. "Excess benefit percentage" means the rate at which employer-provided benefits are determined under a defined benefit excess plan with respect to an employee's average annual compensation above the integration level (expressed as a percentage of such average annual compensation).

(15) EXCESS CONTRIBUTION PERCENTAGE. "Excess contribution percentage" means the rate at which employer contributions are allocated to the account of an employee under a defined contribution excess plan with respect to the employee's plan year compensation above the integration level (expressed as a percentage of such plan year compensation).

(16) EXCESS PLAN -- (i) DEFINED BENEFIT EXCESS PLAN. "Defined benefit excess plan" means a defined benefit plan under which the rate at which employer-provided benefits are determined with respect to average annual compensation above the integration level under the plan (expressed as a percentage of such average annual compensation) is greater than the rate at which employer-provided benefits are determined with respect to average annual compensation at or below the integration level (expressed as a percentage of such average annual compensation).

(ii) DEFINED CONTRIBUTION EXCESS PLAN. "Defined contribution excess plan" means a defined contribution plan under which the rate at which employer contributions are allocated to the account of an employee with respect to plan year compensation above the integration level (expressed as a percentage of such plan year compensation) is greater than the rate at which employer contributions are allocated to the account of an employee with respect to plan year compensation at or below the integration level (expressed as a percentage of such plan year compensation).

(17) FINAL AVERAGE COMPENSATION -- (i) IN GENERAL. "Final average compensation" for an employee means the average of the employee's annual section 414(s) compensation from the employer for the 3-consecutive-year period ending with or within the plan year. The year in which an employee terminates employment may be disregarded in determining final average compensation. If, as of a plan year, an employee's entire period of employment with the employer is less than 3 consecutive years, the employee's final average compensation must be determined by averaging the annual section 414(s) compensation received by the employee from the employer during the employee's entire period of employment with the employer. The definition of final average compensation used in the plan must be applied consistently with respect to all employees. For example, if the plan provides that the year in which the employee terminates employment is disregarded in determining final average compensation, the year must be disregarded for all employees who terminate employment in that year. The plan may specify any 3- consecutive-year period ending in the plan year, provided the period is determined consistently for all employees.

(ii) LIMITATIONS. In determining an employee's final average compensation under this paragraph (c)(16), annual section 414(s) compensation for any year in excess of the taxable wage base in effect at the beginning of that year must not be taken into account. A plan may provide that each employee's final average compensation for a plan year is limited to the employee's average annual compensation for the plan year.

(iii) DETERMINATION OF SECTION 414(s) COMPENSATION. A plan must use the same definition of section 414(s) compensation to determine final average compensation as the plan uses to determine average annual compensation (or plan year compensation in the case of an accumulation plan).

(18) GROSS BENEFIT PERCENTAGE. "Gross benefit percentage" means the rate at which employer-provided benefits are determined under an offset plan (before application of the offset) with respect to an employee's average annual compensation (expressed as a percentage of average annual compensation).

(19) HIGHLY COMPENSATED EMPLOYEE. "Highly compensated employee" means a highly compensated employee within the meaning of section 1.401(a)(4)-12.

(20) INTEGRATION LEVEL. "Integration level" means the dollar amount specified in an excess plan at or below which the rate of employer-provided contributions or benefits (expressed in each case as a percentage of an employee's plan year compensation or average annual compensation up to the specified dollar amount) under the plan is less than the rate of employer-provided contributions or benefits (expressed in each case as a percentage of the employee's plan year compensation or average annual compensation above the specified dollar amount) under the plan above such dollar amount.

(21) NONEXCLUDABLE EMPLOYEE. "Nonexcludable employee" means an employee within the meaning of section 1.410(b)-9, other than an excludable employee with respect to the plan as determined under section 1.410(b)-6. A nonexcludable employee may be either a highly or nonhighly compensated nonexcludable employee, depending on the nonexcludable employee's status under section 414(q).

(22) OFFSET LEVEL. "Offset level" means the dollar limit specified in the plan on the amount of each employee's final average compensation taken into account in determining the offset under an offset plan.

(23) OFFSET PERCENTAGE. "Offset percentage" means the rate at which an employee's employer-provided benefit is reduced or offset under an offset plan (expressed as a percentage of the employee's final average compensation up to the offset level).

(24) OFFSET PLAN. "Offset plan" means a defined benefit plan that is not a defined benefit excess plan and that provides that each employee's employer-provided benefit is reduced or offset by a specified percentage of the employee's final average compensation up to the offset level under the plan.

(25) PLAN. "Plan" means a plan within the meaning of section 1.401(a)(4)-12 or a component plan treated as a plan under section 1.401(a)(4)-9(c).

(26) PLAN YEAR COMPENSATION. "Plan year compensation" means plan year compensation within the meaning of section 1.401(a)(4)-12.

(27) QUALIFIED PLAN. "Qualified plan" means a qualified plan within the meaning of section 1.401(a)(4)-12.

(28) SECTION 401(l) PLAN. "Section 401(l) plan" means a section 401(l) plan within the meaning of section 1.401(a)(4)-12.

(29) SECTION 414(s) COMPENSATION. "Section 414(s) compensation means section 414(s) compensation within the meaning of section 1.401(a)(4)-12.

(30) SOCIAL SECURITY RETIREMENT AGE. "Social security retirement age" for an employee means the social security retirement age of the employee as determined under section 415(b)(8).

(31) STRAIGHT LIFE ANNUITY. "Straight life annuity" means a straight life annuity within the meaning of section 1.401(a)(4)-12.

(32) TAXABLE WAGE BASE. "Taxable wage base" means the contribution and benefit base under section 230 of the Social Security Act (42 U.S.C. section 430).

(33) YEAR OF SERVICE. "Year of service" means a year of service as defined in the plan for purposes of the benefit formula and the accrual method under the plan, unless the context clearly indicates otherwise. An employee may be credited with no more than 1 year of service with respect to any 12-consecutive-month period, except for those cases in which additional service is required to be credited under section 410 or 411, whichever is applicable.

SECTION 1.401(l)-2 PERMITTED DISPARITY FOR DEFINED CONTRIBUTION PLANS.

(a) REQUIREMENTS -- (1) IN GENERAL. Disparity in the rates of employer contributions allocated to employees' accounts under a defined contribution plan is permitted under section 401(l) and this section for a plan year only if the plan satisfies paragraphs (a)(2) through (a)(5) of this section. A plan that otherwise satisfies this paragraph (a) will not be considered to fall section 401(l) merely because it contains one or more provisions described in section 1.401(a)(4)-2(b)(5). See section 1.401(a)(4)-8(b)(3)(i)(E) for special rules applicable to target benefit plans.

(2) EXCESS PLAN REQUIREMENT. The plan must be a defined contribution excess plan.

(3) MAXIMUM DISPARITY. The disparity for all employees under the plan must not exceed the maximum permitted disparity prescribed in paragraph (b) of this section.

(4) UNIFORM DISPARITY. The disparity for all employees under the plan must be uniform within the meaning of paragraph (c) of this section.

(5) INTEGRATION LEVEL. The integration level specified in the plan must satisfy paragraph (d) of this section.

(b) MAXIMUM PERMITTED DISPARITY -- (1) IN GENERAL. The disparity provided for the plan year must not exceed the maximum excess allowance as defined in paragraph (b)(2) of this section. In addition, the plan must satisfy the overall permitted disparity limits of section 1.401(l)-5.

(2) MAXIMUM EXCESS ALLOWANCE. The maximum excess allowance for a plan year is the lesser of --

(i) The base contribution percentage, or

(ii) The greater of --

(A) 5.7 percent, reduced as required under paragraph (d) of this section, or

(B) The percentage rate of tax under section 3111(a), in effect as of the beginning of the plan year, that is attributable to the old age insurance portion of the Old Age, Survivors and Disability Insurance provisions of the Social Security Act, reduced as required under paragraph (d) of this section. For a year in which the percentage rate of tax described in this paragraph (b)(2)(ii)(B) exceeds 5.7 percent, the Commissioner will publish the rate of such tax and a revised table under paragraph (d)(4) of this section.

(c) UNIFORM DISPARITY -- (1) IN GENERAL. The disparity provided under a plan is uniform only if the plan uses the same base contribution percentage and the same excess contribution percentage for all employees in the plan.

(2) DEEMED UNIFORMITY -- (i) IN GENERAL. The disparity under a plan does not fail to be uniform for purposes of this paragraph (c) merely because the plan contains one or more of the provisions described in paragraphs (c)(2)(ii) and (iii) of this section.

(ii) OVERALL PERMITTED DISPARITY. The plan provides that, in the case of each employee who has reached the cumulative permitted disparity limit applicable to the employee under section 1.401(l)- 5(c), employer contributions are allocated to the account of the employee with respect to the employee's total plan year compensation at the excess contribution percentage.

(iii) NON-FICA EMPLOYEES. The plan provides that, in the case of each employee under the plan with respect to whom none of the taxes under section 3111(a), section 3221, or section 1401 is required to be paid, employer contributions are allocated to the account of the employee with respect to the employee's total plan year compensation at the excess contribution percentage.

(d) INTEGRATION LEVEL -- (1) IN GENERAL. The integration level under the plan must satisfy paragraph (d)(2), (d)(3), or (d)(4) of this section, as modified by paragraph (d)(5) of this section in the case of a short plan year. If a reduction applies to the disparity factor under this paragraph (d), the reduced factor is used for all purposes in determining whether the permitted disparity rules for defined contribution plans are satisfied.

(2) TAXABLE WAGE BASE. The requirement of this paragraph (d)(2) is satisfied only if the integration level under the plan for each employee is the taxable wage base in effect as of the beginning of the plan year.

(3) SINGLE DOLLAR AMOUNT. The requirement of this paragraph (d)(3) is satisfied only if the integration level under the plan for all employees is a single dollar amount (either specified in the plan or determined under a formula specified in the plan) that does not exceed the greater of $10,000 or 20 percent of the taxable wage base in effect as of the beginning of the plan year.

(4) Intermediate amount. The requirement of this paragraph (d)(4) is satisfied only if --

(i) the integration level under the plan for all employees is a single dollar amount (either specified in the plan or determined under a formula specified in the plan) that is greater than the highest amount determined under paragraph (d)(3) of this section and less than the taxable wage base, and

(ii) the plan adjusts the factor determined under paragraph (b)(2)(ii) of this section in accordance with the table below.

 TABLE

(e) EXAMPLES. The following examples illustrate this section. In each example, 5.7 percent exceeds the percentage rate of tax described in paragraph (b)(2)(ii) of this section.

EXAMPLE 1. Employer X maintains a profit-sharing plan with the calendar year as its plan year. For the 1989 plan year, the plan provides that the account of each employee who has plan year compensation in excess of the taxable wage base in effect at the beginning of the plan year will receive an allocation for the plan year of 5.7 percent of plan year compensation in excess of the taxable wage base. The plan provides that no allocation will be made to the account of any employee for the plan year with respect to plan year compensation not in excess of the taxable wage base. The maximum excess allowance is exceeded for the 1989 plan year because the excess contribution percentage (5.7 percent) for the plan year exceeds the base contribution percentage (0 percent) for the plan year by more than the lesser of the base contribution percentage (0 percent) or the percentage determined under paragraph (b)(2)(ii) of this section (5.7 percent) for the plan year.

EXAMPLE 2. Employer Y maintains a money purchase pension plan with the calendar year as its plan year. For the 1990 plan year, the plan provides that the account of each employee will receive an allocation of 5 percent of the employee's plan year compensation up to the taxable wage base in effect at the beginning of the plan year plus an allocation of 10 percent of the employee's plan year compensation in excess of the taxable wage base. The maximum excess allowance is not exceeded for the plan year because the excess contribution percentage (10 percent) for the plan year does not exceed the base contribution percentage (5 percent) for the plan year by more than the lesser of the base contribution percentage (5 percent) or the percentage determined under paragraph (b)(2)(ii) of this section (5.7 percent) for the plan year.

EXAMPLE 3. Assume the same facts as in EXAMPLE 2, except that the plan provides that, with respect to plan year compensation in excess of the taxable wage base, the account of each employee will receive an allocation for the plan year of 12 percent of such compensation. The maximum excess allowance is exceeded for the plan year because the excess contribution percentage (12 percent) for the plan year exceeds the base contribution percentage (5 percent) for the plan year by more than the lesser of the base contribution percentage (5 percent) or the percentage determined under paragraph (b)(2)(ii) of this section (5.7 percent) for the plan year.

EXAMPLE 4. Employer Z maintains a money purchase pension plan with a plan year beginning July 1 and ending June 30. The taxable wage base for the 1990 calendar year is $51,300 and the taxable wage base for the 1991 calendar year is $53,400. For the plan year beginning July 1, 1990, and ending June 30, 1991, the plan provides that the account of each employee will receive an allocation of 4 percent of the employee's plan year compensation up to $53,400 plus an allocation of 6 percent of the employee's plan year compensation in excess of $53,400. Although the excess contribution percentage (6 percent) for the plan year does not exceed the base contribution percentage (4 percent) for the plan year by more than the lesser of the base contribution percentage (4 percent) or the percentage determined under paragraph (b)(2)(ii) of this section (5.7 percent), the plan does not satisfy paragraph (a)(5) of this section because the integration level of $53,400 exceeds the maximum permitted integration level of $51,300 (the taxable wage base in effect as of the beginning of the plan year).

EXAMPLE 5. Assume the same facts as in EXAMPLE 4, except that for the plan year beginning July 1, 1990, and ending June 30, 1991, the plan provides that the account of each employee will receive an allocation of 5 percent of the employee's plan year compensation up to $30,000 plus an allocation of 9 percent of the employee's plan year compensation in excess of $30,000. The integration level of $30,000 is 58 percent of the taxable wage base of $51,300 for the 1990 calendar year. The maximum excess allowance is not exceeded for the plan year because the excess contribution percentage (9 percent) for the plan year does not exceed the base contribution percentage (5 percent) for the plan year by more than the lesser of the base contribution percentage (5 percent) or the percentage determined under paragraphs (b)(2)(ii) and (d) of this section (4.3 percent) for the plan year.

SECTION 1.401(l)-3 PERMITTED DISPARITY FOR DEFINED BENEFIT PLANS.

(a) REQUIREMENTS -- (1) IN GENERAL. Disparity in the rates of employer-provided benefits under a defined benefit plan is permitted under section 401(l) and this section for a plan year only if the plan satisfies paragraphs (a)(2) through (a)(6) of this section. A plan that otherwise satisfies this paragraph (a) will not be considered to fail section 401(l) merely because it contains one or more provisions described in section 1.401(a)(4)-3(b)(8) (such as multiple formulas). Section 401(a)(5)(D) and section 1.401(a)(5)-1(d) provide other rules under which benefits provided under a defined benefit plan (including defined benefit excess and offset plans) may be limited. See section 1.401(a)(4)-3(b)(7)(viii) for special rules under which an insurance contract plan may satisfy section 1.401(a)(4)-1(b)(2) and section 401(l). See section 1.401(a)(4)- 8(c)(3)(iii)(B) for special rules applicable to cash balance plans.

(2) EXCESS OR OFFSET PLAN REQUIREMENT. The plan must be a defined benefit excess plan or an offset plan.

(3) MAXIMUM DISPARITY. The disparity for all employees under the plan must not exceed the maximum permitted disparity prescribed in paragraph (b) of this section.

(4) UNIFORM DISPARITY. The disparity for all employees under the plan must be uniform within the meaning of paragraph (c) of this section.

(5) INTEGRATION OR OFFSET LEVEL. The integration or offset level specified in the plan must satisfy paragraph (d) of this section.

(6) BENEFITS, RIGHTS, AND FEATURES. The benefits, rights, and features provided under the plan must satisfy paragraph (f) of this section.

(b) MAXIMUM PERMITTED DISPARITY -- (1) IN GENERAL. In the case of a defined benefit excess plan, the disparity provided for the plan year may not exceed the maximum excess allowance as defined in paragraph (b)(2) of this section. In the case of an offset plan, the disparity provided for the plan year may not exceed the maximum offset allowance as defined in paragraph (b)(3) of this section. In addition, either type of plan must satisfy the overall permitted disparity limits of section 1.401(l)-5.

(2) MAXIMUM EXCESS ALLOWANCE. The maximum excess allowance for a plan year is the lesser of --

(i) 0.75 percent, reduced as required under paragraphs (d) and (e) of this section, or

(ii) The base benefit percentage for the plan year.

(3) MAXIMUM OFFSET ALLOWANCE. The maximum offset allowance for a plan year is the lesser of --

(i) 0.75 percent, reduced as required under paragraphs (d) and (e) of this section, or

(ii) One-half of the gross benefit percentage, multiplied by a fraction (not to exceed one), the numerator of which is the employee's average annual compensation, and the denominator of which is the employee's final average compensation up to the offset level.

(4) RULES OF APPLICATION -- (i) DISPARITY PROVIDED FOR THE PLAN YEAR. Disparity provided for the plan year generally means the disparity provided under the plan's benefit formula for the employee's year of service with respect to the plan year. However, if a plan determines each employee's accrued benefit under the fractional accrual method of section 411(b)(1)(C), disparity provided under the plan also means the disparity in the benefit accrued for the employee for the plan year. Thus, a plan using the fractional accrual method must satisfy this paragraph (b) with respect to the plan's benefit formula and with respect to the benefits accrued for the plan year.

(ii) REDUCTIONS IN DISPARITY RATE. Any reductions in the 0.75-percent factor required under paragraphs (d) and (e) of this section are cumulative.

(iii) NORMAL AND OPTIONAL FORMS OF BENEFIT -- (A) IN GENERAL. A plan satisfies the maximum permitted disparity requirement of this paragraph (b) only if the plan satisfies this paragraph (b) with respect to each optional form of benefit (including the normal form of benefit) provided under the plan.

(B) LEVEL ANNUITY FORMS. In the case of an optional form of benefit payable as a level annuity over a period of not less than the life of the employee, the optional form must satisfy the maximum permitted disparity requirement of this paragraph (b). Thus, for example, if the form of a defined benefit plan's normal retirement benefit is an annuity for life with a 10-year certain feature and the plan permits employees to elect an optional form of benefit in the form of a straight life annuity, the plan must satisfy the maximum disparity requirement of this paragraph (b) with respect to each of the optional forms of benefit. An annuity that decreases only after the death of the employee, or that decreases only after the death of either the employee or the joint annuitant, is considered a level annuity for purposes of this paragraph (b).

(C) OTHER FORMS. In the case of an optional form of benefit that is not described in paragraph (b)(4)(iii)(B) of this section, the optional form must satisfy the maximum permitted disparity requirement of this paragraph (b), when the respective portions of the optional form are normalized under the rules of section 1.401(a)(4)- 3(d)(5)(iv) to a straight life annuity commencing at the same time as the optional form of benefit, regardless of whether the straight life annuity form is actually provided under the plan. In the case of a defined benefit excess plan, the respective portions are the portion of the optional form attributable to average annual compensation up to the integration level (the "base portion") and the portion of the optional form attributable to average annual compensation in excess of the integration level (the "excess portion"). In the case of an offset plan, the respective portions are the optional form determined without regard to the offset (the "gross amount") and the offset applied to the gross amount to determine the optional form (the "offset amount").

(D) POST-RETIREMENT COST-OF-LIVING ADJUSTMENTS -- (1) IN GENERAL. A benefit does not fail to be a level annuity described in paragraph (b)(4)(iii)(B) of this section merely because it provides an automatic post-retirement cost-of-living adjustment that satisfies paragraph (b)(4)(iii)(D)(2) of this section. Thus, increases in the employee's annuity pursuant to such a cost-of-living adjustment do not cause the disparity provided under the optional form of benefit to exceed the maximum disparity permitted under this paragraph (b). For rules on ad hoc post-retirement cost-of-living adjustments, see section 1.401(a)(4)-10(b).

(2) REQUIREMENTS. A cost-of-living adjustment satisfies this paragraph (b)(4)(iii)(D)(2) if --

(i) It is included in the accrued benefit of all employees, and

(ii) It increases, on a uniform and consistent basis, the benefits of all former employees who are no younger than age 62, at a rate no greater than adjustments to social security benefits under section 215(i)(2)(A) of the Social Security Act that have occurred since the later of the employee's attainment of age 62 or commencement of benefits.

(E) SECTION 417(e) EXCEPTION. A plan will not fail to satisfy this paragraph (b) merely because the disparity in a benefit that is subject to the interest rate restrictions of sections 401(a)(11) and 417(e) exceeds the maximum disparity that would otherwise be allowed under this paragraph (b) to the extent the increase in disparity is required to satisfy section 1.417(e)-1(d).

(5) EXAMPLES. The following examples illustrate this paragraph (b). Unless otherwise provided, the following facts apply. The plan is noncontributory and is the only plan ever maintained by the employer. The plan uses a normal retirement age of 65 and contains no provision that would require a reduction in the 0.75-percent factor under paragraph (b)(2) or (b)(3) of this section. In the case of a defined benefit excess plan, the plan uses each employee's covered compensation as the integration level; in the case of an offset plan, the plan uses each employee's covered compensation as the offset level and provides that an employee's final average compensation is limited to the employee's average annual compensation. Each example discusses the benefit formula applicable to an employee who has a social security retirement age of 65.

EXAMPLE 1. Plan N is a defined benefit excess plan that provides a normal retirement benefit of 0.5 percent of average annual compensation in excess of the integration level, for each year of service. The plan provides no benefits with respect to average annual compensation up to the integration level. The disparity provided under the plan exceeds the maximum excess allowance because the excess benefit percentage (0.5 percent) exceeds the base benefit percentage (0 percent) by more than the base benefit percentage (0 percent).

EXAMPLE 2. Plan O is an offset plan that provides a normal retirement benefit equal to 2 percent of average annual compensation, minus 0.75 percent of final average compensation up to the offset level, for each year of service up to 35. The disparity provided under the plan satisfies this paragraph (b) because the offset percentage (0.75 percent) does not exceed the maximum offset allowance equal to the lesser of 0.75 percent or one-half of the gross benefit percentage (1 percent).

EXAMPLE 3. Plan P is a defined benefit excess plan that provides a normal retirement benefit of 0.5 percent of average annual compensation up to the integration level, plus 1.25 percent of average annual compensation in excess of the integration level, for each year of service up to 35. The disparity provided under the plan exceeds the maximum excess allowance because the excess benefit percentage (1.25 percent) exceeds the base benefit percentage (0.5 percent) by more than the base benefit percentage (0.5 percent).

EXAMPLE 4. Plan Q is an offset plan that provides a normal retirement benefit of 1 percent of average annual compensation, minus 0.75 percent of final average compensation up to the offset level, for each year of service up to 35. The disparity under the plan exceeds the maximum offset allowance because the offset percentage exceeds one-half of the gross benefit percentage (0.5 percent).

EXAMPLE 5. (a) Plan R is an offset plan that provides a normal retirement benefit of 1 percent of average annual compensation, minus 0.5 percent of final average compensation up to the offset level, for each year of service up to 35. The plan determines an employee's average annual compensation using an averaging period comprising five consecutive 12-month periods and taking into account the employee's compensation for the ten consecutive 12-month periods ending with the plan year. The plan does not provide that an employee's final average compensation is limited to the employee's average annual compensation.

(b) Employee A has average annual compensation of $20,000, final average compensation of $25,000, and covered compensation of $32,000. The maximum offset allowance applicable to Employee A for the plan year under paragraph (b)(3) of this section is one-half of the gross benefit percentage multiplied by the ratio, not to exceed one, of Employee A's average annual compensation to Employee A's final average compensation up to the offset level. Thus, the maximum offset allowance is 0.4 percent (1/2 x 1 percent x $20,000/$25,000). With respect to Employee A, the benefit formula provides an offset that exceeds the maximum offset allowance. The plan must therefore reduce Employee A's offset percentage to 0.4 percent. (Under paragraph (c)(2)(viii) of this section, Employee A's adjusted disparity rate is deemed uniform.)

(c) Alternatively, under section 1.401(l)-1(c)(17)(ii) (the definition of final average compensation), the plan could specify that an employee's final average compensation is limited to the amount of the employee's average annual compensation. Thus, the ratio of average annual compensation to final average compensation would always be equal to at least one, and the maximum offset allowance under the plan would be one-half of the gross benefit percentage.

EXAMPLE 6. Plan S is a defined benefit excess plan that provides a base benefit percentage of 1 percent of average annual compensation up to the integration level for each year of service. The plan also provides, for each of the first 10 years of service, an excess benefit percentage of 1.85 percent of average annual compensation in excess of the integration level. For each year of service after 10, the plan provides an excess benefit percentage of 1.65 percent of the employee's average annual compensation in excess of the integration level. The disparity provided under the plan exceeds the maximum excess allowance because the excess benefit percentage for each of the first ten years of service (1.85 percent) exceeds the base benefit percentage (1 percent) by more than 0.75 percent.

EXAMPLE 7. The facts are the same as in EXAMPLE 6, except that the plan provides an excess benefit percentage of 1.65 percent of average annual compensation in excess of the integration level for each of the first 10 years of service and an excess benefit percentage of 1.85 percent of average annual compensation in excess of the integration level for each year of service after 10. The disparity provided under the plan exceeds the maximum excess allowance because the excess benefit percentage for each year of service after 10 (1.85 percent) exceeds the base benefit percentage (1 percent) by more than 0.75 percent.

EXAMPLE 8. Plan T is a defined benefit excess plan that provides a normal retirement benefit of 1.0 percent of average annual compensation up to the integration level, plus 1.7 percent of average annual compensation in excess of the integration level, for each year of service up to 35, payable in the form of a joint and survivor annuity. The plan also allows an employee to receive the retirement benefit in the form of an actuarially equivalent straight life annuity. The actuarially equivalent straight life annuity equals 1.09 percent of average annual compensation up to the integration level, plus 1.85 percent of average annual compensation in excess of the integration level, for each year of service up to 35. The disparity provided under the plan with respect to the straight life annuity form of benefit (0.76 percent) exceeds the maximum excess allowance because the excess benefit percentage (1.85 percent) exceeds the base benefit percentage (1.09 percent) by more than 0.75 percent.

EXAMPLE 9. Plan U is a defined benefit excess plan that provides a normal retirement benefit of 1.0 percent of average annual compensation up to the integration level, plus 1.7 percent of average annual compensation in excess of the integration level, for each year of service up to 35, payable in the form of a straight life annuity. Plan U provides a single sum optional form of benefit at normal retirement age equal to 100 times the monthly annuity payable at that age. Thus, if an employee elects the single sum optional form of benefit, the base portion of the single sum benefit is 100 percent (100 times 1.0 percent) of average annual compensation up to the integration level per year of service, and the excess portion of the single sum benefit is 170 percent (100 times 1.7 percent) of average annual compensation in excess of the integration level per year of service. Each respective portion of the single sum option is normalized to a straight life annuity commencing at normal retirement age, using 8-percent interest and the UP-84 mortality table. After normalization, the base portion of the benefit is 1.02 percent of average annual compensation up to the integration level, and the excess portion of the benefit is 1.73 percent of average annual compensation in excess of the integration level. The single sum optional form of benefit satisfies this paragraph (b) because the disparity provided in the optional form of benefit does not exceed the maximum excess allowance.

(c) UNIFORM DISPARITY -- (1) IN GENERAL. The disparity provided under a defined benefit excess plan is uniform only if the plan uses the same base benefit percentage and the same excess benefit percentage for all employees with the same number of year of service. The disparity provided under an offset plan is uniform if and only if the plan uses the same gross benefit percentage and the same offset percentage for all employees with the same number of years of service. The disparity provided under a plan that determines each employee's accrued benefit under the fractional accrual method of section 411(b)(1)(C) is uniform only if the plan satisfies one of the deemed uniformity rules of paragraph (c)(2)(ii) or (iii) of this section.

(2) DEEMED UNIFORMITY -- (i) IN GENERAL. The disparity provided under a plan does not fail to be uniform for purposes of this paragraph (c) merely because the plan contains one or more of the provisions described in paragraphs (c)(2)(ii) through (viii) of this section.

(ii) USE OF FRACTIONAL ACCRUAL AND DISPARITY FOR 35 YEARS. The plan formula provides a benefit as described in paragraphs (c)(2)(ii)(A) and (B) of this section, and the plan determines each employee's accrued benefit under the method described in section 1.401(a)(4)-3(b)(4)(i)(B) or 1.401(a)(4)-3(b)(5)(i)(B), i.e., by multiplying the employee's fractional rule benefit (within the meaning of section 1.411(b)-1(b)(3)(ii)(A)) by a fraction, the numerator of which is the employee's years of service determined as of the plan year, and the denominator of which is the employee's projected years of service as of normal retirement age.

(A) For each year of service at least up to 35, the plan formula provides the same base benefit percentage and the same excess benefit percentage for all employees in the case of a defined benefit excess plan or the same gross benefit percentage and the same offset percentage for all employees in the case of an offset plan.

(B) For each additional year of service, the plan provides a benefit at a uniform percentage of all average annual compensation that is no greater than the excess benefits percentage or the gross benefit percentage under paragraph (c)(2)(ii)(A) of this section, whichever is applicable.

(III) USE OF FRACTIONAL ACCRUAL AND DISPARITY FOR FEWER THAN 35 YEARS. The plan formula provides a benefit as described in paragraphs (c)(2)(iii)(A) through (C) of this section, and the plan determines each employee's accrued benefit under the method described in section 1.401(a)(4)-3(b)(4)(i)(B) or 1.401(a)(4)-3(b)(5)(i)(B).

(A) For each year in the employee's initial period of service comprising fewer than 35 years, the plan formula provides the same base benefit percentage and the same excess benefit percentage for all employees in the case of a defined benefit excess plan or the same gross benefit percentage and the same offset percentage for all employees in the case of an offset plan.

(B) For each year of service after the initial period and at least up to 35, the plan formula provides a benefit at a uniform percentage of all average annual compensation, that is equal to the excess benefit percentage or the gross benefit percentage under paragraph (c)(2)(iii)(A) of this section.

(C) For each year of service after the period described in paragraph (c)(2)(iii)(B) of this section, the plan provides a benefit at a uniform percentage of all average annual compensation that is no greater than the excess benefit percentage or the gross benefit percentage under paragraph (c)(2)(iii)(A) of this section.

(iv) DIFFERENT SOCIAL SECURITY RETIREMENT AGES. The benefit formula uses the same excess benefit percentage or the same gross benefit percentage for all employees with the same number of years of service and, for employees with social security retirement ages later than age 65, adjusts the 0.75-percent factor in the maximum excess or offset allowance as required under paragraph (e)(1) of this section, by increasing the base benefit percentage in the case of a defined benefit excess plan, or reducing the offset percentage in the case of an offset plan.

(v) REDUCTION FOR INTEGRATION LEVEL. The plan uses an integration level or offset level greater than each employee's covered compensation and makes individual reductions in the 0.75-percent factor, as permitted under paragraph (d)(9)(iii)(B) of this section, by increasing the base benefit percentage in the case of a defined benefit excess plan or reducing the offset percentage in the case of an offset plan.

(vi) OVERALL PERMITTED DISPARITY. The benefit formula provides that, with respect to each employee's years of service after reaching the cumulative permitted disparity limit applicable to the employee under section 1.401(1)-5(c), employer-provided benefits are determined with respect to the employee's total average annual compensation at a rate equal to the lesser of --

(A) The excess benefit percentage or gross benefit percentage applicable to an employee with the same number of years of service, or

(B) The highest percentage permitted under the 133-1/3 percent accrual rule of section 411(b)(1)(B).

(vii) NON-FICA EMPLOYEES. The plan provides that, in the case of each employee under the plan with respect to whom none of the taxes under section 3111(a), section 3221, or section 1401 is required to be paid, employer-provided benefits are determined with respect to the employee's total average annual compensation at the excess benefit percentage or gross benefit percentage applicable to an employee with the same number of years of service.

(viii) AVERAGE ANNUAL COMPENSATION ADJUSTMENT FOR OFFSET PLAN. In the case of each employee whose final average compensation exceeds the employee's average annual compensation, the plan adjusts the offset percentage as required under paragraph (b)(3)(ii) of this section in order to satisfy the maximum offset allowance.

(3) EXAMPLES. The following examples illustrate this paragraph (c). Unless otherwise provided, the following facts apply. The plan is noncontributory and is the only plan ever maintained by the employer. The plan uses a normal retirement age of 65 and contains no provision that would require a reduction in the 0.75-percent factor under paragraph (b)(2) or (b)(3) of this section. In the case of a defined benefit excess plan, the plan uses each employee's covered compensation as the integration level; in the case of an offset plan, the plan uses each employee's covered compensation as the offset level and provides that an employee's final average compensation is limited to the employee's average annual compensation. Each example discusses the benefit formula applicable to an employee who has a social security retirement age of 65.

EXAMPLE 1. Plan M is a defined benefit excess plan that satisfies the 133-1/3 percent accrual rule of section 411(b)(1)(B). The plan provides a normal retirement benefit of 1.0 percent of average annual compensation up to the integration level, plus 1.65 percent of average annual compensation in excess of the integration level, for each year of service up to 25. The plan also provides a benefit of 1.0 percent of all average annual compensation for each year of service in excess of 25. The disparity provided under the plan is uniform because the plan uses the same base and excess benefit percentages for all employees with the same number of years of service. If the plan formula were the same except that it used a different excess benefit percentage for some of the years of service between one and 25, the disparity under the plan would continue to be uniform.

EXAMPLE 2. Plan O is a defined benefit excess plan that provides a normal retirement benefit of 50 percent of average annual compensation up to the integration level and 68.75 percent of average annual compensation in excess of the integration level, multiplied by a fraction, the numerator of which is the employee's service, up to 25 years, and the denominator of which is 25. The plan determines an employee's accrued benefit as described in section 1.401(a)(4)- 3(b)(5)(i)(B). Under the plan an employee accrues 1/25th of the normal retirement benefit for each of the employee's first 25 years of service. The plan thus provides a base benefit percentage of 2 percent (50 percent x 1/25) and an excess benefit percentage of 2.75 percent (68.75 percent x 1/25) for each of an employee's first 25 years of service and no benefit for years of service after 25. The disparity provided under the plan is not uniform within the meaning of this paragraph (c) because the plan does not satisfy either of the uniform disparity rules for fractional accrual plans under paragraphs (c)(2)(ii) and (iii) of this section.

EXAMPLE 3. Plan P is an offset plan that provides a normal retirement benefit of 2 percent of average annual compensation for each year of service up to 35, minus 0.75 percent of final average compensation up to the offset level for each year of service up to 25. The plan determines an employee's accrued benefit under the method described in section 1.401(a)(4)- 3(b)(4)(i)(B). Because the formula under the plan provides the same gross benefit percentage and offset percentage for 25 years of service (fewer than 35) and, for years of service after 25 and up to 35, provides a benefit at a uniform rate (equal to the gross benefit percentage) of all average annual compensation, and the plan accrues the benefit ratably, the disparity under the plan is deemed to be uniform under paragraph (c)(2)(iii) of this section.

EXAMPLE 4. Plan Q is an offset plan that benefits employees with social security retirement ages of 65, 66, and 67. For each year of service up to 35, the plan provides a normal retirement benefit equal to 2 percent of average annual compensation, minus an offset based on the employee's final average compensation up to the offset level. For employees with a social security retirement age of 65, the offset percentage is 0.75 percent; for employees with a social security retirement age of 66, the offset percentage is 0.70 percent; and for employees with a social security retirement age of 67, the offset percentage is 0.65 percent. The disparity under the plan is deemed to be uniform under paragraph (c)(2)(iv) of this section because the plan uses the same gross benefit percentage for all employees and reduces the offset percentage for employees with social security retirement ages of 66 and 67 to comply with the adjustments in the 0.75-percent factor in the maximum excess or offset allowance required under paragraph (e)(1) of this section. (Because Plan Q effectively provides unreduced benefits prior to the social security retirement age for employees with social security retirement ages of 66 and 67, the 0.75-percent factor in the maximum offset allowance must be reduced to 0.70 percent and 0.65 percent, respectively.) Alternatively, Plan Q could satisfy this paragraph (c) if it provided a uniform offset percentage of 0.65 percent for all employees because 0.65 percent is the maximum offset allowance under the plan for an employee with a social security retirement age of 67.

EXAMPLE 5. Plan R is an offset plan that provides a normal retirement benefit of 2 percent of average annual compensation, minus an offset determined as a percentage of total final average compensation, for each year of service up to 35, For an employee whose final average compensation does not exceed the employee's covered compensation, the offset percentage is 0.75 percent. For an employee whose final average compensation exceeds the employee's covered compensation, the plan reduces the offset percentage, as required by paragraph (d) of this section. The reduced offset percentage is determined by comparing the employee's final average compensation to the employee's covered compensation as permitted under paragraph (d)(9)(iii)(B) of this section. The disparity provided under the plan is deemed uniform under paragraph (c)(2)(v) of this section because the plan uses the same gross benefit percentage for all employees and makes individual reductions in the 0.75-percent factor, as permitted under paragraph (d)(9)(iii)(B) of this section, by reducing the offset percentage in the case of an employee whose final average compensation exceeds covered compensation.

(d) REQUIREMENTS FOR INTEGRATION OR OFFSET LEVEL -- (1) IN GENERAL. The integration level under a defined benefit excess plan or the offset level under an offset plan must satisfy paragraphs (d)(2), (d)(3), (d)(4), (d)(5) or (d)(6) of this section, as modified by paragraph (d)(7) of this section in the case of a short plan year. Paragraph (d)(8) of this section contains demographic tests that apply to certain defined benefit plans. Paragraph (d)(9) of this section explains certain reductions required in the 0.75-percent factor under paragraph (b)(2) or (b)(3) of this section. Paragraph (d)(10) of this section contains examples. If a reduction applies to the 0.75-percent factor under this paragraph (d) the reduced factor is used for all purposes in determining whether the permitted disparity rules for defined benefit plans are satisfied.

(2) COVERED COMPENSATION. The requirement of this paragraph (d)(2) is satisfied only if the integration or offset level under the plan for each employee is the employee's covered compensation.

(3) UNIFORM PERCENTAGE OF COVERED COMPENSATION. The requirement of this paragraph (d)(3) is satisfied only if --

(i) The integration or offset level under the plan for each employee is a uniform percentage (greater than 100 percent) of each employee's covered compensation,

(ii) In the case of a defined benefit excess plan, the integration level does not exceed the taxable wage base in effect for the plan year, and, in the case of an offset plan, the offset level does not exceed the employee's final average compensation, and

(iii) The plan adjusts the 0.75-percent factor in the maximum excess or offset allowance in accordance with paragraph (d)(9) of this section.

(4) SINGLE DOLLAR AMOUNT. The requirement of this paragraph (d)(4) is satisfied only if the integration or offset level under the plan for all employees is a single dollar amount (either specified in the plan or determined under a formula specified in the plan) that does not exceed the greater of $10,000 or one-half of the covered compensation of an individual who attains social security retirement age in the calendar year in which the plan year begins. In the case of a calendar year in which no individual could attain social security retirement age, for example, the year 2003, this rule is applied using covered compensation of an individual attaining social security retirement age in the preceding calendar year.

(5) INTERMEDIATE AMOUNT. The requirement of this paragraph (d)(5) is satisfied only if --

(i) The integration or offset level under the plan for all employees is a single dollar amount (either specified in the plan or determined under a formula specified in the plan) that is greater than the highest amount determined under paragraph (d)(4) of this section,

(ii) In the case of a defined benefit excess plan, the single dollar amount does not exceed the taxable wage base in effect for the plan year, and, in the case of an offset plan, the single dollar amount does not exceed the employee's final average compensation,

(iii) The plan satisfies the demographic requirements of paragraph (d)(8) of this section, and

(iv) The plan adjusts the 0.75-percent factor in the maximum excess or offset allowance in accordance with paragraph (d)(9) of this section.

For purposes of this paragraph (d)(5), an offset level of each employee's final average compensation is considered a single dollar amount determined under a formula specified in the plan.

(6) INTERMEDIATE AMOUNT SAFE HARBOR. The requirement of this paragraph (d)(6) is satisfied only if --

(i) The integration or offset level under the plan for all employees is a single dollar amount described in paragraph (d)(5) of this section, and

(ii) The 0.75-percent factor in the maximum excess or offset allowance under paragraph (b)(2) or (b)(3) of this section is reduced to the lesser of the adjusted factor determined under paragraph (d)(9) of this section or 80 percent of the otherwise applicable factor under paragraph (b)(2) or (b)(3) of this section, determined without regard to paragraph (d)(9) of this section.

(7) PRORATED INTEGRATION LEVEL FOR SHORT PLAN YEAR. If an accumulation plan uses paragraph (4) of the definition of plan year compensation under section 1.401(a)(4)-12 (i.e., section 414(s) compensation for the period of plan participation) and has a plan year that comprises fewer than 12 months, the integration or offset level under the plan for each employee must be an amount equal to the otherwise applicable integration or offset level described in paragraph (d)(2), (d)(3), (d)(4), (d)(5), or (d)(6) of this section, multiplied by a fraction, the numerator of which is the number of months in the plan year and the denominator of which is 12. No adjustment to the maximum excess or offset allowance is required as a result of the application of this paragraph (d)(7), other than any adjustment already required under paragraph (d)(6) or (d)(9) of this section.

(8) DEMOGRAPHIC REQUIREMENTS -- (i) IN GENERAL. A plan that satisfies the demographic requirements of paragraphs (d)(8)(ii) and (iii) of this section may use an integration level described in paragraph (d)(5) of this section.

(ii) ATTAINED AGE REQUIREMENT. The requirement of this paragraph (d)(8)(ii) is satisfied only if the average attained age of the nonhighly compensated employees in the plan is not greater than the greater of --

(A) Age 50, or

(B) 5 plus the average attained age of the highly compensated employees in the plan.

For purposes of this paragraph (d)(8)(ii), attained ages are determined as of the beginning of the plan year.

(iii) NONDISCRIMINATION REQUIREMENT. The requirement of this paragraph (d)(8)(iii) is satisfied only if at least one of the following three tests is satisfied.

(A) MINIMUM PERCENTAGE TEST. This test is satisfied only if more than 50 percent of the nonhighly compensated employees in the plan have average annual compensation at least equal to 120 percent of the integration or offset level.

(B) RATIO TEST. This test is satisfied only if the percentage of nonhighly compensated nonexcludable employees, who are in the plan and who have average annual compensation at least equal to 120 percent of the integration or offset level, is at least 70 percent of the percentage of highly compensated nonexcludable employees who are employees in the plan.

(C) HIGH DOLLAR AMOUNT TEST. This test is satisfied only if the integration or offset level exceeds 150 percent of the covered compensation of an individual who attains social security retirement age in the calendar year in which the plan year begins. In the case of a calendar year in which no individual could attain social security retirement age, for example, the year 2003, this rule is applied using covered compensation of an individual attaining social security retirement age in the preceding calendar year.

(9) REDUCTION IN THE 0.75-PERCENT FACTOR IF INTEGRATION OR OFFSET LEVEL EXCEEDS COVERED COMPENSATION -- (i) IN GENERAL. If the integration or offset level specified under the plan is each employee's covered compensation as of the plan year, no reduction in the 0.75-percent factor in the maximum excess or offset allowance is required for the plan year under this paragraph (d)(9). If a plan specifies an integration or offset level that exceeds an employee's covered compensation, the 0.75-percent factor in the maximum excess or offset allowance must be reduced as required in paragraph (d)(9)(ii) or (iii) of this section. Paragraph (d)(9)(iv) of this section contains a table of the applicable reductions.

(ii) UNIFORM PERCENTAGE COVERED COMPENSATION. If a plan specifies an integration or offset level that is a uniform percentage (in excess of 100 percent) of each employee's covered compensation, the 0.75-percent factor in the maximum excess or offset allowance must be reduced in accordance with the table in paragraph (d)(9)(iv) of this section. Thus, for example, if a plan specifies an integration or offset level of 120 percent of each employee's covered compensation, the 0.75-percent factor in the maximum excess or offset allowance must be reduced to 0.69 percent in accordance with the table because the specified integration or offset level is more than covered compensation but not more than 125 percent of covered compensation.

(iii) SINGLE DOLLAR AMOUNT. If a plan specifies an integration or offset level of a single dollar amount as permitted under paragraph (d)(5) of this section (for example, $30,000), the applicable reduction in the maximum excess or offset allowance must be determined under paragraph (d)(9)(iii)(A) or (B) of this section, as specified under the plan.

(A) PLAN-WIDE REDUCTION. The applicable reduction in the maximum excess or offset allowance under the table in paragraph (d)(9)(iv) of this section may be determined by comparing the single dollar amount specified in the plan to the covered compensation of an individual attaining social security retirement age in the calendar year in which the plan year begins. Thus, for example, if a plan specifies a single integration or offset level of $30,000 that is uniformly applicable to all employees for a plan year and the covered compensation of an individual attaining social security retirement age in the calendar year in which the plan year begins is $20,000, the 0.75-percent factor in the maximum excess allowance must be reduced to 0.60 percent for all employees in accordance with the table in paragraph (d)(9)(iv) of this section because the specified integration or offset level of $30,000 is more than 125 percent of $20,000 but not more than 150 percent of $20,000. In the case of a calendar year in which no individual could attain social security retirement age (for example, 2003), the comparison is made with covered compensation of an individual who attained social security retirement age in the preceding calendar year. If an offset plan uses an offset level of each employee's final average compensation, the reduction under this paragraph (d)(9)(iii)(A) is determined by comparing the highest possible amount of final average compensation to the covered compensation of an individual attaining social security retirement age in the calendar year in which the plan year begins.

(B) INDIVIDUAL REDUCTIONS. The applicable reduction in the maximum excess or offset allowance under the table in paragraph (d)(9)(iv) of this section may be determined by comparing the single dollar amount specified in the plan to the covered compensation of each employee under the plan. Thus, for example, if a plan specifies a single integration or offset level of $30,000 that is uniformly applicable to all employees for a plan year, the 0.75-percent factor in the maximum excess or offset allowance must be reduced to 0.60 percent for an employee with covered compensation of $20,000, but need not be reduced for an employee whose covered compensation is $30,000 or greater.

(iv) REDUCTIONS -- (A) TABLE.

 TABLE

(10) EXAMPLES. The following examples illustrate this paragraph (d). Unless otherwise provided, the following facts apply. The plan is noncontributory and is the only plan ever maintained by the employer. The plan uses a normal retirement age of 65 and contains no provision that would require a reduction in the 0.75-percent factor under paragraph (b)(2) or (b)(3) of this section. In the case of an offset plan, the plan provides that an employee's final average compensation is limited to the employee's average annual compensation. Each example discusses the benefit formula applicable to an employee who has a social security retirement age of 65.

EXAMPLES 1. (a) Plan M is a defined benefit excess plan that uses the calendar year as its plan year. For the 1989 plan year, the plan uses an integration level of $20,000, which is 118 percent of the 1989 covered compensation of $16,968 for an individual reaching social security retirement age in 1989. The plan may use that integration level without satisfying paragraph (d)(8) of this section, provided the adjustment to the 0.75-percent factor required under paragraph (d)(6) of this section is made. That adjustment is the lesser of the factor determined under paragraph (d)(9) of this section or 80 percent of the factor otherwise applicable under paragraph (b)(2) or (b)(3) of this section.

(b) The plan determines the factor under paragraph (d)(9) of this section by comparing the integration level to the covered compensation of an individual attaining social security retirement age in calendar year in which the plan year begins and by rounding the integration level up to 125 percent of that covered compensation amount. The 0.75-percent factor is therefore replaced by 0.69 percent pursuant to the table in paragraph (d)(9) of this section. The 0.69 percent factor is 92 percent of the 0.75-percent factor. Because the lesser of 80 percent and 92 percent is 80 percent, the 0.75-percent factor is reduced to 0.6 percent (80 percent of 0.75 percent) under paragraph (d)(6) of this section. The 0.6 percent factor applies to benefits commencing at age 65 for an employee with a social security retirement age of 65. In determining normal retirement benefits for employees with social security retirement ages of 66 or 67, the applicable factors for benefits commencing at age 65 are, respectively, 0.56 percent (80 percent of 0.7 percent) and 0.52 percent (80 percent of 0.65 percent).

(c) The plan could also determine the factor under paragraph (d)(9) of this section by comparing the integration level to the covered compensation of each employee under the plan, or by straight line interpolation between the disparity factors contained in the table in paragraph (d)(9) of this section, or both. (Of course, if the plan satisfied paragraph (d)(8) of this section, the plan could use the factor determined under paragraph (d)(9) of this section.)

EXAMPLE 2. (a) Plan N, an accumulation plan, is a defined benefit excess plan that, for each year of service up to 35, accrues a normal retirement benefit of 1 percent of plan year compensation up to the table wage base, plus 1.75 percent of plan year compensation above the taxable wage base, for each year of service up to 35. An employee's total retirement benefit is the sum of the accruals for all years. The plan satisfies paragraph (d)(8) of this section.

(b) Because the plan uses the taxable wage base (an amount above covered compensation) as the integration level, it must reduce the 0.75-percent factor in the maximum excess allowance as required under paragraphs (d)(5) and (d)(9) of this section. The reduced factor, if determined on a plan-wide bases under paragraph (d)(9)(iii)(A) of this section, is 0.42 percent. The plan must therefore reduce the disparity in the plan so that it does not exceed 0.42 percent.

EXAMPLE 3. (a) For the 1990 plan year, Plan O provides a normal retirement benefit of 2 percent of average annual compensation, minus a percentage of final average compensation up to $48,000, for each year of service up to 35. The plan satisfies paragraph (d)(8) of this section. As permitted under paragraph (d)(9) of this section, the plan provides that each employee's offset percentage is determined by comparing $48,000 to the employee's covered compensation and by rounding the result up to the next highest percentage of covered compensation.

(b) Employee A has a social security retirement age of 66 and covered compensation of $40,000. Because the plan provides for commencement of Employee A's benefit at age 65, the 0.75-percent factor in the maximum offset allowance is reduced to 0.7 percent under paragraph (e)(l) of this section (the "paragraph (e) factor"). In addition, because $48,000 is rounded up to 125 percent of Employee A's covered compensation, the 0.75-percent factor in the maximum offset allowance is reduced to 0.69 percent under paragraph (d)(9) of this section (the "paragraph (d) factor"). The reductions are cumulative under paragraph (b)(3)(ii) of this section.

(c) The cumulative reductions can be made by multiplying the paragraph (e) factor by the ratio of the paragraph (d) factor to 0.75 percent or by multiplying the paragraph (d) factor by the ratio of the paragraph (e) factor to 0.75 percent. The disparity factor for Employee A is therefore 0.64 percent ((0.7 percent x 0.69 percent/0.75 percent) or (0.69 percent x 0.7 percent/0.75 percent)).

EXAMPLE 4. Plan P is an offset plan that uses the calendar year as the plan year and uses an offset level of each employee's final average compensation. Assume that the taxable wage bases for 1990- 1992 are the following:

 1990 - $51,300

 1990 - $47,000

(e) ADJUSTMENTS TO THE 0.75-PERCENT FACTOR FOR BENEFITS COMMENCING AT AGES OTHER THAN SOCIAL SECURITY RETIREMENT AGE -- (1) IN GENERAL. The 0.75-percent factor in the maximum excess allowance and in the maximum offset allowance applies to a benefit commencing at an employee's social security retirement age. Except as provided in paragraph (e)(4) of this section, if a benefit payable to an employee under a defined benefit excess plan or a defined benefit offset plan commences at an age before the employee's social security retirement age (including a benefit payable at the normal retirement age under the plan), the 0.75-percent factor in the maximum excess allowance or in the maximum offset allowance, respectively, is reduced in accordance with paragraph (e)(2)(i) of this section. If a benefit payable to an employee under a defined benefit excess plan or a defined benefit offset plan commences at an age after the employee's social security retirement age, the 0.75-percent factor in the maximum excess allowance or in the maximum offset allowance, respectively, may be increased in accordance with paragraph (e)(2)(ii) of this section. Paragraph (e)(5) of this section provides rules on the age at which a benefit commences. See paragraph (f) of this section for the requirements applicable to optional forms of benefit.

(2) ADJUSTMENTS -- (i) BENEFITS COMMENCING ON OR AFTER AGE 55 AND BEFORE SOCIAL SECURITY RETIREMENT AGE. If benefits commence before an employee's social security retirement age, the 0.75-percent factor in the maximum excess allowance and in the maximum offset allowance must be reduced for such early commencement of benefits in accordance with the tables set forth in paragraph (e)(3) of this section.

(ii) BENEFITS COMMENCING AFTER SOCIAL SECURITY RETIREMENT AGE AND ON OR BEFORE AGE 70.

If benefits commence after an employee's social security retirement age, the 0.75-percent factor in the maximum excess allowance and in the maximum offset allowance may be increased for such delayed commencement of benefits in accordance with the tables set forth in paragraph (e)(3) of this section.

(iii) BENEFITS COMMENCING BEFORE AGE 55. If benefits commence before the employee attains age 55, the 0.75-percent factor in the maximum excess allowance and in the maximum offset allowance is further reduced (on a monthly basis to reflect the month in which benefits commence) to a factor that is the actuarial equivalent of the 0.75-percent factor, as adjusted under the tables in paragraph (e)(3) of this section, applicable to a benefit commencing in the month in which the employee attains age 55. In determining actual equivalence for this purpose, a reasonable interest rate must be used. In addition, a reasonable mortality table must be used to determine the actuarial present value, as defined in section 1.401(a)(4)-12, of the benefits commencing at age 55 and at the earlier commencement age, and a reasonable mortality table may be used to determine the actuarial present value at the earlier commencement age of the benefits commencing at age 55. A standard interest rate and a standard mortality table, as defined in section 1.401(a)(4)-12, are considered reasonable.

(iv) BENEFITS COMMENCING AFTER AGE 70. If benefits commence after the employee attains age 70, the 0.75-percent factor in the maximum excess allowance and in the maximum offset allowance may be further increased (on a monthly basis to reflect the month in which benefits commence) to a factor that is the actuarial equivalent of the 0.75-percent factor (as adjusted in accordance with this paragraph (e)) applicable to a benefit commencing in the month in which the employee attains age 70. In determining actuarial equivalence for this purpose, a reasonable interest rate must be used. In addition, a reasonable mortality table must be used to determine the actuarial present value, as defined in section 1.401(a)(4)-12, of the benefits commencing at age 70 and at the later commencement age, and a reasonable mortality table may be used to determine the value at the later commencement age of the benefits commencing at age 70. A standard interest rate and a standard mortality table, as defined in section 1.401(a)(4)-12, are considered reasonable.

(3) TABLES. Tables I, II, and III provide the adjustments in the 0.75-percent factor in the maximum excess allowance and in the maximum offset allowance applicable to benefits commencing on or after age 55 and on or before age 70 to an employee who has a social security retirement age of 65, 66 or 67. Table IV is a simplified table for a plan that uses a single disparity factor of 0.65 percent for all employees at age 65. The factors in the following tables are applicable to benefits that commence in the month the employee attains the specified age. Accordingly, if benefits commence in a month other than the month in which the employee attains the specified age, appropriate adjustments in the 0.75-percent factor in the maximum excess allowance and the maximum offset allowance must be made. For this purpose, adjustments may be based on straight-line interpolation from the factors in the tables or in accordance with the methods of adjustment specified in paragraphs (e)(2)(iii) and (iv) of this section.

 TABLE I

(i) The benefit is payable under the plan solely on account of an employee's disability, as determined by the Social Security Administration,

(ii) The benefit terminates no later than at the employee's normal retirement age,

(iii)The benefit is not in excess of the amount of the benefit that would be payable to the employee under the plan if the employee had separated from service at the employee's normal retirement age, and

(iv) Upon attainment of early or normal retirement age, an employee receives a benefit that satisfies the accrual and vesting rules of section 411 without taking into account the disability benefit payments made up to that age.

(5) BENEFIT COMMENCEMENT DATE -- (i) IN GENERAL. Except as provided in paragraph (e)(5)(ii) of this section, a benefit commences for purposes of this paragraph (e) on the first day of the period for which the benefit is paid under the plan.

(ii) QUALIFIED SOCIAL SECURITY SUPPLEMENT. If a plan uses a qualified social security supplement, as defined in section 1.401(a)(4)-12, to provide an aggregate benefit at retirement before social security retirement age that is a uniform percentage of average annual compensation, benefits will be considered to commence on the first day of the period for which the qualified social security supplement is no longer payable. In order for this paragraph (e)(5)(ii) to apply, the uniform percentage must be equal to the excess benefit percentage in the case of an excess plan or the gross benefit percentage in the case of an offset plan.

(6) EXAMPLES. The following examples illustrate this paragraph (e). Unless otherwise provided, the following facts apply. The plan is noncontributory and is the only plan ever maintained by the employer. The plan uses a normal retirement age of 65 and contains no provision that would require a reduction in the 0.75-percent factor under paragraph (b)(2) or (b)(3) of this section. In the case of a defined benefit excess plan, the plan uses each employee's covered compensation as the integration level; in the case of an offset plan the plan uses each employee's covered compensation as the offset level and provides that an employee's final average compensation is limited to the employee's average annual compensation. Each example discusses the benefit formula applicable to an employee who has a social security retirement age of 65.

EXAMPLE 1. Plan M is a defined benefit excess plan that, for an employee with a social security retirement age of 65, provides a normal retirement benefit of 1.25 percent of average annual compensation up to the integration level, plus 2.0 percent of average annual compensation in excess of the integration level, for each year of service up to 35. For an employee with at least 20 years of service for X, the plan provides a benefit commencing at age 55 that is equal to the benefit payable at age 65. For that employee, the disparity provided under the plan at age 55 is 0.75 percent (2 percent - 1.25 percent). Because this disparity exceeds the 0.375 percent factor provided in the table for a benefit payable at age 55 to an employee with a social security retirement age of 65, the plan fails to satisfy paragraphs (b) and (e) of this section with respect to the early retirement benefit.

EXAMPLE 2. Assume the same facts as in EXAMPLE 1, except that the base benefit percentage under the plan is 1.75 percent. Thus, the disparity provided under the plan at age 55 is 0.25 percent (2 percent - 1.75 percent). Because the disparity does not exceed the 0.375 percent factor provided in the table for a benefit payable at age 55 to an employee with a social security retirement age of 65, the plan does not fail to satisfy paragraphs (b) and (e) of this section with respect to the early retirement benefit.

EXAMPLE 3. Plan N is an offset plan that, for an employee with a social security retirement age of 65, provides a normal retirement benefit of 1.75 percent of average annual compensation, minus 0.75 percent of final average compensation up to the offset level, for each year of service up to 35. For an employee with at least 20 years of service, the plan provides a benefit commencing at age 55 that is equal to the benefit payable at age 65. For that employee, the disparity provided under the plan at age 55 is 0.75 percent. Because this disparity exceeds the 0.375 percent factor provided in the table for an offset applied to a benefit payable at age 55 to an employee with a social security retirement age of 65, the plan fails to satisfy paragraphs (b) and (e) of this section with respect to the early retirement benefit. The plan would not fall to satisfy paragraphs (b) and (e) of this section with respect to the early retirement benefit if the applicable factor for determining the offset applied to the benefit were reduced to 0.375 percent.

EXAMPLE 4. Plan O is a defined benefit excess plan that, for an employee with a social security retirement age of 65, provides a normal retirement benefit of 1.25 percent of average annual compensation up to the integration level, plus 2.0 percent of average annual compensation in excess of the integration level, for each year of service up to 35. The plan provides benefits commencing before normal retirement age with the following reductions:

 Age            Percentage of normal

EXAMPLE 5. Plan P is a defined benefit excess plan that provides a normal retirement benefit of 0.75 percent of average annual compensation up to the integration level, plus 1.5 percent of average annual compensation in excess of the integration level, for each year of service up to 35. The plan does not provide any benefits, other than normal retirement benefits, commencing before an employee's social security retirement age. Employee A, born in 1947, has a social security retirement age of 66. Because the plan provides for the distribution of normal retirement benefits before Employee A's social security retirement age, the 0.75-percent factor in the maximum excess allowance applicable to Employee A must be reduced to 0.70 percent in accordance with this paragraph (e). Accordingly, the disparity provided to A under the plan exceeds the maximum excess allowance because the excess benefit percentage (1.5 percent) exceeds the base benefit percentage (0.75 percent) by more than the maximum excess allowance of 0.70 percent, as reduced in accordance with this paragraph (e).

EXAMPLE 6. Assume the same facts as in EXAMPLE 5, except that the plan also provides an early retirement benefit, commencing at age 62, to an employee who satisfies the conditions for early retirement specified in the plan. The early retirement benefit is based upon the employee's accrued benefit at early retirement age and equals the amount that would have been paid commencing at the employee's normal retirement age based upon the employee's average annual compensation, covered compensation and years of service at the date of the employee's early retirement. Employee B, who has a social security retirement age of 65, meets the conditions for early retirement under the plan and retires at age 62 with 30 years of service. At the time of early retirement, Employee B has average annual compensation of $20,000 and covered compensation of $16,000. Under the plan's benefit formula, Employee B has accrued a normal retirement benefit, commencing at age 65, of $5,400 ((22.5 percent x $16,000) + (45 percent x $4,000)) based on Employee B's average annual compensation, covered compensation and years of service at early retirement. Accordingly, under the plan's early retirement provisions, Employee B is entitled to receive, commencing at early retirement, a benefit of $5,400. Because the early retirement benefit is a benefit (other than a qualified disability benefit) commencing at age 62 (before Employee B's social security retirement age), the 0.75-percent factor in the maximum excess allowance must be reduced to 0.60 percent in accordance with this paragraph (e). Accordingly, the disparity provided to Employee B under the plan at early retirement exceeds the maximum excess allowance.

EXAMPLE 7. (a) Plan Q is a defined benefit excess plan that provides a normal retirement benefit of 1.35 percent of average annual compensation up to the integration level, plus 2 percent of average annual compensation in excess of the integration level, for each year of service up to 35. The plan provides that an employee with 10 years of service at age 55 may receive an unreduced retirement benefit. The plan also provides that employee with a supplemental benefit of 0.65 percent of average annual compensation up to the integration level for each year of service up to 35, payable from early retirement until age 65. The supplemental benefit is a qualified social security supplement under section 1.401(a)(4)-12. The effect of the supplement is to provide an employee with a uniform benefit of 2 percent of average annual compensation from early retirement until age 65, when the supplement is no longer payable. Therefore, for purposes of this paragraph (e), the employee's benefit will be considered to commence at age 65.

(b) Assume that Plan Q is instead an offset plan that provides a normal retirement benefit of 2 percent of average annual compensation, minus 0.65 percent of final average compensation up to the offset level, for each year of service up to 35. The plan provides the same early retirement benefit on the same conditions, except that the supplement is 0.65 percent of an employee's final average compensation up to the offset level. An employee at age 55 thus receives a uniform benefit of 2 percent of average annual compensation until age 65, when the supplement is no longer payable. Therefore, for purposes of this paragraph (e), the employee's benefit will be considered to commence at age 65.

(f) BENEFITS, RIGHTS, AND FEATURES -- (1) DEFINED BENEFIT EXCESS PLAN. In the case of a defined benefit excess plan, each benefit, right, or feature provided under the plan with respect to employer- provided benefits attributable to average annual compensation above the integration level (an "excess benefit, right, or feature") must also be provided on the same terms with respect to employer-provided benefits attributable to average annual compensation up to the integration level (a "base benefit, right, or feature"). Alternatively, an excess benefit, right, or feature may be provided on different terms than the base benefit, right, or feature, if the terms used to determine the base benefit, right, or feature produce a benefit, right, or feature of inherently equal or greater value than the benefit, right, or feature that would be produced under the terms used to determine the excess benefit, right, or feature.

(2) OFFSET PLAN. In the case of an offset plan, each benefit, right, or feature provided under the plan with respect to employer- provided benefits before application of the offset (a "gross benefit, right, or feature") must be provided on the same terms as those used to determine the offset applied to the gross benefit, right, or feature. Alternatively, a gross benefit, right, or feature may be provided on different terms from those used to determine the offset applied to the gross benefit, right, or feature, if the terms used to determine the gross benefit, right, or feature produce a benefit, right, or feature of inherently equal or greater value than the benefit, right, or feature that would be produced under the terms used to determine the offset applied to the gross benefit, right, or feature. In addition, if benefits commence before an employee's normal retirement age, the gross benefit percentage under the plan must be reduced by a number of percentage points that is not less than the number of percentage points by which the offset percentage must be reduced, from normal retirement age to the age at which benefits commence, under the rules of paragraph (e) of this section.

(3) EXAMPLES. The following examples illustrate this paragraph (f). Unless otherwise provided, the following facts apply. The plan is noncontributory and is the only plan ever maintained by the employer. The plan uses a normal retirement age of 65 and contains no provision that would require a reduction in the 0.75-percent factor under paragraph (b)(2) or (b)(3) of this section. In the case of a defined benefit excess plan, the plan uses each employee's covered compensation as the integration level; in the case of an offset plan, the plan uses each employee's covered compensation as the offset level and provides that an employee's final average compensation is limited to the employee's average annual compensation. Each example discusses the benefit formula applicable to an employee who has a social security retirement age of 65. All optional forms of benefit under each plan are provided on the same terms.

EXAMPLE 1. Plan M is a defined benefit excess plan that provides a normal retirement benefit of 1 percent of average annual compensation up to the integration level, plus 1.65 percent of average annual compensation above the integration level, for each year of service up to 35. The plan provides an early retirement benefit for any employee who terminates employment at or after age 55 with 10 or more years of service. In determining an employee's early retirement, the 1.65 percent excess benefit percentage is reduced in accordance with the table in paragraph (e)(3) of this section for a plan that uses a single disparity factor of 0.65 percent for all employees at age 65. However, a larger reduction factor is applied to determine the base benefit percentage at early retirement. The plan violates this paragraph (f) because the excess early retirement benefit is not provided on the same terms as the base early retirement benefit, nor do the terms used to determine the base early retirement benefit produce an early retirement benefit of inherently equal or greater value than the early retirement benefit that would be produced under the terms used to determine the excess benefit, right, or feature.

EXAMPLE 2. The fact are the same as in EXAMPLE 1 except that the plan determines the early retirement benefit by applying the same reduction factors under paragraph (e)(3) of this section to the base and excess benefit percentages. Furthermore, if an employee terminates employment at or after age 55 with 30 or more years of service, the plan provides that the base benefit percentage of 1 percent is not reduced. Although the excess early retirement benefit is provided on different terms than the base early retirement benefit, the plan satisfies this paragraph (f) because the terms used to determine the base early retirement benefit produce an early retirement of inherently equal or greater value than the early retirement benefit that would be produced under the terms used to determine the excess benefit, right, or feature.

EXAMPLE 3. Plan N is an offset plan that provides a normal retirement benefit of 2 percent of average annual compensation, minus 0.65 percent of final average compensation up to the offset level, for each year of service up to 35. In determining the qualified joint and survivor ("QJSA") form of the normal retirement benefit, the plan applies a factor of 80 percent to the gross benefit percentage and a factor of 100 percent to the offset percentage. Thus, the QJSA form is 1.6 percent of average annual compensation, minus 0.65 percent of final average compensation up to the offset level, for each year of service up to 35. The plan violates this paragraph (f) because the gross QJSA form is not provided on the same terms as the terms used to determine the offset applied to the QJSA, nor does it produce a QJSA benefit that is of inherently equal or greater value than the QJSA benefit that would be produced under the terms used to determine the offset under the plan.

EXAMPLE 4. Plan O is a defined benefit excess plan that provides a normal retirement benefit of 1 percent of average annual compensation up to the integration level, plus 1.65 percent of average annual compensation above the integration level, for each year of service up to 35. The plan also provides a single sum optional form of benefit determined by applying a single interest rate and mortality assumption to the entire normal retirement benefit. The plan satisfies this paragraph (f) because the excess optional form is provided on the same terms as the base optional form. The plan would also satisfy this paragraph (f) if it used a lower interest rate to determine the base optional form than used to determine the excess optional form because the lower interest rate would produce an optional form of inherently equal or greater value than the optional form produced by using the same interest rate.

EXAMPLE 5. Plan R is a defined benefit excess plan that provides a normal retirement benefit of 1 percent of average annual compensation up to the integration level, plus 1.65 percent of average annual compensation above the integration level, for each year of service up to 35. If an employee continues to work after normal retirement age, the plan provides that the employee receives credit for additional years of service up to the service limit of 35. The plan also provides that the disparity provided under the plan will increase as permitted under paragraph (e) of this section for benefits commencing after social security retirement age. However, the plan does not provide an increase in the base benefit percentage to reflect the fact that the employee has delayed commencement of benefits past normal retirement age. Thus, for example, for an employee at age 68, the plan provides a benefit of 1 percent of average annual compensation up to the integration level, plus 1.86 percent of average annual compensation above the integration level, for each year of service up to 35. The plan violates this paragraph (f) because the excess benefit provided for an employee after normal retirement age is not provided on the same terms as the base benefit, nor do the terms used to determine the base benefit produce a benefit of inherently equal or greater value than the benefit that would be produced under the terms used to determine the excess benefit.

EXAMPLE 6. Plan Q is an offset plan that provides a normal retirement benefit of 2 percent of average annual compensation, minus 0.65 percent of final average compensation up to the offset level, for each year of service up to 35. In accordance with paragraph (e) of this section, the plan reduces the offset percentage under the plan for early retirement and provides a benefit at age 55 of 2 percent of average annual compensation, minus 0.325 percent of final average compensation up to the offset level, for each year of service up to 35. However, the early retirement benefit does not meet this paragraph (f) because an employee's gross benefit percentage is not reduced for early retirement.

EXAMPLE 7. The facts are the same as in EXAMPLE 6 except that the plan reduces the gross benefit percentage for early retirement at age 55 a 1.675 percent. Because the gross benefit percentage is reduced by 0.325 percent (from 2.0 percent to 1.675 percent), the same percentage point reduction made in the offset percentage (from 0.65 percent to 0.325 percent), the early retirement benefit meets this paragraph (f).

(g) NO REDUCTIONS IN 0.75-PERCENT FACTOR FOR DEATH BENEFITS. For purposes of applying the maximum excess allowance described in paragraph (b)(2) of this section and the maximum offset allowance described in paragraph (b)(3) of this section, no reduction is made to the 0.75-percent factor in the maximum excess allowance or in the maximum offset allowance solely because the plan provides disparity in death benefits that are unrelated to retirement benefits and are payable before an employee's social security retirement age.

(h) BENEFITS ATTRIBUTABLE TO EMPLOYEE CONTRIBUTIONS NOT TAKEN INTO ACCOUNT. Benefits attributable to employee contributions to a defined benefit excess plan or to an offset plan are not taken into account in determining whether the disparity provided under a defined benefit excess plan or an offset plan exceeds the maximum permitted disparity described in paragraph (b) of this section. Therefore, the base benefit percentage and the excess benefit percentage under a defined benefit excess plan for the plan year are reduced to the extent that benefits are attributable to employee contributions. Similarly, the gross benefit percentage under a defined benefit offset plan for the plan year is reduced to the extent the benefit is attributable to employee contributions. See section 1.401(a)(4)-6(b) for methods of determining the employer-provided benefit under a plan that includes employee contributions not allocated to separate accounts (i.e., a contributory DB plan).

(i) MULTIPLE INTEGRATION LEVELS -- [Reserved].

(j) ADDITIONAL RULES. The Commissioner may, in revenue rulings, notices or other documents of general applicability, prescribe additional rules as may be necessary or appropriate to carry out the purposes of this section, including updated tables under paragraphs (d) and (e) of this section providing for reductions in the 0.75-percent factor in the maximum excess allowance and in the maximum offset allowance and rules in paragraph (h) of this section for determining the portion of an employee's benefit attributable to employee contributions.

SECTION 1.401(l)-4 SPECIAL RULES FOR RAILROAD PLANS.

(a) IN GENERAL. Section 401(l)(6) provides that, in the case of a plan maintained by a railroad employer that covers employees who are entitled to benefits under the Railroad Retirement Act of 1974, in determining whether such a plan satisfies section 401(l), rules similar to the rules under section 401(l) apply and such rules take into account the employer-derived portion of tier 2 and supplemental annuity benefits provided under the railroad retirement system. In general, for purposes of determining whether a defined contribution plan or a defined benefit plan maintained by a railroad employer and covering employees described in the preceding sentence, satisfies section 401(l), the employer-derived portion of an employee's tier 2 benefits and supplementary annuity benefits under the Railroad Retirement Act of 1974 are treated as though such benefits were provided by the railroad employer under a qualified plan. Paragraph (b) of this section contains rules for defined contribution plans. Paragraph (c) of this section contains rules for defined benefit excess plans. Paragraph (d) of this section contains rules for offset plans. Paragraph (e) of this section contains definitions and additional rules of application.

(b) DEFINED CONTRIBUTION PLANS -- (1) IN GENERAL. A defined contribution plan maintained by a railroad employer satisfies section 401(l) and section 1.401(l)-2 for a plan year only if the plan satisfies paragraph (b)(2) or (b)(3) of this section for the plan year.

(2) SINGLE INTEGRATION LEVEL METHOD -- (i) IN GENERAL. A plan satisfies this paragraph (b)(2) if --

(A) The plan specifies a single integration level for all employees that does not exceed the railroad retirement taxable wage base in effect as of the beginning of the plan year,

(B) The plan uses the same base contribution percentage and the same excess contribution percentage for all employees, and

(C) The excess contribution percentage does not exceed the sum of 11.4 percentage points and the base contribution percentage.

(ii) DEFINITIONS. The following definitions govern for purposes of this paragraph (b)(2).

(A) "Base contribution percentage" means the rate at which employer contributions are allocated to the account of an employee under the plan with respect to the employee's plan year compensation at or below the railroad retirement taxable wage base (expressed as a percentage of such plan year compensation).

(B) "Excess contribution percentage" means the rate at which employer contributions are allocated to the account of an employee under the plan with respect to the employee's plan year compensation above the railroad retirement taxable wage base (expressed as a percentage of such plan year compensation).

(3) TWO INTEGRATION LEVEL METHOD -- (i) IN GENERAL. A plan satisfies this paragraph (b)(3) if--

(A) The plan specifies two integration levels for all employees, equal to the railroad retirement taxable wage base in effect as of the beginning of the plan year and the taxable wage base in effect as of the beginning of the plan year, and

(B) The plan satisfies paragraphs (b)(3)(ii) and (iii) of this section.

(ii) TOTAL DISPARITY REQUIREMENT. A plan satisfies this paragraph (b)(3)(ii) if --

(A) The plan uses the same base contribution percentage and the same excess contribution percentage for all employees, and

(B) The excess contribution percentage does not exceed the sum of 11.4 percentage points and the base contribution percentage.

(iii) INTERMEDIATE DISPARITY REQUIREMENT. A plan satisfies this paragraph (b)(3)(iii) if --

(A) The plan uses the same base contribution percentage and the same intermediate contribution percentage for all employees, and

(B) The intermediate contribution percentage does not exceed the sum of 5.7 percentage points and the base contribution percentage.

(iv) DEFINITIONS. The following definitions govern for purposes of this paragraph (b)(3).

(A) "Base contribution percentage" means the rate at which employer contributions are allocated to the account of an employee under the plan with respect to the employee's plan year compensation at or below the railroad retirement taxable wage base (expressed as a percentage of such plan year compensation).

(B) "Intermediate contribution percentage" means the rate at which employer contributions are allocated to account of an employee under the plan with respect to the employee's plan year compensation between the railroad retirement taxable wage base and the taxable wage base (expressed as a percentage of such plan year compensation).

(C) "Excess contribution percentage" means the rate at which employer contributions are allocated to the account of an employee under the plan with respect to the employee's plan year compensation above the taxable wage base (expressed as a percentage of such plan year compensation).

(c) DEFINED BENEFIT EXCESS PLANS -- (1) IN GENERAL. A defined benefit excess plan maintained by a railroad employer satisfies section 401(l) and section 1.401(l)-3 for a plan year only if the plan satisfies paragraph (c)(2) or (c)(3) of this section for the plan year.

(2) SINGLE INTEGRATION LEVEL METHOD -- IN GENERAL. A plan satisfies this paragraph (c)(2) if --

(A) The plan specifies a single integration level for all employees that does not exceed railroad retirement covered compensation,

(B) The plan uses the same base benefit percentage and the same excess benefit percentage for all employees, and

(C) The excess benefit percentage does not exceed the lesser of --

(1) Two times the sum of 0.56 percent and the base benefit percentage, or

(2) 0.56 percent plus the base benefit percentage plus 0.75 percent.

(ii) DEFINITIONS. The following definitions govern for purposes of this paragraph (c)(2).

(A) "Base benefit percentage" means the rate at which employer- provided benefits are determined under the plan with respect to an employee's average annual compensation at or below the employee's railroad retirement covered compensation (expressed as a percentage of such average annual compensation).

(B) "Excess benefit percentage" means the rate at which employer-provided benefits are determined under the plan with respect to an employee's average annual compensation above the employee's railroad retirement covered compensation (expressed as a percentage of such average annual compensation).

(3) TWO INTEGRATION LEVEL METHOD -- (i) IN GENERAL. A plan satisfies this paragraph (c)(3) for a plan year if --

(A) The plan specifies two integration levels for all employees, equal to each employee's railroad retirement covered compensation and each employee's covered compensation, and

(B) The plan satisfies paragraphs (c)(3)(ii) and (iii) of this section.

(ii) EMPLOYEE WITH LOWER COVERED COMPENSATION. A plan satisfies this paragraph (c)(3)(ii) if, with respect to each employee whose lower integration level is the employee's covered compensation --

(A) The plan uses the same base benefit percentage and the same intermediate benefit percentage for all employees,

(B) The intermediate benefit percentage does not exceed the base benefit percentage by more than the lesser of 0.75 percent or the base benefit percentage,

(C) The plan uses the same intermediate benefit percentage and the same excess benefit percentage by an amount for all employees, and

(D) The excess benefit percentage does not exceed the intermediate benefit percentage by more than 0.56 percent.

(iii) EMPLOYEE WITH LOWER RAILROAD RETIREMENT COVERED COMPENSATION. A plan satisfies this paragraph (c)(3)(iii) if, with respect to each employee whose lower integration level is the employee's railroad retirement covered compensation --

(A) The plan uses the same base benefit percentage and the same excess benefit percentage for all employees,

(B) The excess benefit percentage does not exceed the lesser of --

(1) Two times the sum of 0.56 percent and the base benefit percentage, or

(2) The sum of 0.56 percent plus the base benefit percentage plus 0.75 percent,

(C) The plan uses the same the base benefit percentage and the same intermediate benefit percentage for all employees, and

(D) The intermediate benefit percentage does not exceed the sum of 0.56 percent plus the base benefit percentage.

(iv) DEFINITIONS. The following definitions govern for purposes of this paragraph (c)(3).

(A) "Base benefit percentage" means the rate at which employer- provided benefits are determined under the plan with respect to an employee's average annual compensation at or below the lower integration level specified in the plan (expressed as a percentage of such average annual compensation).

(B) "Intermediate benefit percentage" means the rate at which employer-provided benefits are determined under the plan with respect to an employee's average annual compensation between the lower and higher integration levels specified in the plan (expressed as a percentage of such average annual compensation).

(C) "Excess benefit percentage" means the rate at which employer-provided benefits are determined under the plan with respect to an employee's average annual compensation above the higher integration level specified in the plan (expressed as a percentage of such average annual compensation).

(d) OFFSET PLANS -- (1) IN GENERAL. An offset plan maintained by a railroad employer satisfies section 401(l) and section 1.401(l)-3 for a plan year only if --

(i) The plan satisfies section 1.401(l)-3 for the plan year without regard to the offset for the employer-derived portion of tier 2 and supplementary annuity benefits provided under the railroad retirement system, and

(ii) The offset for the employer-derived portion of tier 2 and supplementary annuity benefits provided under the railroad retirement system does not exceed the maximum tier 2 and supplementary annuity offset allowance.

(2) MAXIMUM TIER 2 AND SUPPLEMENTARY ANNUITY OFFSET ALLOWANCE. For purposes of paragraph (d)(1) of this section, the maximum tier 2 and supplementary annuity offset allowance for a plan year is equal to 0.56 percent of the employee's railroad retirement covered compensation for the plan year.

(e) ADDITIONAL RULES -- (1) DEFINITIONS. The following definitions govern for purposes of this section.

(i) "Railroad retirement taxable wage base" means the applicable base, as determined under section 3231(e)(2)(B)(ii), for purposes of the tax under section 3221(b) (the tier 2 tax).

(ii) "Railroad retirement covered compensation" for an employee means 12 multiplied by the average of the 60 highest monthly railroad taxable wage bases in effect for the employee's period of employment. The monthly railroad taxable wage base is determined by dividing the railroad taxable wage base for the calendar year in which the month occurs by 12. An employee's railroad retirement covered compensation for the plan year is determined as of the beginning of the plan year. A plan must provide that an employee's railroad retirement covered compensation is automatically adjusted for each plan year. See section 1.401(l)-1(b) for rules relating to prohibited decreases in an employee's accrued benefit within the meaning of section 411(d)(6) or section 411(b)(1)(G).

(2) ADJUSTMENTS TO 0.75-PERCENT FACTOR. The 0.75-percent factor in the maximum excess allowance and in the maximum offset allowance is subject to the reductions prescribed in section 1.401(1)-3(d) and (e), except that in the case of an employee with at least 30 years of service with a railroad employer, the following tables are substituted for Tables I through III contained in section 1.401(1)- 3(e)(3).

 TABLE I

(i) "Railroad retirement covered compensation" is substituted for "covered compensation" in section 1.401(l)-3(d),

(ii) The reductions under section 1.401(l)-3(d) are made by multiplying the 0.56 factor by the ratio of the applicable factor from the table in section 1.401(l)-(3)(d)(g)(iv)(A) to 0.75, and

(iii) The following tables are substituted for Tables I through III set forth in section 1.401(l)-3(e)(3).

 (A) Tables Applicable to 0.56% Factor for Employees Covered by

SECTION 1.401(l)-5 OVERALL PERMITTED DISPARITY LIMITS.

(a) INTRODUCTION -- (1) IN GENERAL. The maximum excess allowance and maximum offset allowance limit the disparity that can be provided under a plan for a plan year. The overall permitted disparity rules apply to limit the disparity provided for a plan year if an employee benefits under more than one plan maintained by the employer (the "annual overall permitted disparity limit") and to limit the disparity provided for an employee's total years of service, either in a single plan or in more than one plan of the employer (the "cumulative overall permitted disparity limit"). The overall permitted disparity rules take into account the disparity provided under a section 401(l) plan and the permitted disparity imputed under a plan that satisfies section 401(a)(4) by relying on section 1.401(a)(4)-7. A plan that is not a section 401(l) plan is generally deemed to impute permitted disparity under section 1.401(a)(4)-7 unless established otherwise. Paragraph (b) of this section provides rules on the annual overall permitted disparity limit. Paragraph (c) of this section provides rules on the cumulative overall permitted disparity limit.

(2) PLAN REQUIREMENTS. In order to satisfy section 401(l), a plan must provide that the overall permitted disparity limits may not be exceeded and must specify how employer-provided contributions or benefits under the plan are adjusted, if necessary, to satisfy the overall permitted disparity limits. Any adjustments made to satisfy the overall permitted disparity limits must be made in a uniform manner for all employees.

(3) PLANS TAKEN INTO ACCOUNT. For purposes of this section, all plans of the employer are taken into account. In addition, all plans of any other employer are taken into account for all periods of service with the other employer for which the employee receives credit for purposes of benefit accrual under any plan of the current employer.

(b) ANNUAL OVERALL PERMITTED DISPARITY LIMIT -- (1) IN GENERAL. If, in the plan year, an employee benefits under more than one plan, the annual overall permitted disparity limit is satisfied only if the employee's total annual disparity fraction, as defined in paragraph (b)(2) of this section, does not exceed one. Paragraphs (b)(3) through (b)(8) of this section explain the determination of an employee's annual disparity fractions. Paragraph (b)(9) of this section provides examples.

(2) TOTAL ANNUAL DISPARITY FRACTION. An employee's total annual disparity fraction is the sum of the employee's annual disparity fractions, as defined in paragraphs (b)(3) through (b)(7) of this section. An employee's total annual disparity fraction is determined as of the end of the current plan year, based on the employee's annual disparity fractions under all plans with plan years ending in the current plan year.

(3) ANNUAL DEFINED CONTRIBUTION PLAN DISPARITY FRACTION. For a plan year, the annual defined contribution plan disparity fraction for an employee benefiting under a defined contribution plan that is a section 401(l) plan is a fraction --

(i) The numerator of which is the disparity provided under the plan for the plan year, and

(ii) The denominator of which is the maximum excess allowance under section 1.401(l)-2(b)(2) for the plan year.

(4) ANNUAL DEFINED BENEFIT EXCESS PLAN DISPARITY FRACTION. For a plan year, the annual defined benefit excess plan disparity fraction for an employee benefiting under a defined benefit excess plan that is a section 401(l) plan is a fraction --

(i) The numerator of which is the disparity provided under the plan for the plan year, and

(ii) The denominator of which is the maximum excess allowance under section 1.401(l)-3(b)(2) for the plan year.

(5) ANNUAL OFFSET PLAN DISPARITY FRACTION. For a plan year, the annual offset plan disparity fraction for an employee benefiting under an offset plan that is a section 401(l) plan is a fraction --

(i) The numerator of which is the disparity provided under the plan for the plan year, and

(ii) The denominator of which is the maximum offset allowance under section 1.401(l)-3(b)(3) for the plan year.

(6) ANNUAL IMPUTED DISPARITY FRACTION. For a plan year, the annual imputed disparity fraction for an employee benefiting under a plan that imputes permitted disparity with respect to the employee under section 1.401(a)(4)-7 is one.

(7) ANNUAL NONDISPARATE FRACTION. For a plan year, the annual nondisparate fraction for an employee benefiting under a plan that neither is a section 401(l) plan nor imputes permitted disparity under section 1.401(a)(4)-7 is zero.

(8) DETERMINATION OF FRACTION -- (i) GENERAL RULE. A separate annual disparity fraction is generally determined for each plan under which the employee benefits. Thus, for example, if two plan are aggregated and treated as a single plan for purposes of section 401(a)(4), a single annual disparity fraction applies to the aggregated plan.

(ii) MULTIPLE FORMULAS. If a plan provides an allocation or benefit equal to the sum of two or more formulas, each formula is considered a separate plan for purposes of this section. If a plan provides an allocation or benefit equal to the greater of two or more formulas, an annual disparity fraction is calculated for the employee under each formula and the largest of the fractions is the employee's annual disparity fraction under the plan.

(iii) OFFSET ARRANGEMENTS -- (A) IN GENERAL. If an employee benefits under two plans of the employer described in paragraph (b)(8)(iii)(B) or (C) of this section, the employee's annual disparity fraction under both plans is the larger of the annual disparity fractions calculated separately under each plan.

(B) DEFINED BENEFIT PLANS. The employee's employer-provided accrued benefit under a defined benefit plan is offset by the employee's total employer-provided accrued benefit under another defined benefit plan or by the actuarial equivalent (as defined in section 1.401(a)(4)-12) of the employee's total account balance under a defined contribution plan that is attributable to employer contributions.

(C) DEFINED CONTRIBUTION PLANS. The amount allocated to the employee's account under a defined contribution plan is offset by the total amount allocated to the employee's account under another defined contribution plan.

(iv) APPLICABLE PERCENTAGES. The disparity provided under a plan is determined on the base and excess percentages under an excess plan and the offset percentage under an offset plan, regardless of whether the employee's plan year or average annual compensation exceeds the integration or offset level under the plan.

(9) EXAMPLES. The following examples illustrate this paragraph (b). Except as otherwise provided, each plan is a section 401(l) plan.

EXAMPLE 1. (a) Employee A benefits for the plan year under a defined contribution excess plan, Plan X, and a defined benefit excess plan, Plan Y, of the employer. Plans X and Y have the same plan year. Employee A benefits under no other plan of the employer for the plan year of any other plan ending in the plan year of Plans X and Y. Plan X provides a base contribution percentage of 5 percent and an excess contribution percentage of 7 percent, thus providing Employee A with disparity of 2 percent for the plan year. The maximum excess allowance for the plan year under Plan X is 5 percent. Plan Y provides a base benefit percentage of 1 percent and an excess benefit percentage of 1.35 percent, thus providing Employee A with disparity of 0.35 percent for the plan year. The maximum excess allowance for the plan year under Plan Y is 0.75 percent.

(b) Employee A's annual defined contribution plan disparity fraction under Plan X for the plan year is 0.4 (2 percent divided by 5 percent). Employee A's annual defined benefit excess plan disparity fraction under Plan Y for the plan year is 0.47 (0.35 percent divided by 0.75 percent). Employee A's total annual disparity fraction is the sum of 0.4 and 0.47 or 0.87. Because Employee A's total annual disparity fraction does not exceed one, the plans satisfy the annual overall permitted disparity limit with respect to Employee A for the plan year.

EXAMPLE 2. (a) The facts are the same as in EXAMPLE 1, except that Plan Y is a defined contribution plan, rather than a defined benefit plan. Plan X and Plan Y cover the same employees and are identical in their terms except for the base and excess contribution percentages provided under the plans. Plan Y provides a base contribution percentage of 3 percent and an excess contribution percentage of 6 percent, thus providing Employee A with disparity of 3 percent for the plan year. The maximum excess allowance for the plan year under Plan Y is 3 percent.

(b) Employee A's annual defined contribution plan disparity fraction under Plan X for the plan year is 0.4 (2 percent divided by 5 percent). Employee A's annual defined contribution plan disparity fraction under Plan Y for the plan year is 1 (3 percent divided by 3 percent). Because Employee A's total annual disparity fraction (the sum of 0.4 and 1 or 1.4) exceeds one, the plans do not satisfy the annual overall permitted disparity requirements with respect to Employee A for the plan year.

(c) Plan X and Plan Y are aggregated for purposes of section 401(a)(4) and form a single section 401(l) plan. Under the plan, the base contribution percentage is 8 percent (5 percent plus 3 percent), and the excess contribution percentage is 13 percent (7 percent plus 6 percent). A single annual defined contribution plan disparity fraction is determined for Employee A for the plan year, the numerator of which is the disparity of 5 percent provided under the plan (13 percent minus 8 percent), and the denominator of which is 5.7 percent, the maximum excess allowance that applies to the plan. Because Employee A's only annual disparity fraction of 0.88 (5 percent divided by 5.7 percent) does not exceed one, Employee A's total annual disparity fraction also does not exceed one. The plan thus satisfies the annual overall permitted disparity limit with respect to Employee A for the plan year.

EXAMPLE 3. Assume the same facts as in EXAMPLE 2, except that Plan X and Plan Y use different integration levels. Therefore, when Plan X and Plan Y are aggregated to form a single plan for purposes of section 401(a)(4), the single plan does not satisfy section 401(l). In applying the general test of section 1.401(a)(4)-2(c), the plan imputes disparity under section 1.401(a)(4)-7. Employee A's only annual disparity fraction is the annual imputed disparity fraction of one. Employee A's total annual disparity fraction is also one, and the plan satisfies the annual overall permitted disparity limit with respect to Employee A for the plan year.

EXAMPLE 4. (a) Employee B participates in two plans: Plan M, which is a section 401(l) plan, and Plan N, which is subject to the general test under section 1.401(a)(4)-3(b). Plan M provides that the disparity provided an employee for the plan year will be reduced to the extent necessary to satisfy the annual overall permitted disparity limits. The employer wishes to impute permitted disparity under section 1.401(a)(4)-7 in order for Plan N to satisfy section 401(a)(4). Employee B's imputed disparity fraction under Plan N is therefore one, and Plan M provides no disparity provided for Employee B for the plan year. As a result, Plan M provides disparity that is neither uniform nor deemed uniform under section 1.401(l)-3(c); Plan M therefore does not satisfy section 401(l).

(b) Assume instead that Plan M provides that the annual overall permitted disparity limits must be satisfied without reducing the disparity provided for an employee under Plan M, thus requiring a reduction in the employee's annual disparity fraction under another plan. In that case, the disparity provided under Plan M would be uniform for the plan year and Plan M would continue to satisfy section 401(l). However, imputation of permitted disparity with respect to Employee B would not be allowed under Plan N.

(c) CUMULATIVE PERMITTED DISPARITY LIMIT -- (1) IN GENERAL (i) EMPLOYEES WHO BENEFIT UNDER DEFINED BENEFIT PLANS. In the case of an employee who has benefited under one or more defined benefit plans for a plan year beginning after December 31, 1991, the cumulative permitted disparity limit is satisfied if the employee's cumulative disparity fraction, as defined in paragraph (c)(2) of this section, does not exceed 35.

(ii) EMPLOYEES WHO DO NOT BENEFIT UNDER DEFINED BENEFIT PLANS. In the case of an employee who has not benefited under a defined benefit plan for any plan year beginning after December 31, 1991, the cumulative permitted disparity limit is satisfied.

(iii) CERTAIN PLAN YEARS DISREGARDED. For purposes of this paragraph (c), an employee is not treated as benefiting under a defined benefit plan for a plan year beginning after December 31, 1991, if the employer can establish that for that plan year the defined benefit plan was not a section 401(l) plan and did not impute permitted disparity under section 1.401(a)(4)-7.

(iv) DETERMINATION OF TYPE OF PLAN. For purposes of this paragraph (c), a target benefit plan that relies on the special rule of section 1.401(a)(4)-8(b)(3) to satisfy section 401(a)(4) and a DB/DC plan within the meaning of section 1.401(a)(4)-9(a) are treated as defined benefit plans. Similarly, a cash balance plan that relies on the special rule of section 1.401(a)(4)-8(c)(3) to satisfy section 401(a)(4) is treated as a defined contribution plan.

(2) CUMULATIVE DISPARITY FRACTION. An employee's cumulative disparity fraction is the sum of the employee's total annual disparity fractions, as defined in paragraph (b)(3) of this section, attributable to the employee's total years of service under all plans.

(3) DETERMINATION OF TOTAL ANNUAL DISPARITY FRACTIONS FOR PRIOR YEARS -- (i) PRE-EFFECTIVE DATE YEARS. For each of the employee's years of service under all plans as of the end of the last plan year beginning before January 1, 1989, the employee's total annual disparity fraction is one.

(ii) OPTION FOR ANY PRIOR YEAR. The total annual disparity fraction for each prior year of service (or for each prior year of service as of a single date specified in the plan) for each employee may be treated as one. Thus, for example, in lieu of calculating annual disparity fractions for all plan years, the employer may choose to assume that the full annual disparity limit has been used in each prior plan year, including years after 1988.

(4) EXAMPLES. The following examples illustrate this paragraph (c). In each example the plan is noncontributory and, unless provided otherwise, is the only plan ever maintained by the employer. Each plan uses a normal retirement age of 65 and contains no provision that would require a reduction in the 0.75-percent factor under paragraph (b)(2) or (b)(3) of this section. Each example discusses the benefit formula applicable to an employee who has a social security retirement age of 65.

EXAMPLE 1. Plan M is a defined benefit excess plan that provides a normal retirement benefit of 1 percent of average annual compensation up to covered compensation, plus 1.75 percent of average annual compensation above covered compensation, for each year of service without limit. The disparity provided under the plan for the plan year is 0.75 percent, the excess benefit percentage of 1.75 percent minus the base benefit percentage of 1 percent. The maximum excess allowance for the plan year is 0.75 percent. Thus, each employee's annual defined benefit excess plan disparity fraction under the plan for each plan year is one. Because the plan contains no limit on the years of service taken into account under the plan, the sum of the total annual disparity fractions for a potential employee with more than 35 years of service will exceed 35. In addition, the plan does not provide that the overall permitted disparity limits may not be exceeded as required by paragraph (a)(2) of this section. The plan therefore does not satisfy the cumulative permitted disparity limit of this paragraph (c).

EXAMPLE 2. Plan N is an offset plan that provides a normal retirement benefit of 2 percent of average annual compensation, minus 0.75 percent of final average compensation up to the lesser of covered compensation and average annual compensation, for each year of service up to 35. The disparity provided under the plan for the plan year is 0.75 percent, the offset percentage. The maximum offset allowance for the plan year is 0.75 percent. Thus, each employee's annual offset plan disparity fraction under the plan for each plan year is one. Because the plan limits the years of service taken into account under the plan to 35, the sum of the total annual disparity fractions for an employee cannot exceed 35. The plan therefore satisfies the cumulative permitted disparity limit of this paragraph (c).

EXAMPLE 3. Plan O is a defined benefit excess plan that provides a normal retirement benefit of 0.75 percent of average annual compensation up to covered compensation, plus 1.25 percent of average annual compensation above covered compensation, for each year of service up to 45. The disparity provided under the plan for the plan year is 0.5 percent, the excess benefit percentage of 1.25 percent minus the base benefit percentage of 0.75 percent. The maximum excess allowance for the plan year is 0.75 percent. Thus, each employee's annual defined benefit excess plan disparity fraction under the plan for each plan year is 0.67 (0.5 percent divided by 0.75 percent). Because the plan limits the years of service taken into account under the plan to 45, the sum of the total annual disparity fractions for an employee cannot exceed 30 (0.67 x 45). The plan therefore satisfies the cumulative permitted disparity limit of this paragraph (c).

EXAMPLE 4. (a) Plan P is a defined contribution excess plan. Plan P provides a base contribution percentage of 6 percent and an excess contribution percentage of 11.7 percent, thus providing disparity of 5.7 percent for the plan year. Because the maximum excess allowance for each plan year under Plan P is 5.7 percent, each employee's annual defined contribution excess plan disparity fraction under Plan P for each plan year is one. Plan Q is a defined benefit excess plan maintained by the same employer. Plan Q provides a base benefit percentage of 1 percent and an excess benefit percentage of 1.75 percent for each year of service up to 35, thus providing disparity of 0.75 percent for the plan year. Because the maximum excess allowance for each plan year under Plan Q is 0.75 percent, each employee's annual defined benefit excess plan disparity fraction under Plan Q for each plan year is one.

(b) Employee A benefits under Plan P for the 1980 through the 1994 plan years. The sum of Employee A's total annual disparity fractions under Plan P is 15. (Under paragraph (c)(3)(i) of this section, Employee A's annual disparity fraction for each year of service as of the end of the 1985 plan year is one.) As of the 1995 plan year, Employee A no longer benefits under Plan P and begins to benefit under Plan Q for the first time. In order to satisfy the cumulative permitted disparity limit of this paragraph (c), Plan Q must provide that no disparity will be provided if the sum of an employee's total annual disparity fractions reaches 35, taking into account the employee's annual defined contribution plan disparity fractions under Plan P as well as the employee's annual defined benefit excess plan disparity fractions under Plan Q. Thus, after Employee A has benefited under Plan Q for 20 years, Plan Q may not provide any disparity in additional benefits accrued for Employee A.

(d) ADDITIONAL RULES. The Commissioner may prescribe additional rules under this section as the Commissioner considers appropriate. Additional rules may include (without being limited to) rules for computing the fractions described in this section with respect to terminated plans, rules for applying the overall permitted disparity limits to employees who benefit under plans maintained by railroad employers, and rules for determining which plans do not satisfy section 401(l) if the overall permitted disparity limits are not exceeded.

SECTION 1.401(l)-6 EFFECTIVE DATES AND TRANSITION RULES.

(a) IN GENERAL. Section 401(a)(5)(C) is effective for plan years beginning after December 31, 1988, and section 401(l) is effective with respect to plan years, and benefits attributable to plan years, beginning after December 31, 1988. The preceding sentence is applicable to a plan without regard to whether the plan was in existence as of a particular date.

(b) DEFINED CONTRIBUTION PLANS. A defined contribution plan satisfies section 401(l) with respect to a plan year beginning after December 31, 1988, if it satisfies the applicable requirements of sections 1.401(l)-1 through 1.401(l)-5 for the plan year.

(c) DEFINED BENEFIT PLANS. A defined benefit excess plan or offset plan satisfies section 401(l) with respect to all plan years, and benefits attributable to all plan years, beginning after December 31, 1988, by satisfying the applicable requirements of sections 1.401(l)-1 through 1.401(l)-5 and the requirements of section 1.401(a)(4)-13(c), using as the fresh-start date the last day of the last plan year beginning before January 1, 1989. A defined benefit excess plan or offset plan that does not satisfy section 401(l) with respect to all plan years, and benefits attributable to all plan years, beginning after December 31, 1988, may, under the rules of section 1.401(a)(4)-13(c), satisfy section 401(l) for plan years beginning after a fresh-start date by satisfying the applicable requirements of sections 1.401(l)-1 through 1.401(l)-5 after the fresh-start date. See section 1.401(a)(4)-13(c)(5)(iii) and (d), which allow increases in each employee's benefit accrued as of the fresh-start date to reflect increases in the employee's compensation if the plan uses a fresh-start date before the effective date applicable to the plan under section 1.401(a)(4)-13(a) or (b).

(d) COLLECTIVELY BARGAINED PLANS. (1) In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified before March 1, 1986, sections 401(a)(5) and 401(l) are applicable for plan years beginning on or after the later of --

(i) January 1, 1989, or

(ii) The date on which the last of such collective bargaining agreements terminates (determined without regard to any extension of any such agreement occurring on or after March 1, 1986). However, notwithstanding the preceding sentence, sections 401(a)(5) and 401(l) apply to plans described in this paragraph (d) no later than the first plan year beginning after January 1, 1991.

(2) For purposes of paragraph (d)(l)(ii) of this section, a change made after October 22, 1986, in the terms or conditions of a collectively bargained plan, pursuant to a collective bargaining agreement ratified before March 1, 1986, is not treated as a change in the terms and conditions of the plan.

(3) In the case of a collectively bargained plan described in paragraph (d)(l) of this section, if the date in paragraph (d)(l)(ii) of this section precedes November 15, 1988, then the date in this paragraph (d) is replaced with the date on which the last of any collective bargaining agreements in effect on November 15, 1988, terminates, provided that the plan complies during this period with a reasonable good faith interpretation of section 401(l).

(4) Whether a plan is maintained pursuant to a collective bargaining agreement is determined under the principles applied under section 1017(c) of the Employee Retirement Income Security Act of 1974, See H.R. Rep. No. 1280, 93d Cong., 2d Sess. 266 (1974). In addition, a plan is not treated as maintained under a collective bargaining agreement unless the employee representatives satisfy section 7701(a)(46) of the Internal Revenue Code after March 31, 1984, See section 301.7701-17T of this chapter for other requirements for a plan to be considered to be collectively bargained. In the case of a collectively bargained plan described in paragraph (d)(1) of this section, if the date in paragraph (d)(1)(ii) of this section precedes November 15, 1988, then the date in this paragraph (d) shall be replaced with the date on which the last of any collective bargaining agreements in effect on November 15, 1988, terminates, provided that the plan complies during this period with a reasonable good faith interpretation of section 401(1).