Final Regs on Minimum Coverage Requirements for Employee Plans

 [4830-01-u]

 ACTION: Final regulations.

 SUMMARY: This document contains amendments to the final regulations under section 410(b), which provides minimum coverage requirements. The regulations reflect changes made by the Tax Reform Act of 1986 and by the Technical and Miscellaneous Revenue Act of 1988. The regulations provide guidance necessary to comply with the law and affect sponsors of, and participants in, tax-qualified retirement plans and certain other employee benefit plans.

 DATES: These regulations are effective January 1, 1994, and apply to plan years beginning on or after January 1, 1994, except as provided in the transition rules of section 1.410(b)-10.

 FOR FURTHER INFORMATION CONTACT: Dave Munroe at (202) 622-4606 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

On September 19, 1991, final regulations under section 410(b) (T.D. 8363) were published in the Federal Register (56 FR 47638). Amendments to those regulations were published in the Federal Register on December 4, 1991, (56 FR 63420), in connection with finalizing the separate line of business regulations (T.D. 8376) under section 414(r) of the Code. In the Federal Register of August 10, 1992, (57 FR 35536), the Internal Revenue Service published proposed regulations to extend the effective date of the final regulations under section 410(b) and related regulations generally to plan years beginning on or after January 1, 1994.

 On April 21, 1993, proposed regulations amending the final regulations were published in the Federal Register (58 FR 21417). Written comments were received from the public on the proposed regulations, and a public hearing was held on June 7, 1993. After consideration of all of the written comments received and the statements made at the public hearing, these regulations are adopted as modified by this Treasury decision.

EXPLANATION OF PROVISIONS

1. OVERVIEW

 Section 410(b) provides a minimum coverage requirement that a plan must meet in order to be tax qualified. In addition, the minimum coverage requirement is also relevant under the related section 401(a)(4) regulations in determining whether certain requirements of those regulations are satisfied.

 The September 1991 final regulations under section 410(b) provide that a plan can meet the section 410(b) minimum coverage requirement by satisfying one of two tests, the section 410(b)(1)(A) and (B) ratio percentage test or the section 410(b)(2) average benefit test. To satisfy the ratio percentage test for a plan year, a plan must have a ratio percentage of at least 70 percent. A plan's ratio percentage is the percentage of the employer's nonhighly compensated employees who benefit under the plan divided by the percentage of the employer's highly compensated employees who benefit under the plan.

 To satisfy the average benefit test, two requirements must be met -- the nondiscriminatory classification test of section 410(b)(2)(A)(i) and The average benefit percentage test of section 410(b)(2)(A)(ii). The nondiscriminatory classification test requires a plan to benefit employees who qualify under a reasonable employer- determined classification that does not discriminate in favor of highly compensated employees. The average benefit percentage test requires that the average of the employee benefit percentages for nonhighly compensated employees be at least 70 percent of the average of the employee benefit percentages for highly compensated employees, generally taking into account all the plans of the employer.

 The April 1993 regulations proposed to amend the September 1991 regulations generally to simplify them and to address other issues raised since the publication of those regulations. In addition, the proposed regulations make coordinating amendments to the September 1991 regulations under section 410(b) to take into account the changes proposed in the January 1993 proposed section 401(a)(4) regulations. Major changes in the April 1993 proposed regulations include the following:

•   o Replacing the rules for the average benefit percentage test in their entirety with less detailed rules that coordinate the determination of these percentages with the determination of accrual rates under the section 401(a)(4) regulations.

•   o Replacing objective testing of coverage of former employees with a flexible facts-and-circumstances analysis.

•   o Expanding the situations where employees in a multiemployer plan may continue to be treated as collectively bargained employees after they have switched from collectively bargained to noncollectively bargained status.

•   o Providing that the portion of a plan benefiting employees who have not satisfied the greatest permissible minimum age and service conditions may be disaggregated for purposes of the average benefit percentage test.

2. SPECIAL MULTIEMPLOYER PLAN RULES

 The September 1991 regulations provide that a plan benefiting both collectively bargained employees (as defined in the regulations) and noncollectively bargained employees is treated as two separate plans for section 410(b) purposes. The portion of the plan benefiting collectively bargained employees is deemed to satisfy the section 401(a)(4) and section 410(b) requirements automatically. In testing the portion of the plan benefiting noncollectively bargained employees, all collectively bargained employees are treated as excludable.

 The April 1993 proposed regulations contain several special rules that allow noncollectively bargained employees in a multiemployer plan who were formerly collectively bargained employees to continue to be treated as collectively bargained employees. These rules represent an exception to the general requirement that benefits provided to noncollectively bargained employees be tested under sections 401(a)(4) and 410(b).

 In view of the practical problems for plan trustees in identifying and accounting for noncollectively bargained employees of different employers, one of the special rules in the proposed regulations permits formerly collectively bargained employees to continue to be treated as collectively bargained employees indefinitely. This exception applies only if no more than two percent of the employees covered under the multiemployer plan are in this category and the terms of the plan providing for benefit accruals treat those employees in the same manner as similarly situated employees who are collectively bargained. In addition, in order to use this special alumni rule, the employees treated as collectively bargained must be performing services for one or more employers that are parties to the collective bargaining agreement.

 The Treasury and the Service believe that this exception for alumni is appropriate only if those noncollectively bargained employees represent a limited percentage of the multiemployer plan's population. However, commentators on the April 1993 regulations requested that the two-percent limit for the alumni rule be expanded to make this exception available to additional multiemployer plans. After weighing both the practical concerns expressed by the commentators and the importance of limiting this exemption from nondiscrimination testing (which could apply for an indefinite period of time), the Treasury and the Service have increased the percentage from two percent to five percent. In addition, it is anticipated that guidance on data collection and testing will be provided for multiemployer plans in the revenue procedure on substantiating compliance (proposed in Announcement 92-81, 1992-22 I.R.B. 56) when that document is finalized shortly.

 In response to comments, these regulations also liberalize and clarify the special multiemployer plan rules in a number of respects. For example, certain of the rules are conditioned on the noncollectively bargained employees being treated under the plan in the same manner as similarly situated collectively bargained employees. These regulations require only that the noncollectively bargained employees be treated in a manner that is generally no more favorable than similarly situated collectively bargained employees and clarify that only the terms of the plan providing for benefit accruals must treat the noncollectively bargained employees in this manner. Thus, for example, differences in vesting that may arise because the noncollectively bargained employees are subject to different statutory vesting schedules than collectively bargained employees will not prevent a multiemployer plan from using the special rules. These regulations also make clear that these special rules apply if the employee performs services for the plan or for the employee representative. In addition, among other clarifications, these regulations provide that the term "collective bargaining agreement" as used in these rules includes any successor agreement.

3. EMPLOYEES BENEFITING UNDER A PLAN

 The regulations generally provide that an employee is treated as benefiting under a defined benefit plan for a plan year only if there is an increase in the employee's accrued benefit. In response to comments, a revision has been made to these regulations that is intended to clarify that increases in the dollar amount of the accrued benefit merely because of the passage time or because of a change in indices affecting the accrued benefit do not cause an employee to be treated as benefiting.

 The regulations provide that in certain situations, however, an employee in a defined benefit plan will be treated as benefiting for a plan year even though the employee does not receive an accrual for the plan year. One of these situations is where an employee's accrued benefit would have increased if a previously accrued benefit were disregarded, such as where the plan utilizes a "wear-away" formula. The regulations include an increase in covered compensation or a decrease in the employee's compensation for the plan year as further examples of situations where this might occur. These examples have been eliminated in order to remove any possible inference concerning the proper interpretation of section 411(d)(6) or section 411(b)(1)(G) in these situations, but no inference should be drawn from this revision as to the correct interpretation of section 411.

4. EMPLOYEES TRANSFERRING BETWEEN PLANS THAT ARE MANDATORILY DISAGGREGATED

 The regulations require that certain plans be mandatorily disaggregated and treated as separate plans for purposes of section 410(b). Among the situations in which a plan must be disaggregated are those in which a plan benefits employees of different qualified separate lines of business, employees of more than one employer, or both collectively bargained and noncollectively bargained employees. Questions have arisen regarding the treatment of employees who change from being tested under one portion of a disaggregated plan to another portion of the disaggregated plan due to a change in status. To address these questions, proposed amendments to the mandatory disaggregation rules will be published in the proposed qualified separate line of business regulations, rather than in these final regulations.

5. GOVERNMENTAL PLANS

 Under the regulations, a plan that benefits employees of more than one employer (treating all members of a controlled group of employers under section 414 as a single employer) is treated as consisting of separate plans, each of which is maintained by a separate employer. Each of these plans must satisfy coverage and test for nondiscrimination with reference only to the applicable employer's employees.

 Some commentators have requested, in the absence of specific controlled group rules applicable to governmental entities, that they be permitted to treat all federal instrumentalities as a single employer and, thus, test a plan benefiting employees of more than one federal instrumentality on a plan-wide basis. The commentators note that such plan-wide testing would simplify compliance and reduce additional administrative costs for plans sponsored by federal instrumentalities.

 Under a special transition rule, governmental plans described in section 414(d) are deemed to satisfy the regulations under section 401(a)(4), section 410(b) and related nondiscrimination requirements generally for plan years beginning before 1996. A principal purpose of the transition rule is to provide the Treasury and the Service additional time to receive comments from governmental employers regarding appropriate modifications to the regulations to take into account the special circumstances of governmental plans. Consequently, treating federal instrumentalities as members of a controlled group will be considered, together with other comments received on the unique features of governmental plans, in developing future appropriate modifications to the regulations for governmental plans.

6. CHANGES TO MINIMUM PARTICIPATION REQUIREMENTS

 These regulations finalize the effective date change for governmental plans and certain 403(b) annuities under section 1.401(a)(26)-9(b)(1) that was proposed in August, 1992. In addition, they conform the language in the special testing rule in section 1.401(a)(26)-1(b)(4) for section 401(k) plans maintained by certain governmental or tax-exempt entities to the corresponding language used for such plans under the excludable employee rules in section 1.410(b)-6(g) of the regulations.

EFFECTIVE DATES

 The regulations generally are effective for plan years beginnIng on or after January 1, 1994, or, in the case of governmental plans and plans maintained by tax-exempt organizations, for plan years beginning on or after January 1, 1996. For plan years beginning on or after the first day of the first plan year to which the amendments made by section 1112(a) of the Tax Reform Act of 1986 (TRA '86) apply and before the applicable regulatory effective date, section 1.410(b)-10 provides that a plan must be operated in accordance with a reasonable, good faith interpretation of the requirements of section 410(b). Whether a plan is operated in accordance with a reasonable, good faith interpretation of section 410(b) generally will be determined based on all of the relevant facts and circumstances, including the extent to which an employer has resolved unclear issues in its favor. A plan will be deemed to be operated in accordance with a reasonable, good faith interpretation of section 410(b) if it is operated in accordance with these final regulations, the April 1993 proposed regulations, the September 1991 regulations, the May 1990 proposed section 410(b) regulations, or the May 1989 proposed section 410(b) regulations.

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 also has 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 Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking was submitted to the Small Business Administration for comment on its impact on small business.

DRAFTING INFORMATION

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

LIST OF SUBJECTS IN 26 CFR PART 1

 Income taxes, Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.401(a)(26)-1(b)(4) is revised to read as follows:

SECTION 1.401(a)(26)-1 MINIMUM PARTICIPATION REQUIREMENTS.

* * * * *

(b) * * *

(4) SECTION 401(k) PLAN MAINTAINED BY EMPLOYERS THAT INCLUDE CERTAIN GOVERNMENTAL OR TAX-EXEMPT ENTITIES. Section 401(k)(4)(B) prevents certain State and local governments and tax-exempt organizations from maintaining a qualified cash or deferred arrangement. A plan (or portion of a plan) that is either a section 401(k) plan or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan may be treated as a separate plan that satisfies section 401(a)(26) for a plan year if the following requirements are satisfied:

(i) The section 401(k) plan is maintained by an employer who has employees precluded from being eligible employees under the arrangement by reason of section 401(k)(4)(B), and

(ii) More than 95 percent of the employees of the employer who are not precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B) benefit under the section 401(k) plan.

Par. 3. Section 1.401(a)(26)-9(b)(1) is revised to read as follows:

SECTION 1.401(a)(26)-9 EFFECTIVE DATES AND TRANSITION RULES.

* * * * *

(b) * * *

(1) GOVERNMENTAL PLANS AND CERTAIN SECTION 403(b) ANNUITIES. Section 401(a)(26) is treated as satisfied for plan years beginning before the later of January 1, 1996, or 90 days after the opening of the first legislative session beginning on or after January 1, 1996, of the governing body with authority to amend the plan, if that body does not meet continuously, in the case of governmental plans described in section 414(d), including plans subject to section 403(b)(12)(A)(i) (nonelective plans). For purposes of this paragraph (b)(1), the term "governing body with authority to amend the plan" means the legislature, board, commission, council, or other governing body with authority to amend the plan.

* * * * *

Par. 4. Section 1.410(b)-0 is amended by:

1. Revising the introductory text and the section headings for sections 1.410(b)-1 and 1.410(b)-2.

2. Removing the entries for sections 1.410(b)-2(c)(2)(i) and (ii),

3. Amending the entries for section 1.410(b)-3 by:

a. Revising the entries for paragraphs (a)(2)(iii) and (a)(2)(iv).

b. Removing the entry for paragraph (a)(2)(v).

4. Revising the entries for section 1.410(b)-5, paragraphs (d) and (e).

5. Amending the entries for section 1.410(b)-6 by:

a. Revising the entry for paragraph (d)(2)(ii).

b. Correctly designating the entry for paragraph (i), PREVIOUSLY EXCLUDABLE EMPLOYEES, as the entry for paragraph (h)(3) and adding a new entry for paragraph (i).

6. Amending the entries for section 1.410(b)-9 by removing the following: Defined benefit excess plan, Excess benefit percentage, Gross benefit percentage, and Offset plan;

7. Revising the entries for section 1.410(b)-10.

8. The revisions and addition read as follows:

SECTION 1.410(B)-0 TABLE OF CONTENTS.

This section contains a listing of the major headings of sections 1.410(b)-1 through 1.410(b)-10.

SECTION 1.410(B)-1 MINIMUM COVERAGE REQUIREMENTS (BEFORE 1994).

* * * * *

SECTION 1.410(B)-2 MINIMUM COVERAGE REQUIREMENTS (AFTER 1993).

* * * * *

 SECTION 1.410(B)-3 EMPLOYEES AND FORMER EMPLOYEES WHO BENEFIT UNDER A PLAN.

SECTION 1.410(B)-1 MINIMUM COVERAGE REQUIREMENTS (BEFORE 1994).

Par. 6. Section 1.410(b)-2 is amended by:

1. Revising the section heading.

2. Revising paragraph (c)(2);

3. Revising the last sentence of paragraph (d).

4. Revising the last sentence of paragraph (e) and adding a sentence at the end of paragraph (e).;

5. Revising paragraph (f).

6. The revisions and addition read as follows:

SECTION 1.410(B)-2 MINIMUM COVERAGE REQUIREMENTS (AFTER 1993).

* * * * *

(c) * * *

(2) TESTING FORMER EMPLOYEES. A plan satisfies section 410(b) WITH respect to former employees if and only if, under all of the relevant facts and circumstances (including the group of nonexcludable former employees not benefiting under the plan), the group of former employees benefiting under the plan does not discriminate significantly in favor of highly compensated former employees.

* * * * *

(d) * * * For plan years beginning before the effective date set forth in section 1.410(b)-10(d), any plan described in section 410(c)(1)(A) (regarding governmental plans) satisfies the requirements of this section.

(e) * * * For plan years beginning before the effective date set forth in section 1.410(b)-10(d), any plan described in section 410(c)(1)(A) (regarding governmental plans) satisfies the requirements of this section and is thus treated as satisfying the requirements of section 401(a)(3) as in effect on September 1, 1974. See section 1.410(b)-10(b)(2) for a special rule for plans of tax- exempt organizations.

(f) CERTAIN ACQUISITIONS OR DISPOSITIONS. Section 410(b)(6)(C) (relating to certain acquisitions or dispositions) provides a special rule whereby a plan may be treated as satisfying section 410(b) for a limited period of time after an acquisition or disposition if it satisfies section 410(b) (without regard to the special rule) immediately before the acquisition or disposition and there is no significant change in the plan or in the coverage of the plan other than the acquisition or disposition. For purposes of section 410(b)(6)(C) and this paragraph (f), the terms "acquisition" and "disposition" refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business.

* * * * *

Par. 7. Section 1.410(b)-3 is amended by:

1. Revising paragraphs (a)(1), and (a)(2)(ii) through (a)(2)(iv) as set forth below.

2. Removing paragraph (a)(2)(v).

SECTION 1.410(B)-3 EMPLOYEES AND FORMER EMPLOYEES WHO BENEFIT UNDER A PLAN.

(a) * * * (1) IN GENERAL. Except as provided in paragraph (a)(2) of this section, an employee is treated as benefiting under a plan for a plan year if and only if for that plan year, in the case of a defined contribution plan, the employer receives an allocation taken into account under section 1.401(a)(4)-2(c)(2)(ii), or in the case of a defined benefit plan, the employee has an increase in a benefit accrued or treated as an accrued benefit under section 411(d)(6).

(2) * * *

(ii) SECTION 415 LIMITS -- (A) GENERAL RULE FOR DEFINED BENEFIT PLANS. In determining whether an employee is treated as benefiting under a defined benefit plan for a plan year, plan provisions that implement the limits of section 415 are disregarded. Any plan provision that provides for increases in an employee's accrued benefit under the plan due solely to adjustments under section 415(d)(1), additional years of participation or service under section 415(b)(5), or changes in the defined contribution fraction under section 415(e) is also disregarded, but only if such provision applies uniformly to all employees in the plan.

(B) DEFINED BENEFIT PLANS TAKING SECTION 415 LIMITS INTO ACCOUNT UNDER SECTION 401(A)(4) TESTING. Paragraph (a)(2)(ii)(A) of this section does not apply in the case of a defined benefit plan that uses the option in section 1.401(a)(4)-3(d)(2)(ii)(B) to take into account plan provisions implementing the provisions of section 415 in determining accrual rates under the section 401(a)(4) general test.

(C) DEFINED CONTRIBUTION PLANS. A defined contribution plan is permitted to apply the rule in the first sentence of paragraph (a)(2)(ii)(A) of this section in determining whether an employee is treated as benefiting under the plan, provided it applies the rule on a consistent basis for all employees in the plan.

(iii) CERTAIN EMPLOYEES TREATED AS BENEFITING -- (A) In general. An employee is treated as benefiting under a plan for a plan year if the employee satisfies all of the applicable conditions for accruing a benefit or receiving an allocation for the plan year but fails to have an increase in accrued benefit or to receive an allocation solely because of one or more of the conditions set forth in paragraphs (a)(2)(iii)(B) through (F) of this section.

(B) CERTAIN PLAN LIMITS. The employee's benefit would otherwise exceed a limit that is applicable on a uniform basis to all employees in the plan. Thus, for example, if the formula under a defined benefit plan takes into account only the first 30 years of service for accrual purposes, an employee who has completed more than 30 years of service is still treated as benefiting under the plan.

(C) BENEFITS PREVIOUSLY ACCRUED. The benefit previously accrued by the employee is greater than the benefit that would be determined under the plan if the benefit previously accrued were disregarded. This could happen, for example, when the plan is applying the wear- away formula of section 1.401(a)(4)-13(c)(4)(ii) and the employee's frown accrued benefit exceeds the benefit determined under the current formula.

(D) BENEFIT OFFSET ARRANGEMENTS. The plan offsets the employee's current benefit accrual under an offset arrangement described in section 1.401(a)(4)-3(f)(9) (without regard to whether the offset is attributable to pre-participation service or past service).

(E) TARGET BENEFIT PLANS. In the case of a target benefit plan that satisfies the nondiscriminatory amount requirement of section 1.401(a)(4)-1(b)(2) by satisfying the safe harbor in section 1.401(a)(4)-8(b)(3), the employee's theoretical reserve is greater than or equal to the actuarial present value of the fractional rule benefit.

(F) POST-NORMAL RETIREMENT AGE ADJUSTMENTS. The employee has attained normal retirement age under a deemed benefit plan and fails to accrue a benefit because of the provisions of section 411(b)(1)(H)(iii) regarding adjustments for delayed retirement.

(iv) SECTION 412(i) PLANS -- (A) GENERAL RULE. Notwithstanding paragraph (a)(1) of this section, an employee is treated as benefiting under an insurance contract plan within the meaning of section 412(i) for a plan year if and only if a premium is paid on behalf of the employee for the plan year.

(B) EXCEPTIONS. Notwithstanding paragraph (a)(2)(iv)(A) of this section, an employee is treated as benefiting under an insurance contract plan within the meaning of section 412(i) for a plan year if the sole reason that a premium is not paid on behalf of the employee is one of the reasons described in paragraph (a)(2)(iii) of this section. In addition, an employee is treated as benefiting under an insurance contract plan, within the meaning of section 412(i), that is a defined benefit plan if a premium is not paid on behalf of the employee solely because the insurance contracts that have previously been purchased on behalf of the employee guarantee to provide for the employee's projected normal retirement benefit without regard to future premium payments.

* * * * *

Par. 8. Section 1.410(b)-5 is amended by revising paragraphs (d) and (e) to read as follows:

SECTION 1.410(b)-5 AVERAGE BENEFIT PERCENTAGE TEST.

* * * * *

(d) DETERMINATION OF EMPLOYEE BENEFIT PERCENTAGES -- (1) OVERVIEW. This paragraph (d) provides rules for determining employee benefit percentages. See paragraph (e) of this section for alternative methods for determining employee benefit percentages.

(2) EMPLOYEE CONTRIBUTIONS AND EMPLOYEE-PROVIDED BENEFITS DISREGARDED. Only employer-provided contributions and benefits are taken into account in determining employee benefit percentages. Therefore, employee contributions (including both employee contributions allocated to separate accounts and employee contributions not allocated to separate accounts), and benefits derived from such contributions, are not taken into account in determining employee benefit percentages.

(3) PLANS AND PLAN YEARS TAKEN INTO ACCOUNT -- (i) TESTING GROUP. All plans included in the testing group under section 1.410(b)-7(e)(1), and only those plans, are taken into account in determining an employee's employee benefit percentage.

(ii) TESTING PERIOD. An employee's employee benefit percentage is determined on the basis of plan years ending with or within the same calendar year. These plan years are referred to in this section as the relevant plan years or, in the aggregate, as the testing period.

(4) CONTRIBUTIONS OR BENEFITS BASIS. Employee benefit percentages may be determined on either a contributions or a benefits basis. Employee benefit percentages for any testing period must be determined on the same basis (contributions or benefits) for all plans in the testing group.

(5) DETERMINATION OF EMPLOYEE BENEFIT PERCENTAGE -- (i) GENERAL RULE. The employee benefit percentage for an employee for a testing period is the rate that would be determined for that employee for purposes of applying the general test for nondiscrimination in sections 1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8 or 1.401(a)(4)- 9, if all the plans in the testing group were aggregated for purposes of section 410(b). Thus, if employee benefit percentages are determined on a contributions basis, each employee's employee benefit percentage is the aggregate normal allocation rate that would be determined for the employee under section 1.401(a)(4)-9(b)(2)(ii)(A) (if the plans in the testing group include both defined benefit and deemed contribution plans), the allocation rate that would be determined for the employee under section 1.401(a)(4)-2(c)(2) (if the plans in the testing group include only defined contribution plans), or the equivalent normal allocation rate that would be determined for the employee under section 1.401(a)(4)-8(c)(2) (if the plans in the testing group include only defined benefit plans). Similarly, if employee benefit percentages are determined on a benefits basis, each employee's employee benefit percentage is the aggregate normal accrual rate that would be determined for the employee under section 1.401(a)(4)-9(b)(2)(ii)(B), the normal accrual rate that would be determined for the employee under section 1.401(a)(4)-3(d), or the equivalent accrual rate that would be determined for the employee under section 1.401(a)(4)-8(b)(2), depending on whether the plans in the testing group include both defined benefit and defined contribution plans, only defined benefit plans, or only defined contribution plans.

(ii) PLANS WITH DIFFERING PLAN YEARS. If not all the plans in the testing group share the same plan year, section 1.410(b)-7(d)(5) would ordinarily prohibit them from being aggregated for purposes of section 410(b). In such a case, employee benefit percentages are determined by applying the rules of paragraph (d)(5)(i) of this section separately to each subset of plans in the testing group that share the same plan year (or the same accrual computation period) and aggregating the results for all plans in the testing group. Thus, an employee's employee benefit percentage is determined as the sum of these separate employee benefit percentages that are determined consistently for all the plans in the testing group (except for differences attributable solely to the differences in plan years).

(iii) OPTIONS AND CONSISTENCY REQUIREMENTS. In determining employee benefit percentages under this paragraph (d)(5), any optional or alternative methods or rules available for determining rates in sections 1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8, or 1.401(a)(4)-9, whichever is applicable, may be applied. Thus, for example, employee benefit percentages may generally be calculated using any of the alternative methods of determining average annual compensation or plan year compensation under section 1.401(a)(4)-12, and using any underlying definition of compensation that satisfies section 414(s). Except as otherwise specifically permitted, the determination of employee benefit percentages must be made on a consistent basis for all employees and for all plans in the testing group as required by sections 1.401(a)(4)-2(c)(2)(vi), 1.401(a)(4)- 3(d)(2)(i), 1.401(a)(4)-8(b)(2)(iv), 1.401(a)(4)-8(c)(2)(iv) or 1.401(a)(4)-9(b) (2)(iv).

(6) PERMITTED DISPARITY -- (i) IN GENERAL. Permitted disparity may be imputed in determining employee benefit percentages as provided in sections 1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8, or 1.401(a)(4)-9, whichever is applicable. When separate employee benefit percentages are determined for individual plans under paragraph (e)(2) of this section (or for subsets of plans that have the same plan year as described in paragraph (d)(5)(ii) of this section), permitted disparity may be imputed for an employee only in one individual plan (or subset of plans) and may not be imputed for the same employee in another individual plan (or subset of plans). However, if the same average annual compensation or plan year compensation is used to determine employee benefit percentages in more than one plan, the employee's employee benefit percentages for those plans may be summed prior to imputing permitted disparity.

(ii) PLANS WHICH MAY NOT USE PERMITTED DISPARITY. Permitted disparity may be reflected in the determination of rates only to the extent that the plans for which rates are being determined are plans for which the permitted disparity of section 401(l) is available. Thus, for example, if a section 401(k) plan is included in the testing group and permitted disparity is imputed under section 1.401(a)(4)-2(c)(iv), then employee benefit percentages are determined by first calculating an adjusted allocation rate (within the meaning of section 1.401(a)(4)-7(b)(1)) without regard to the amount of allocations under the section 401(k) plan and adding to it the allocation rate for the section 401(k) plan. See section 1.401(l)-1(a)(4) for a list of types of plans for which permitted disparity is not available.

(7) REQUIREMENTS FOR CERTAIN PLANS PROVIDING EARLY RETIREMENT BENEFITS -- (i) GENERAL RULE. If any defined benefit plan in the testing group provides for early retirement benefits in addition to normal retirement benefits to any highly compensated employee, and the average actuarial reduction for any one of these benefits commencing in the five years prior to the plan's normal retirement age is less than four percent per year, then the aggregate most valuable allocation rate, equivalent most valuable allocation rate, aggregate most valuable accrual rate, or most valuable accrual rate must be substituted for the related normal rates in paragraph (d)(5) of this section.

(ii) EXCEPTION. Paragraph (d)(7)(i) of this section does not apply if early retirement benefits with average actuarial reductions described in that paragraph are currently available, within the meaning of section 1.401(a)(4)-4(b), under plans in the testing group to a percentage of nonhighly compensated employees that is at least 70 percent of the percentage of highly compensated employees to whom these benefits are currently available.

(e) ADDITIONAL OPTIONAL RULES -- (1) OVERVIEW. This paragraph (e) contains various alternative methods for determining employee benefit percentages for a testing period.

(2) DETERMINATION OF EMPLOYEE BENEFIT PERCENTAGES AS THE SUM OF SEPARATELY DETERMINED RATES -- (i) IN GENERAL. Employee benefit percentages may be determined as the sum of separately determined employee benefit percentages for each of the plans in the testing group that are aggregated under paragraphs (d)(5)(i) or (ii) of this section, provided that these employee benefit percentages are determined on a consistent basis for all of these plans pursuant to paragraph (d)(5)(iii) of this section.

(ii) EXCEPTION FROM CONSISTENCY REQUIREMENT. The consistency requirement of paragraph (e)(2)(i) of this section is not violated merely because employee benefit percentages are not determined in a consistent manner for all of the plans in the testing group and the inconsistencies in determination of rates among plans are described in paragraph (e)(2)(iii) of this section. The exception in this paragraph (e)(2)(ii) applies only if it is reasonable to believe that the inconsistencies do not result in an average benefit percentage that is significantly higher than the average benefit percentage that would be determined had employee benefit percentages been determined on a consistent basis pursuant to paragraph (d)(5)(iii) of this section.

(iii) PERMITTED INCONSISTENCIES. The following inconsistencies between plans are permitted under this paragraph (e)(2) --

(A) Use of different underlying definitions of section 414(s) compensation in the determination of rates;

(B) Use of different definitions of average annual compensation;

(C) Use of different testing ages;

(D) Use of different fresh-start dates;

(E) Use of different actuarial assumptions for normalization; or

(F) Disregard of actuarial increases after normal retirement age and QPSA charges without regard to any requirement for uniformity in the actuarial increases or QPSA charges.

(3) DETERMINATION OF EMPLOYEE BENEFIT PERCENTAGES WITHOUT REGARD TO PLANS OF ANOTHER TYPE -- (i) GENERAL RULE. Employee benefit percentages may be determined under plans of one type (i.e., defined benefit plans or defined contribution plans) by treating all plans of the other type (i.e., defined contribution plans or defined benefit plans, respectively) as if they were not part of the testing group, using the method provided in this paragraph (e)(3). If this method is used to determine whether a defined contribution plan satisfies the average benefit percentage test, employee benefit percentages under all defined contribution plans in the testing group must be determined on a contributions basis, and benefits under any defined benefit plans may not be included in the employee benefit percentage. Similarly, if this method is used to determine whether a defined benefit plan satisfies the average benefit percentage test, employee benefit percentages under all defined benefit plans in the testing group must be determined on a benefits basis, and allocations under any defined contribution plans may not be included in the employee benefit percentage.

(ii) RESTRICTION ON USE OF SEPARATE TESTING GROUP DETERMINATION METHOD. A plan does not satisfy the average benefit percentage test using the method provided in this paragraph (e)(3) unless each of the plans in the testing group of the other type (i.e., defined benefit plan or defined contribution plan) than the plan being tested satisfies the average benefit test of section 1.410(b)-2(b)(3) using the method in this paragraph (e)(3) or satisfies the ratio percentage test of section 1.410(b)-2(b)(2).

(iii) TREATMENT OF PERMITTED DISPARITY. Although under the general rule of this paragraph (e)(3) plans of another type are disregarded in determining employee benefit percentages, the permitted disparity used by those plans (including any permitted disparity that is used by those plans to satisfy section 1.401(a)(4)- 1(b)(2)) is nonetheless taken into account in determining the extent to which permitted disparity may be used in determining employee benefit percentages.

(iv) EXAMPLE. The following example illustrates the rules of this paragraph (e)(3):

EXAMPLE. Employer A maintains two defined benefit plans, neither of which covers a group of employees that satisfies the ratio percentage test of section 1.410(b)-2(b)(2), and a profit- sharing plan and a section 401(k) plan, each of which benefits a group of employees that satisfies the ratio percentage test of section 1.410(b)-2(b)(2). The defined benefit plans will satisfy the average benefit percentage test if the actual benefit percentage of all nonexcludable nonhighly compensated employees, computed on a benefits basis without regard to contributions under the profit-sharing plan or the section 401(k) plan, is at least 70 percent of the actual benefit percentage of all nonexcludable highly compensated employees, computed on a benefits basis without regard to contributions under the profit-sharing plan or the section 401(k) plan.

(4) SIMPLIFIED METHOD FOR DETERMINING EMPLOYEE BENEFIT PERCENTAGES FOR CERTAIN DEFINED BENEFIT PLANS -- (i) IN GENERAL. An employee's employee benefit percentage with respect to a plan may be determined under the simplified method of paragraph (e)(4)(ii) of this section, provided the following conditions are satisfied:

(A) The only plans included in the testing group are defined benefit plans, and employee benefit percentages under these plans are determined on a benefits basis.

(B) Employee benefit percentages under the plans in the testing group are not required to be determined by taking into account early retirement benefits under paragraph (d)(7) of this section.

(C) The plan is a safe harbor defined benefit plan described in section 1.401(a)(4)-3(b).

(ii) SIMPLIFIED METHOD -- (A) SECTION 401(l) PLANS. Under the simplified method of this paragraph (e)(4)(ii), an employee's employee benefit percentage with respect to a section 401(l) plan described in section 1.401(a)(4)-3(b)(3) (i.e., a unit credit plan) may be deemed equal to the employee's excess benefit percentage or gross benefit percentage (as defined in section 1.401(l)-1(c)(14) or (18), respectively), whichever is applicable under the plan's benefit formula in the plan year. In the case of a section 401(l) plan described in section 1.401(a)(4)-3(b)(4) (i.e., a fractional accrual plan), an employee's employee benefit percentage with respect to that plan may be deemed equal to the rate at which the excess or gross benefit, whichever is applicable, accrues for the employee in the plan year, taking into account the plan's benefit formula and the employee's projected service at normal retirement age. The use of this simplified method will be treated as an imputation of permitted disparity. See paragraph (d)(6) of this section for a restriction on multiple use of permitted disparity.

(B) OTHER PLANS. Under the simplified method of this paragraph (e)(4)(ii), an employee's employee benefit percentage with respect to a plan described in section 1.401(a)(4)-3(b)(3) that is not a section 401(l) plan and that is not imputing permitted disparity may be deemed equal to the employee's benefit rate in the plan year under the plan's benefit formula. In the case of a plan described in section 1.401(a)(4)-3(b)(4) that is not a section 401(l) plan and that is not imputing permitted disparity, an employee's employee benefit percentage with respect to that plan may be deemed equal to the rate at which the benefit accrues for the employee in the plan year, taking into account the plan's benefit formula and an employee's projected service at normal retirement age.

(5) THREE-YEAR AVERAGING PERIOD. An employee's employee benefit percentage may be determined for a testing period as the average of the employee's employee benefit percentages determined separately for the testing period and for the immediately preceding one or two testing periods (referred to in this section as an averaging period). Employee benefit percentages of a particular employee that are averaged together within an averaging period must be determined on a consistent basis for all testing periods within the averaging period.

(6) ALTERNATIVE METHODS OF DETERMINING COMPENSATION. Employee benefit percentages may be determined on the basis of any definition of compensation that satisfies section 1.414(s)-1(d) (without regard to whether the definition satisfies section 1.414(s)-1(d)(3)), provided that the same definition is used for all employees and it is reasonable to believe that the definition does not result in an average benefit percentage that is significantly higher than the average benefit percentage that would be determined had employee benefit percentages been determined using a definition of compensation that also satisfies section 1.414(s)-1(d)(3).

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Par. 9. Section 1.410(b)-6 is amended by:

1. Removing the reference "(b)through (h)" and adding "(b)through (i)" in its place in the first sentence of paragraph (a)(1) and in the second and third sentence of paragraph (a)(2).

2. Revising paragraphs (b)(1), (b)(2), (d)(2), and (g) as set forth below.

3. Adding paragraph (i) as set forth below.

SECTION 1.410(b)-6 EXCLUDABLE EMPLOYEES.

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(b) MINIMUM AGE AND SERVICE EXCLUSIONS -- (1) IN GENERAL. If a plan applies minimum age and service eligibility conditions permissible under section 410(a)(1) and excludes all employees who do not meet those conditions from benefiting under the plan, then all employees who fail to satisfy those conditions are excludable employees with respect to that plan. An employee is treated as meeting the age and service requirements on the date that any employee with the same age and service (including service permitted to be taken into account for purposes of nondiscrimination testing under section 1.401(a)(4)-11(d)(3)) would be eligible to commence participation in the plan, as provided in section 410(b)(4)(C).

(2) MULTIPLE AGE AND SERVICE CONDITIONS. If a plan, including a plan for which an employer chooses the treatment under paragraph (b)(3) of this section, has two or more different sets of minimum age and service eligibility conditions, those employees who fail to satisfy all of the different sets of age and service conditions are excludable employees with respect to the plan. Except as provided in paragraph (b)(3) of this section, an employee who satisfies any one of the different sets of conditions is not an excludable employee with respect to the plan. Differences in the manner in which service is credited (e.g., hours of service calculated in accordance with 29 CFR 2530.200b-2 for hourly employees and elapsed time calculated in accordance with section 1.410(a)-7 for salaried employees) for purposes of applying a service condition are not taken into account in determining whether multiple age and service eligibility conditions exist.

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(d) * * *

(2) DEFINITION OF COLLECTIVELY BARGAINED EMPLOYEE -- (i) IN GENERAL. A collectively bargained employee is an employee who is included in a unit of employees covered by an agreement that the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, provided that there is evidence that retirement benefits were the subject of good faith bargaining between employee representatives and the employer or employers. An employee is a collectively bargained employee regardless of whether the employee benefits under any plan of the employer. See section 7701(a)(46) and section 301.7701-17T of this chapter for additional requirements applicable to the collective bargaining agreement. An employee who performs hours of service during the plan year as both a collectively bargained employee and a noncollectively bargained employee is treated as a collectively bargained employee with respect to the hours of service performed as a collectively bargained employee and a noncollectively bargained employee with respect to the hours of service performed as a noncollectively bargained employee. See section 1.410(b)-7(c) for disaggregation rules for plans benefiting collectively bargained and noncollectively bargained employees.

(ii) SPECIAL RULES FOR CERTAIN EMPLOYEES IN MULTIEMPLOYER PLANS -- (A) IN GENERAL. For purposes of this paragraph (d), in testing the disaggregated portion of a multiemployer plan benefiting noncollectively bargained employees, a noncollectively bargained employee who benefits under the plan may be treated as a collectively bargained employee with respect to all of the employee's hours of service under the rules of paragraphs (d)(2)(ii)(B) through (E) of this section, if the employee is or was a member of a unit of employees covered by a collective bargaining agreement and that agreement or a successor agreement provides for the employee to benefit under the plan in the current plan year. For this purpose, provisions of a participation agreement or similar document are taken into account in determining whether a collective bargaining agreement provides for an employee to benefit under a multiemployer plan.

(B) EMPLOYEES WHO WERE COLLECTIVELY BARGAINED EMPLOYEES DURING A PORTION OF THE CURRENT PLAN YEAR. An employee described in paragraph (d)(2)(ii)(A) of this section who performs services for one or more employers that are parties to the collective bargaining agreement, for the plan, or for the employee representative both as a collectively bargained employee and as a noncollectively bargained employee during a plan year may be treated as a collectively bargained employee for the plan year, provided that at least half of the employee's hours of service during the plan year are performed as a collectively bargained employee.

(C) EMPLOYEES WHO WERE COLLECTIVELY BARGAINED EMPLOYEES DURING THE COLLECTIVE BARGAINING AGREEMENT. An employee described in paragraph (d)(2)(ii)(A) of this section who was a collectively bargained employee with respect to all of the employee's hours of service during a plan year (including employees who are treated as collectively bargained employees with respect to all of their hours of service during a plan year under paragraph (d)(2)(ii)(B) or (E) of this section) may be treated as a collectively bargained employee with respect to all of the employee's hours of service for the duration of the collective bargaining agreement applicable for such plan year or, if later, until the end of the following plan year. For this purpose, a collective bargaining agreement is applicable for a plan year if it provided for the employee to benefit in the plan and was effective for any portion of that plan year. This paragraph (d)(2)(ii)(C) does not apply unless the terms of the plan providing for benefit accruals treat the employee in a manner that is generally no more favorable than similarly-situated employees who are collectively bargained employees.

(D) EMPLOYEES WHO PREVIOUSLY WERE COLLECTIVELY BARGAINED EMPLOYEES. An employee who was treated as a collectively bargained employee pursuant to paragraph (d)(2)(ii)(C) of this section may be treated as a collectively bargained employee with respect to all of the employee's hours of service after the end of the period described in paragraph (d)(2)(ii)(C) of this section, provided that the employee is performing services for one or more employers that are parties to the collective bargaining agreement, for the plan, or for the employee representative. This paragraph (d)(2)(ii)(D) does not apply unless the terms of the plan providing for benefit accruals treat the employee in a manner that is generally no more favorable than similarly-situated employees who are collectively bargained employees, and no more than five percent of the employees covered under the multiemployer plan are noncollectively bargained employees (determined without regard to this paragraph (d)(2)(ii)(D)). In determining whether more than five percent of the employees covered under the multiemployer plan are noncollectively bargained employees, those employees who are described in paragraphs (d)(2)(ii)(B) and (C) of this section are treated as collectively bargained employees.

(E) TRANSITION RULE. For a plan year beginning before the applicable effective date of these regulations as set forth in section 1.410(b)-10(b) or (d), any employee described in paragraph (d)(2)(ii)(A) of this section may be treated as a collectively bargained employee with respect to all of the employee's hours of service for that plan year.

(F) CONSISTENCY REQUIREMENT. The rules in paragraphs (d)(2)(i) and (ii) of this section must be applied to all employees on a reasonable and consistent basis for the plan year.

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(g) EMPLOYEES OF CERTAIN GOVERNMENTAL OR TAX-EXEMPT ENTITIES PRECLUDED FROM MAINTAINING A SECTION 401(k) PLAN. For purposes of testing either a section 401(k) plan or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan; an employer may treat as excludable those employees of governmental or tax-exempt entities who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B), if more than 95 percent of the employees of the employer who are not precluded from being eligible employees by section 401(k)(4)(B) benefit under the plan for the plan year.

* * * * *

(i) FORMER EMPLOYEES TREATED AS EMPLOYEES. An employer may treat as excludable employees all formerly nonhighly compensated employees who are treated as employees of the employer under section 1.410(b)-9 solely because they have increases in accrued benefits under a defined benefit plan that are based on ongoing service or compensation credits (including imputed service or compensation) after they cease to perform services for the employer.

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Par. 10. Section 1.410(b)-7 is amended by:

1. Removing the last sentence in paragraph (d)(5).

2. Removing the reference "(c)(1) through (c)(3)" and adding "(c)(1) and (c)(2)" in its place in the last sentence of paragraph (e)(1).

Par. 11. Section 1.410(b)-9 is amended by:

1. Removing the definitions DEFINED BENEFIT EXCESS plan and EXCESS BENEFIT PERCENTAGE.

2. Revising the definitions EMPLOYEE and FORMER EMPLOYEE as set forth below.

3. Removing the definition GROSS BENEFIT PERCENTAGE.

4. Revising the definitions HIGHLY COMPENSATED EMPLOYEE and HIGHLY COMPENSATED FORMER EMPLOYEE as set forth below.

5. Removing the definition OFFSET PLAN.

6. Removing the reference "section 1.401(a)(4)-2(b)(3)" and adding "section 1.401(a)(4)-2(b)(2)" in its place in paragraph (2) of the definition SECTION 401(l) PLAN.

7. Removing the word "engineer" from the definition PROFESSIONAL EMPLOYEE.

SECTION 1.410(b)-9 DEFINITIONS.

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EMPLOYEE. EMPLOYEE means an individual who performs services for the employer who is either a common law employee of the employer, a self-employed individual who is treated as an employee pursuant to section 401(c)(1), or a leased employee (not excluded under section 414(n)(5)) who is treated as an employee of the employer-recipient under section 414(n)(2) or 414(o)(2). Individuals that an employer treats as employees under section 414(n) pursuant to the requirements of section 414(o) are considered to be leased employees for purposes of this rule. In addition, an individual must be treated as an employee with respect to allocations under a defined contribution plan taken into account under section 1.401(a)(4)-2(c)(ii) and with respect to increases in accrued benefits (within the meaning of 411(a)(7)) under a defined benefit plan that are based on ongoing service or compensation (including imputed service or compensation) credits.

* * * * *

FORMER EMPLOYEE. FORMER EMPLOYEE means an individual who was, but has ceased to be, an employee of the employer (i.e., the individual has ceased performing services as an employee for the employer). An individual is treated as a former employee beginning on the day after the day on which the individual ceases performing services as an employee for the employer. Thus, an individual who ceases performing services as an employee for an employer during a plan year is both an employee and a former employee for the plan year. Notwithstanding the foregoing, an individual is an employee (and not a former employee) to the extent that the individual is treated as an employee with respect to the plan for the plan year under the definition of employee in this section.

* * * * *

HIGHLY COMPENSATED EMPLOYEE. HIGHLY COMPENSATED EMPLOYEE means an employee who is a highly compensated employee within the meaning of section 414(q) or a former employee treated as an employee under the definition of employee in this section who is a highly compensated former employee within the meaning of section 414(q).

HIGHLY COMPENSATED FORMER EMPLOYEE. HIGHLY COMPENSATED FORMER EMPLOYEE means a former employee who is a highly compensated former employee within the meaning of section 414(q).

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Par. 12. Section 1.410(b)-10 is revised to read as follows:

SECTION 1.410(b)-10 EFFECTIVE DATES AND TRANSITION RULES.

(a) STATUTORY EFFECTIVE DATES -- (1) IN GENERAL. Except as set forth in paragraph (a)(2) of this section, the minimum coverage rules of section 410(b) as amended by section 1112 of the Tax Reform Act of 1986 apply to plan years beginning on or after January 1, 1989.

(2) SPECIAL STATUTORY EFFECTIVE DATE FOR COLLECTIVE BARGAINING AGREEMENTS -- (i) IN GENERAL. As provided for by section 1112(e)(2) of the Tax Reform Act of 1986, in the case of a plan maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers ratified before March 1, 1986, the minimum coverage rules of section 410(b) as amended by section 1112 of the Tax Reform Act of 1986 do not apply to employees covered by any such agreement in plan years beginning before the earlier of --

(A) January 1, 1991; or

(B) The later of January 1, 1989, or the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after February 28, 1986). For purposes of this paragraph (a)(2), any extension or renegotiation of a collective bargaining agreement, which extension or renegotiation is ratified after February 28, 1986, is to be disregarded in determining the date on which the agreement terminates.

(ii) EXAMPLE. The following example illustrates this paragraph (a)(2).

EXAMPLE. Employer A maintains Plan 1 pursuant to a collective bargaining agreement. Plan 1 covers 100 of Employer A's noncollectively bargained employees and 900 of Employer A's collectively bargained employees. Employer A also maintains Plan 2, which covers Employer A's other 400 noncollectively bargained employees. The collective bargaining agreement under which Plan 1 is maintained was entered into on January 1, 1986, and expires December 31, 1992. Because Plan 1 is a plan maintained pursuant to a collective bargaining agreement, section 410(b) applies to the first plan year beginning on or after January 1, 1991. In applying section 410(b) to Plan 2, the 100 noncollectively bargained employees in Plan 1 must be taken into account. The deferred effective date for plans maintained pursuant to a collective bargaining agreement is not applicable in determining how section 410(b) is applied to a plan that is not maintained pursuant to a collective bargaining agreement.

(iii) PLAN MAINTAINED PURSUANT TO A COLLECTIVE BARGAINING AGREEMENT. For purposes of this paragraph (a)(2), a plan is maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers, if one or more of the agreements were ratified before March 1, 1986. Only plans maintained pursuant to agreements that the Secretary of Labor finds to be collective bargaining agreements and that satisfy section 7701(a)(46) are eligible for the deferred effective date under this paragraph (a)(2). A plan will not be treated as a plan maintained pursuant to one or more collective bargaining agreements eligible for the deferred effective date under this paragraph (a)(2) unless the plan would be a plan maintained pursuant to one or more collective bargaining agreements under the principles applied under section 1017(c) of the Employee Retirement Income Security Act of 1974. See H.R. Rep. No. 1280, 93rd Cong. 2d Sess. 266 (1974).

(b) REGULATORY EFFECTIVE DATES --(i) IN GENERAL. Except as otherwise provided in this section, sections 1.410(b)-2 through 1.410(b)-9 apply to plan years beginning on or after January 1, 1994.

(2) PLANS OF TAX-EXEMPT ORGANIZATIONS. In the case of plans maintained by organizations exempt from income taxation under section 501(a), including plans subject to section 403(b)(12)(A)(i) (nonelective plans), sections 1.410(b)-2 through 1.410(b)-9 apply to plan years beginning on or after January 1, 1996, to the extent such plans are subject to section 410(b).

(c) COMPLIANCE DURING TRANSITION PERIOD. For plan years beginning before the effective date of these regulations, as set forth in paragraph (b) of this section, and on or after the statutory effective date as set forth in paragraph (a) of this section, a plan must be operated in accordance with a reasonable, good faith interpretation of section 410(b). Whether a plan is operated in accordance with a reasonable, good faith interpretation of section 410(b) will generally be determined based on all of the relevant facts and circumstances, including the extent to which an employer has resolved unclear issues in its favor. If a plan's classification has been determined by the Commissioner to be nondiscriminatory and there have been no significant changes in or omissions of a material fact, the classification will be treated as nondiscriminatory for the relevant plan year. A plan will be deemed to be operated in accordance with a reasonable, good faith interpretation of section 410(b) if it is operated in accordance with the terms of sections 1.410(b)-2 through 1.410(b)-9.

(d) EFFECTIVE DATE FOR GOVERNMENTAL PLANS. In the case of governmental plans described in section 414(d), including plans subject to section 403(b)(12)(A)(i) (nonelective plans) section 1.410(b)-2 through section 1.410(b)-10 apply to plan years beginning on or after January 1, 1996, or 90 days after the opening of the first legislative session beginning on or after January 1, 1996, of the governing body with authority to amend the plan, if that body does not meet continuously. Such plans are deemed to satisfy section 410(b) (and in the case of such plans that are not subject to section 403(b)(12)(A)(i), section 401(a)(3) as in effect on September 1, 1974) for plan years before that effective date. For purposes of this section, the governing body with authority to amend the plan is the legislature, board, commission, council, or other governing body with authority to amend the plan. See section 1.410(b)-2(d) and (e).