Compensation Defined for Qualified Plan Purposes -- Temporary and Proposed Regulations Under Section 414(s)

 [4830-01]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to the scope and meaning of the term "compensation" in section 414(s) of the Internal Revenue Code of 1986. They reflect changes made by the Tax Reform Act of 1986 (TRA '86) and conform the existing regulations to section 1115 of the Tax Reform Act of 1986 (100 Stat. 2453) and section 1011(j)(1) of the Technical and Miscellaneous Revenue Act of 1988. These temporary regulations provide guidance necessary to comply with the law and will affect sponsors of, and participants in, pension, profit-sharing and stock bonus plans, and certain other employee benefit plans. The text of the temporary regulations set forth in this document also serves as the text of the proposed regulations for the notice of proposed rulemaking that appears in the Proposed Rules Section of this issue of the Federal Register. These temporary regulations are issued in conjunction with three other sets of proposed regulations concerning the application of sections 401(a)(4), 401(a)(17), and 401(a)(26) to pension, profit sharing and stock bonus plans. In each of these areas, compensation under section 414(s) is an important concept.

 EFFECTIVE DATE: These temporary regulations are effective for years beginning on or after January 1, 1987.

 FOR FURTHER INFORMATION CONTACT: Concerning the temporary regulations, Marjorie Hoffman, Office of the Assistant Chief Counsel (Employee Benefits and Exempt Organizations), at 202-343-6954 (not a toll-free number). Concerning the hearing, Carol Savage, Regulations Unit, at 202-343-0232 or 202-566-3935 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document amends the Income Tax Regulations (26 CFR Part 1) under section 414(s) and under section 415(c)(3) of the Internal Revenue Code of 1986 (Code). These amendments conform the regulations to section 1115 of the Tax Reform Act of 1986 (TRA '86) and section 1011(j)(1) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA).

REISSUANCE OF PROPOSED AND TEMPORARY REGULATIONS

 Section 1.414(s)-1T, COMPENSATION, was originally published, with section 1.414(q)-1T, HIGHLY COMPENSATED EMPLOYEE, in the Federal Register on February 19, 1988, as temporary regulations as well as the text of proposed regulations (prior regulations) to amend the Income Tax Regulations to conform to section 1115 of the Tax Reform Act of 1986. See 53 FR 4965, 4999 [See T.D. 8173 in REG-209558-92]. Comments were solicited and a hearing was held on December 4, 1989. The definition of compensation in section 414(s)(1) was substantially revised by section 1011(j)(1) of TAMRA. Consequently section 1.414(s)-1T published on February 19, 1988 has been revised and is now reissued as temporary regulations and the text of proposed regulations in order to incorporate the new definition of compensation under section 414(s)(1).

 The revised rules have been developed in conjunction with the development of regulations under section 401(a)(4) in order to provide comprehensive guidance on the nondiscrimination requirements applicable to qualified plans. These temporary regulations alter the overall approach taken in the prior temporary regulations. As a result, the provisions in section 1.414(s)-1T addressing statutory provisions that remained essentially unchanged have also been substantially revised.

OVERVIEW

 Section 414(s) and these temporary regulations provide rules for defining compensation for purposes of applying any provision that specifically refers to section 414(s). For example, section 414(s) is explicitly referred to in many of the nondiscrimination provisions applicable to pension, profit-sharing, and stock bonus plans qualified under section 401(a). The amount of plan benefits or contributions, expressed as a percentage of compensation within the meaning of section 414(s), is generally one of the key factors in determining whether these nondiscrimination provisions are satisfied.

 These temporary regulations implement the section 414(s) definition of compensation as compensation within the meaning of section 415(c)(3). In addition, these temporary regulations exercise the authority granted to the Secretary in section 414(s) to prescribe alternative nondiscriminatory definitions of compensation.

 These temporary regulations also amend the regulations defining compensation within the meaning of section 415(c)(3) to clarify those amounts that are included in compensation under the existing rules and to add the two types of wages reported on Form W-2 to the definitions that automatically satisfy section 415(c)(3).

 The revised temporary regulations under section 414(s) provide that any definition of compensation automatically satisfies section 414(s) if it includes all compensation within the meaning of section 415(c)(3) and excludes all other compensation. The temporary regulations also provide a safe harbor alternative definition of compensation that automatically satisfies section 414(s) without further testing. Furthermore, the temporary regulations generally provide that any other reasonable definition of compensation satisfies section 414(s) if the definition does not by design favor highly compensated employees and satisfies a nondiscrimination requirement. Finally, the temporary regulations provide rules that permit compensation to include elective salary reduction contributions specified in section 414(s)(2), section 457 deferred compensation, and section 414(h) employer pick-up amounts.

DEFINITIONS OF TOTAL COMPENSATION UNDER SECTION 415(c)(3)

 The Code treats compensation within the meaning of section 415(c)(3) as the basic definition of compensation to be used to determine whether plan qualification requirements are satisfied. This definition may therefore be used to apply the limits on benefits and contributions under section 415, to determine which employees of an employer are highly compensated, and to determine whether a plan satisfies any applicable nondiscrimination requirements.

 The temporary regulations amend section 1.415-2(d) to add the types of wages reported on Form W-2 (FICA wages and wages for purposes of income tax withholding) to the definitions of compensation that satisfy section 415(c)(3). This approach permits use of these W-2 wage amounts for each of the three purposes described above and permits an employer to use compensation data already maintained for employment tax purposes in administering its retirement plan.

 Additionally, because the definition of compensation in section 415(c)(3) is the basic definition of compensation used to determine whether plan qualification requirements are satisfied, section 1.415-2(d)(1) has been revised to clarify what amounts are included in compensation (within the meaning of section 415(c)(3)) under the existing rules. These revisions are designed to clarify the existing rules with respect to certain items of compensation and make the existing rules easier to use for employers who do not choose to use one of the two new employment tax definitions of compensation.

 For purposes of determining both whether a plan is nondiscriminatory and which employees are highly compensated employees, compensation that is currently includable in gross income should be used. Therefore, the temporary regulations eliminate the rule in section 1.415-2(d)(4) permitting an employer to elect to use accrued compensation. The temporary regulations provide a de minimis rule that permits an employer to include in compensation amounts earned but not paid in a year because of the timing of pay periods and pay days, as long as these amounts are paid during the first few weeks of the next year. Use of accrued compensation under this de minimis rule is permitted if used on a uniform and consistent basis with respect to all similarly situated employees. The temporary regulations provide a transitional period in order to allow employers to make adjustments for this change. Consequently, the elimination of the election to use accrued compensation applies only to years beginning after December 31, 1991.

 Finally, section 1.415-2(d) has been updated to reflect certain statutory changes to other sections of the Code. This revision, however, is not comprehensive. For example, no revisions were considered to the rules in section 1.415-2(d)(2) for determining amounts not included in compensation. The Service welcomes comments concerning any rules in section 1.415-2(d) that require additional clarification or updating.

ALTERNATIVE DEFINITIONS OF COMPENSATION

 The alternative definitions of compensation provided in the prior regulations are changed and significantly expanded in these temporary regulations to make the applicable rules easier for employers to use. A safe harbor alternative definition is provided that is deemed to be nondiscriminatory and thus automatically satisfies section 414(s). The method for determining whether other alternative definitions of compensation are discriminatory has been modified.

 Under the safe harbor alternative definition, an employer may generally define compensation as including regular or base salary or wages, plus commissions, tips, overtime and other premium pay, and bonuses, and excluding (even if includable in gross income) reimbursements or other expense allowances, fringe benefits (whether cash or noncash), moving expenses, deferred compensation, and welfare benefits. Consequently, under this alternative definition of compensation, most forms of noncash compensation, which may be difficult to anticipate, are excluded from compensation. Similarly, many forms of compensation that are based on an employee's individual need rather than a rate of payment for services performed are excluded from compensation.

 In addition to the safe harbor definition, the temporary regulations provide that any other alternative definition of compensation satisfies section 414(s) if it is reasonable, does not by design favor highly compensated employees, and satisfies a nondiscrimination requirement. Thus, if the definition of compensation under an employer's retirement plan for determining benefits or contributions is reasonable and nondiscriminatory, the employer generally may use that definition to determine if the plan satisfies any applicable nondiscrimination requirements, thereby limiting the compensation data that must be collected to administer the plan.

 This flexible approach to defining compensation is intended to accommodate the legitimate business needs and problems of employers while retaining the basic statutory requirement that the definition of compensation must be nondiscriminatory. For example, this approach permits employers to use definitions designed to: (1) exclude amounts that may fluctuate significantly from year to year and thus are difficult for the employer to anticipate; or (2) take into account the relative administrative difficulty of capturing certain amounts on the employer's pension accounting systems. The temporary regulations provide the following examples of compensation that, subject to the applicable facts and circumstances, an employer might exclude under a reasonable definition of compensation: any type of additional compensation for employees working outside their regularly scheduled tour of duty (such as overtime pay, premiums for shift differential, and call-in premiums); bonuses for individual performance; or any type of compensation excluded under the safe harbor definition.

NONDISCRIMINATION REQUIREMENT

 The temporary regulations provide that an alternative definition of compensation is nondiscriminatory under section 414(s) if the average percentage of total compensation included under the alternative definition of compensation for an employer's highly compensated employees as a group does not exceed by more than a de minimis amount the average percentage of total compensation included under the alternative definition for the employer's other employees as a group.

 An employer may use any reasonable method to determine whether this requirement is satisfied. For example, an employer may calculate individual percentages for each employee in a group and then average the percentages as described in Q&A-4 of the prior regulations. Alternatively, an employer may calculate an aggregate compensation percentage for each group of employees by dividing the aggregate amount of compensation of all employees in that group that is included under the alternative definition by the aggregate amount of total compensation of all employees in that group. This alternative method is considered reasonable only if it does not produce distortion as a result of the extra weight given employees with higher compensation in the relevant group.

 The temporary regulations provide that the determination of whether the average percentage of total compensation included for the employer's highly compensated employees as a group exceeds by more than a de minimis amount the average percentage of total compensation included for the employer's other employees as a group is based on the applicable facts and circumstances.

 Consistent with this approach, the temporary regulations provide that the differences between the percentages for prior periods may be considered in determining whether the difference between the percentages for a given period is de minimis, recognizing that small fluctuations in the compensation percentages may be caused by fluctuations in an employer's work force or business operations unrelated to the employer's pension plan. In addition, an isolated instance of a more than de minimis difference between the compensation percentages that is due to an extraordinary unforeseeable event (such as large overtime payments after a major hurricane) will be disregarded if the amount of the difference in prior determination periods was de minimis.

AVAILABILITY OF ELECTIVE CONTRIBUTION AND OF EMPLOYEE CONTRIBUTIONS AND MATCHING CONTRIBUTIONS

 These temporary regulations clarify that any reasonable definition of compensation may be used to apply the nondiscrimination requirement with respect to the availability of elective contributions to eligible employees under a cash or deferred arrangement and with respect to the availability of employee contributions and matching contributions under a defined contribution plan. For example, for this limited purpose, it would generally be reasonable to define compensation as including only regular or base salary or wages even if the average percentage of total compensation included for an employer's highly compensated employees under this definition exceeds by more than a de minimis amount the average percentage of total compensation included for an employer's other employees. This special rule is appropriate for testing the availability of elective contributions and of employee contributions and matching contributions because the actual deferral percentage (ADP) test in section 401(k)(3) and the actual contribution percentage (ACP) test in section 401(m) are the principal means for determining whether elective contributions under a cash or deferred arrangement and matching contributions and employee contributions under a defined contribution plan are nondiscriminatory in amount. For the same reason, sections 401(k) and 401(m) require a definition of compensation that satisfies section 414(s) to be used to determine if the ADP test and ACP test are satisfied. Thus, the broad definition of compensation usable for availability testing cannot be used for ADP and ACP testing unless that definition satisfies either the safe harbor or nondiscriminatory alternative definition requirements of section 414(s).

INCLUSION OF CERTAIN ELECTIVE CONTRIBUTIONS AND DEFERRED COMPENSATION

 Section 414(s)(2) permits an employer to include in compensation elective contributions that are not includable in gross income under section 125, 402(a)(8), 402(h), or 403(b). The temporary regulations incorporate this alternative and also permit the inclusion in compensation of section 457 deferred compensation (under certain plans maintained by state and local governments or tax-exempt organizations) and employer pick-up amounts (relating to certain government plans).

 In the case of the safe harbor definitions of compensation that automatically satisfy section 414(s), the temporary regulations require the definition of compensation to either include or exclude all of the above types of elective contributions and deferred compensation in order to continue automatically to satisfy section 414(s). In order to accommodate the existing practices of employers, however, the temporary regulations permit an alternative definition of compensation under section 414(s) to include some but not all of the types of elective contributions and deferred compensation described above if the definition satisfies the nondiscrimination requirement under section 414(s) taking the elective contributions or deferred compensation into account.

CONSISTENCY REQUIREMENTS FOR USE OF A DEFINITION.

 The temporary regulations provide that an employer may use any definition of compensation that satisfies section 414(s) to determine if an applicable provision is satisfied with respect to a plan. This rule is designed to permit an employer, whenever possible, to use the definition used under the plan for calculating contributions or benefits to determine if an applicable nondiscrimination provision is satisfied. Consequently, an employer that maintains several pension, profit-sharing, or stock bonus plans may generally use one definition of compensation that satisfies section 414(s) in determining whether one of the plans satisfies a particular nondiscrimination requirement (such as section 401(a)(4)) and use the same or a different definition of compensation in determining whether another plan satisfies the same nondiscrimination requirement. The definition of compensation selected generally must be used consistently to define the compensation of all employees taken into account in determining whether a plan satisfies the nondiscrimination provision for the determination period with respect to that provision. This general flexibility in section 414(s) does not overrule any more specific requirements that relate to a particular use of the term compensation.

EFFECTIVE DATE OF THESE TEMPORARY REGULATIONS

 These revised temporary regulations are effective for years beginning on or after January 1, 1987. However, for years beginning before January 1, 1991, compliance with either the provisions of these revised temporary regulations or the provisions of the prior regulations constitutes compliance with these revised temporary 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 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 temporary 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 for the regulations is being submitted to the Administrator of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

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

LIST OF SUBJECTS

26 CFR 1.401-0 - 1.425-1

 Employee benefit plans, Employee stock ownership plans, Income taxes, Individual retirement accounts, Pensions, Stock options.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly 26 CFR Part 1 is amended as follows:

INCOME TAX REGULATIONS

(26 CFR Part 1)

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

 Authority: 26 U.S.C. 7805. * * *

SECTION 1.414(s)-1T DEFINITION OF COMPENSATION (TEMPORARY).

(a) INTRODUCTION -- (1) IN GENERAL. Section 414(s) and this section provide rules for defining compensation for purposes of applying any provision that specifically refers to section 414(s) or this section. For example, section 414(s) is explicitly referred to in many of the nondiscrimination provisions applicable to pension, profit-sharing, and stock bonus plans qualified under section 401(a). This section implements the section 414(s) definition of compensation as compensation within the meaning of section 415(c)(3), and it exercises the authority granted to the Secretary to prescribe alternative nondiscriminatory definitions of compensation. A definition of compensation that satisfies section 414(s) may also include certain types of elective contributions and deferred compensation.

(2) LIMITATIONS ON SCOPE OF SECTION 414(s). Section 414(s) and this section do not apply unless a provision specifically refers to section 414(s) or these regulations. For example, even though a definition of compensation permitted under section 414(s) must be used in determining whether the contributions or benefits under a pension, profit sharing, or stock bonus plan satisfy a certain applicable provision (such as section 401(a)(4)), the plan is not required to use a definition of compensation that satisfies section 414(s) in calculating the amount of contributions or benefits actually provided under the plan.

(3) OVERVIEW. Paragraph (b) of this section provides consistency rules for the use of a definition of compensation that satisfies section 414(s). Paragraph (c) of this section contains specific definitions of compensation that satisfy section 414(s) without satisfying any additional nondiscrimination requirement under section 414(s). Paragraph (d) of this section provides rules permitting the use of alternative definitions of compensation that satisfy section 414(s) as long as the nondiscrimination test described in paragraph (d)(2) of this section is met. Paragraph (e) of this section provides other special rules, including a special rule for determining the compensation of a self-employed individual under an alternative definition of compensation.

(b) CONSISTENCY REQUIREMENTS FOR USE OF A DEFINITION. Any definition of compensation that satisfies section 414(s) may be used when a provision explicitly refers to section 414(s) unless the reference specifically indicates otherwise. For example, any definition of compensation that satisfies section 414(s) may be used to determine whether a particular money purchase pension plan satisfies section 401(a)(4). At the same time, a different definition of compensation that satisfies section 414(s) may be used to determine whether a defined benefit plan maintained by the same employer and not aggregated with the money purchase plan satisfies the requirements of section 401(a)(4). Each definition of compensation selected must be used consistently to define the compensation of all employees taken into account in satisfying the requirements of an applicable provision for the relevant determination period. For example, the same definition of compensation generally must be used consistently to define the compensation of all employees taken into account in determining whether section 401(a)(4) is satisfied in a particular instance. An employer may, however, change its definition of compensation for a subsequent determination period with respect to that same provision. Rules provided under any provision specifically requiring use of a section 414(s) definition of compensation may modify the consistency requirements of this paragraph.

(c) SPECIFIC DEFINITIONS OF COMPENSATION THAT SATISFY SECTION 414(s) -- (1) GENERAL RULES. The definitions of compensation provided in paragraphs (c)(2) and (c)(3) of this section satisfy section 414(s) and need not satisfy any additional nondiscrimination requirement under section 414(s). Paragraph (c)(2) of this section describes definitions of compensation within the meaning of section 415(c)(3). Paragraph (c)(3) of this section provides a safe harbor alternative definition of compensation that is deemed nondiscriminatory. Paragraph (c)(4) of this section permits any definition provided in paragraph (c)(2) or (c)(3) of this section to include certain types of elective contributions and deferred compensation.

(2) COMPENSATION WITHIN THE MEANING OF 415(c)(3). A definition of compensation that includes all compensation within the meaning of section 415(c)(3) and excludes all other compensation satisfies section 414(s). Section 1.415-2(d)(1) and (d)(2) provide rules for determining items of compensation included in and excluded from compensation within the meaning of section 415(c)(3). In addition, section 1.415-2(d)(10) and (d)(11) provide safe harbor definitions that are treated as satisfying section 415(c)(3), and these definitions therefore satisfy section 414(s). Additional definitions of compensation that are prescribed by the Commissioner as satisfying section 415(c)(3) under the authority provided in section 1.415-2(d)(12) also satisfy section 414(s).

(3) SAFE-HARBOR ALTERNATIVE DEFINITION. Under the safe harbor alternative definition in this paragraph (c)(3), compensation is compensation as defined in paragraph (c)(2) of this section, reduced by all of the following items (even if includable in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, and welfare benefits. However, this definition is not permitted to be used to determine the compensation of a self-employed individual even if the consistency requirement in paragraph (b) of this section would otherwise require using this alternative definition. The compensation for any relevant self-employed individuals must be determined pursuant to the rules in paragraph (e)(1) of this section.

(4) INCLUSION OF CERTAIN DEFERRALS IN COMPENSATION. Any definition of compensation provided in paragraph (c)(2) or (c)(3) of this section will satisfy section 414(s) even though it is modified to include all of the following types of elective contributions and all of the following types of deferred compensation:

(i) Elective contributions that are made by the employer on behalf of its employees that are not includable in income under section 125, section 402(a)(8), section 402(h), or section 403(b);

(ii) Compensation deferred under an eligible deferred compensation plan within the meaning of section 457(b)(deferred compensation plans of state and local governments and tax-exempt organizations); and

(iii) Employee contributions (under governmental plans) described in section 414(h)(2) that are picked up by the employing unit and thus are treated as employer contributions.

(d) ALTERNATIVE DEFINITIONS OF COMPENSATION -- (1) ANY REASONABLE DEFINITION OF COMPENSATION -- (i) GENERAL RULE. In addition to the definitions provided in paragraph (c) of this section, any definition of compensation satisfies section 414(s) with respect to employees (other than self-employed individuals) if the definition of compensation is reasonable, does not by design favor highly compensated employees, and satisfies the nondiscrimination requirement in paragraph (d)(2) of this section. Subject to the applicable facts and circumstances, a reasonable definition of compensation is permitted to, on a consistent basis, exclude certain types of compensation, including (but not limited to) one or more of the following: any type of additional compensation for employees working outside their regularly scheduled tour of duty (such as overtime pay, premiums for shift differential, and call-in premiums); bonuses for individual performance; or any type of compensation excluded under the safe harbor alternative definition in paragraph (c)(3) of this section. A reasonable definition of compensation is also permitted to include any of the types of elective contributions or deferred compensation described in paragraph (c)(4) of this section.

(ii) AVAILABILITY OF ELECTIVE CONTRIBUTIONS AND OF EMPLOYEE CONTRIBUTIONS AND MATCHING CONTRIBUTIONS. For the limited purposes of applying the nondiscrimination requirements in section 1.401(k)- 1(e)(1)(ii) with respect to the availability of elective contributions to eligible employees under a cash or deferred arrangement and in section 1.401(m)-1(c)(1) with respect to the availability of employee contributions and the availability of matching contributions under a defined contribution plan, any reasonable definition of compensation, such as regular or base salary or wages, is treated as nondiscriminatory and therefore satisfies section 414(s). This special rule does not apply for any other purpose, including application of the actual deferral percentage test of section 401(k)(3) or the actual contribution percentage test of section 401(m)(2).

(iii) SELF-EMPLOYED INDIVIDUALS. An alternative definition of compensation under this paragraph (d) is not permitted to be used to determine the compensation of a self-employed individual even if the consistency requirement in paragraph (b) of this section would otherwise require using this alternative definition. The compensation for any relevant self-employed individuals must be determined pursuant to the rules in paragraph (e)(1) of this section.

(2) NONDISCRIMINATION REQUIREMENT -- (i) IN GENERAL. An alternative definition of compensation under this paragraph (d) is nondiscriminatory under section 414(s) if the average percentage of total compensation included under the alternative definition of compensation for an employer's highly compensated employees as a group does not exceed by more than a de minimis amount the average percentage of total compensation included under the alternative definition for the employer's other employees as a group.

(ii) TOTAL COMPENSATION. For purposes of this paragraph (d)(2), total compensation must be determined using a definition of compensation provided in paragraph (c)(2) of this section. An employer is permitted to increase this amount by including all the types of elective contributions and deferred compensation described in paragraph (c)(4) of this section. Total compensation taken into account for each employee (including, if added, the elective contributions and deferred compensation described in paragraph (c)(4) of this section) may not exceed the annual compensation limit of section 401(a)(17).

(iii) EMPLOYEES TAKEN INTO ACCOUNT. In applying the requirement of this paragraph (d)(2), the employees taken into account are the same employees taken into account in satisfying the requirements of the applicable provision that refers to section 414(s). Alternatively, all of the nonexcludable employees of the employer may be taken into account in applying the requirements of this paragraph (d)(2), unless doing so can reasonably be expected to result in a distortion in the percentages that is more than de minimis given the compensation characteristics of the employer's work force. For purposes of determining the employees taken into account under either alternative, self-employed individuals are disregarded.

(iv) FACTS AND CIRCUMSTANCES DETERMINATION. The determination of whether the average percentage of total compensation included for the employer's highly compensated employees as a group exceeds by more than a de minimis amount the average percentage of total compensation included for the employer's other employees as a group is based on the applicable facts and circumstances. The differences between the percentages for prior periods may be considered in determining whether the amount of the difference between the percentages for a given period is more than de minimis. In addition, an isolated instance of a more than de minimis difference between the compensation percentages that is due to an extraordinary unforeseeable event (such as overtime payments due to a major hurricane) will be disregarded if the amount of the difference in prior determination periods was de minimis.

(E) SPECIAL RULES -- (1) SELF-EMPLOYED INDIVIDUALS -- (i) GENERAL RULE. If an alternative definition of compensation under paragraph (c)(3) or (d) of this section is used to satisfy an applicable provision, an equivalent alternative compensation amount must be determined for any self-employed individual who is in the group of employees for whom paragraph (b) of this section requires a single definition of compensation to be used. This equivalent alternative compensation amount is determined by multiplying the self-employed individual's total earned income (as defined in section 401(c)(2)) by the percentage of total compensation (as defined in paragraph (d)(2)(ii) of this section) included under the alternative definition for the employer's common-law employees as a group (determined in a manner consistent with the rules in paragraph (d)(2)(iii) of this section). For purposes of this determination, highly compensated common-law employees must be disregarded. This equivalent alternative compensation amount will be treated as compensation determined using the alternative definition of compensation.

(ii) INCLUSION OF ELECTIVE CONTRIBUTIONS. If the alternative definition of compensation includes any types of elective contributions described in paragraph (c)(4) of this section, the self-employed individual's earned income for this determination must be increased by the amount of elective contributions made by the employer on behalf of the self-employed individual, and the definition of total compensation for this determination must include all the types of elective contributions described in paragraph (c)(4) of this section made by the employer on behalf of common-law employees (other than highly compensated employees).

(2) LEASED EMPLOYEES. [Reserved].

(f) The Commissioner may in revenue rulings, notices, and other guidance of general applicability provide additional rules for defining compensation within the meaning of section 414(s), including additional definitions of compensation that satisfy section 414(s).

(g) EFFECTIVE DATE -- (1) GENERAL EFFECTIVE DATE. This section 1.414(s)-1T applies to years beginning on or after January 1, 1987.

(2) OPTIONAL USE OF PRIOR REGULATIONS. For years beginning before May 14, 1990, employers may, in defining compensation for purposes of section 414(s), comply with either the provisions of this section 1.414(s)-1T or the prior regulation provisions of section 1.414(s)-1T. See 26 CFR section 1.414(s)-1T (revised as of April 1, 1989).

Par. 3 Section 1.415-2, paragraph (d)(1), (d)(4), and the last sentence of paragraph (d)(6) are revised, paragraph (d)(8) is redesignated as paragraph (d)(10), paragraphs (d)(11) and (d)(12) are added, paragraph (d)(8) is added and reserved, and paragraph (d)(9) is added and reserved.

SECTION 1.415-2 DEFINITIONS AND SPECIAL RULES.

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(d) COMPENSATION -- (1) ITEMS INCLUDABLE AS COMPENSATION. For purposes of applying the limitations of section 415, the term "compensation" includes --

(i) The participant's wages, salaries, fees for professional service and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining the plan to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements, and expense allowances).

(ii) In the case of a participant who is an employee within the meaning of section 401(c)(1) and the regulations thereunder, the participant's earned income (as described in section 401(c)(2) and the regulations thereunder).

(iii) Amounts described in section 104(a)(3), 105(a) and 105(h), but only to the extent that these amounts are includable in the gross income of the employee.

(iv) Amounts paid or reimbursed by the employer for moving expenses incurred by an employee, but only to the extent that these amounts are not deductible by the employee under section 217.

(v) The value of a non-qualified stock option granted to an employee by the employer, but only to the extent that the value of the option is includable in the gross income of the employee for the taxable year in which granted.

(vi) The amount includable in the gross income of an employee upon making the election described in section 83(b).

Paragraphs (d)(1)(i) and (d)(1)(ii) of this section include foreign earned income (as defined in section 911(b)), whether or not excludable from gross income under section 911.

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(4) ELECTION TO USE COMPENSATION ACCRUED DURING LIMITATION YEARS -- (i) YEARS BEGINNING AFTER DECEMBER 31, 1991. For limitation years beginning after December 31, 1991, an employer may not use accrued compensation. Any election previously made to use accrued compensation is not valid for limitation years beginning after December 31, 1991.

(ii) DE MINIMIS ACCRUED COMPENSATION. Notwithstanding paragraph (d)(4)(i) of this section, an employer may include in compensation amounts earned but not paid in a year because of the timing of pay periods and pay days if these amounts are paid during the first few weeks of the next year, the amounts are included on a uniform and consistent basis with respect to all similarly situated employees, and no compensation is included in more than one limitation period. No formal election is required to include the accrued compensation permitted under this de minimis rule. The rule described in this paragraph (d)(4)(ii) does not apply to a section 403(b) annuity contract or to an individual retirement plan (as described in section 7701(a)(37)).

(iii) YEARS BEGINNING BEFORE JANUARY 1, 1992. For limitation years beginning before January 1, 1992, instead of using the compensation actually paid or made available to a participant during the limitation year, an employer may elect to use the compensation accrued for an entire limitation year for purposes of applying the limitations of section 415. In the case of a group of employers which constitute either a controlled group of corporations (within the meaning of section 414(b) as modified by section 415(h)) or trades or businesses (whether or not incorporated) which are under common control (within the meaning of section 414(c) as modified by section 415(h)), the election to use accrued compensation must be made by all members of the group that maintain a qualified plan. Once an election is made, it remains in effect until it is revoked by the employer or group of employers. The election is made or revoked by the adoption of a written resolution by the employer or group of employers. The written resolution requirement described in the preceding sentence is satisfied if the election is made in connection with the adoption, by the employer, or employers, of the plan or any amendments to such plan. The rule described in this paragraph (d)(4)(iii) does not apply to a section 403(b) annuity contract or to an individual retirement plan (as described in section 7701(a)(37)).

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(6) SPECIAL RULE FOR EMPLOYEES OF CONTROLLED GROUPS OF CORPORATIONS, ETC. * * * This special rule is also applicable to an employee of two or more trades or businesses (whether or not incorporated) that are under common control (as defined in section 414(c) as modified by section 415(h)), to an employee of two or more members of an affiliated service group as defined in section 414(m), and to an employee of two or more members of any group of employers who must be aggregated and treated as one employer pursuant to section 414(o).

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(8) SPECIAL RULES FOR LEASED EMPLOYEES. [Reserved.]

(9) SPECIAL RULES FOR PERMANENT AND TOTAL DISABILITY. [Reserved.]

(10) SAFE HARBOR RULE WITH RESPECT TO PLAN'S DEFINITION OF COMPENSATION. * * *

(11) ALTERNATIVE DEFINITION OF COMPENSATION. In lieu of defining compensation in accordance with paragraph (d)(1) and (d)(2) of this section, for purposes of applying the limitations of section 415 in the case of employees other than employees within the meaning of section 401(c)(1), a plan may define compensation using either of the following definitions used for employment tax purposes, as modified herein, and the definition will be considered automatically to satisfy section 415(c)(3):

(i) SECTION 3121(a) WAGES. Wages as defined in section 3121(a), for purposes of calculating social security taxes, but determined without regard to the wage base limitation in section 3121(a)(1), the special rules in section 3121(v) (applicable to certain elective contributions and nonqualified deferred compensation), any rules that limit covered employment based on the type or location of an employee's employer, and any rules that limit the remuneration included in wages based on familial relationship or based on the nature or location of the employment or the services performed (such as the exceptions to the definition of employment in section 3121(b)(1) through (20)).

(ii) SECTION 3401(a) WAGES. Wages as defined in section 3401(a) for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2)).

(12) The Commissioner may in revenue rulings, notices, and other guidance of general applicability provide additional definitions of compensation that are treated as satisfying section 415 (c)(3).

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There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. Section 414(s) is generally applicable to provisions that refer to it for years beginning on or after January 1, 1987. Section 414(s) permits an employer to use a definition of compensation other than the definition provided in section 415(c)(3) to satisfy an applicable provision only if the alternative definition is prescribed by regulations. It is therefore found impracticable and contrary to the public interest to issue this Treasury decision with notice and public procedure under section 553(b) of Title 5 of the United States Code or subject to the effective date limitations of section 553(d) of that title.