Minimum Participation Rules -- Final Regulations Under Section 401(a)(26)

 [4830-01]

 ACTION: Final regulations

 SUMMARY: This document contains final regulations relating to the minimum participation requirements of section 401(a)(26) of the Internal Revenue Code of 1986. They reflect changes made by the Tax Reform Act of 1986 and the Technical and Miscellaneous Revenue Act of 1988. These 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.

 EFFECTIVE DATE: These regulations are effective for plan years beginning on or after January 1, 1989, and are applied to those plan years except as set forth in section 1.401(a)(26)-9.

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

SUPPLEMENTARY INFORMATION:

Proposed regulations under section 401(a)(26) of the Internal Revenue Code (Code) were published in the Federal Register on February 14, 1989 (54 FR 6710). A public hearing on the proposed regulations was announced in 54 FR 32453 and held on October 30, 1989. After consideration of all comments regarding the proposed regulations, the proposed regulations were withdrawn and new proposed regulations were published on May 14, 1990 (55 FR 19935). These new proposed regulations were supplemented and modified by proposed regulations published in the Federal Register on February 1, 1991 (56 FR 3988).

 Written comments were received from the public on the proposed section 401(a)(26) regulations of May 14, 1990. In addition, a public hearing on those proposed regulations was held on September 26, 27, and 28, 1990 and a public hearing on the February 1, 1991, proposed regulations was held on May 16, 1991. After consideration of all the written comments received and the statement made at the public hearings, the propose regulations under section 401(a)(26) are adopted as modified by this Treasury Decision.

STATUTORY ANALYSIS

 Section 401(a)(26) requires that each qualified plan benefit at least the lesser of 50 employees or 40 percent of all employees of the employer (the minimum participation rule). The minimum participation rule applies separately to each qualified plan of an employer and generally is effective for plan years beginning on or after January 1, 1989.

 The section 401(a)(26) minimum participation rules were added by the Tax Reform Act of 1986 (TRA 86) in conjunction with amendments to the minimum coverage requirements of section 410(b). The primary purpose of section 401(a)(26), like section 410(b) and section 401(a)(4), is to ensure that tax-favored pension, stock bonus or profit-sharing plans do not discriminate in favor of the highly compensate employees of the employer maintaining the plan. Specifically, Congress enact section 401(a)(26) to address two fundamental concerns. First, the provision is intended to promote the nondiscriminatory provision of benefits or features by limiting the extent to which an employer is able to design different benefit formulas for different employees in order to maximize benefit disparities in favor of highly compensated employees. Second, the provision is intended to limit the extent to which a defined benefit plan operates as an individual account for one employee, or a small group of the employer's employees, either by currently benefiting only one or a few of the employer's highly compensated employees or by maintaining accrued benefits for only one or a few such employees.

Explanation of provisions

Development of final regulations

 These regulations were developed in conjunction with regulations under the various related statutory nondiscrimination provisions governing tax-qualified retirement plans, principally sections 401(a)(4), 401(a)(17), 401(l), 410(b), and 414(s). This coordinated approach was initially adopted in developing the proposed regulations and was intended to provide taxpayers with an integrate framework for applying the nondiscrimination provisions of the Code. Because the then proposed and now final regulations under section 401(a)(4) set out comprehensive nondiscrimination tests for the first time, it has been possible to substantially simplify the legal and administrative requirements contained in the section 401(a)(26) regulations.

 Most significantly, although section 401(a)(26)(I) states that the Secretary may provide that any separate benefit structure, trust, or other arrangement is to be treated as a separate plan for purposes of section 401(a)(26), the final regulations, like the May 14, 1990, proposed regulations, do not require separate current benefit structure testing. As in the proposed regulations, the decision not to exercise this statutory grant of discretion at this time was made because the Treasury and the Service believe that the relevant underlying statutory purpose of section 401(a)(26) is adequately addressed by the publication of comprehensive guidelines on the nondiscrimination requirements under section 401(a)(4).

Summary of significant modifications

 In general, the comments on the May 14, 1990, proposed regulations were favorable. Therefore, in large part, the final regulations adopt the rules in the proposed regulations with only minor revisions to clarify and to more closely parallel similar provisions under sections 401(a)(4) and 410(b). The more significant changes are the provision of a retroactive correction period extending beyond the end of the plan year that parallels similar provisions for sections 401(a)(4) and 410(b), the clarification of the term "benefiting" by generally adopting the benefiting rules of section 410(b) by cross reference, and the revision of the rules governing the exclusion of nonresident aliens and the exclusion of former employees to reflect expanded exclusions provided for these categories of employees in the section 410(b) final regulations.

Summary of provisions

1. APPLICABLE TO PLANS SEPARATELY.

 Section 401(a)(26) applies separately to each plan of the employer. Thus, plans may not be aggregated to satisfy the requirements of section 401(a)(26) even where the plans are identical in all respects or where the plans are aggregated and treated as a single plan for purposes of section 401(a)(4) and section 410(b).

 The final regulations, like the proposed regulations, provide generally that each single plan within the meaning of section 414(l) is a separate plan for purposes of section 401(a)(26). A plan that is treated as a single plan under section 414(l) is, however, treat as comprising separate plans if disaggregated. The final regulations provide disaggregation provisions that generally parallel similar provisions in section 410(b). However, for purposes of section 401(a)(26), disaggregation is permissive for portions of plans covering collectively bargained and noncollectively bargained employees, respectively. Portions of plans covered by sections 401(k) and 401(m) and portions of plans not subject to those provisions are not disaggregated for purposes of section 401(a)(26).

2. PLANS THAT ARE ACCEPTED FROM SECTION 401(a)(26)

 Like the proposed regulations, the final regulations provide exceptions in the case of four categories of plans. Plans meeting the requirements of these exceptions are generally treat as satisfying section 401(a)(26) without further testing of participation under the plan.

A. PLANS BENEFITING NO HIGHLY COMPENSATED EMPLOYEES. A plan, other than a top-heavy plan under section 416 or a frozen defined benefit plan, satisfies section 401(a)(26) if the plan benefits no highly compensated employee or highly compensated former employee of the employer.

B. MULTIEMPLOYER PLANS. A multiemployer plan, or portion thereof, that benefits only employees included in a unit of employees covered by a collective bargaining agreement is not required to meet the minimum participation requirements of section 401(a)(26). A multiemployer plan that also covers employees not included in a unit of employees covered by a collective bargaining agreement is required to satisfy section 401(a)(26). However, the final regulations retain a special testing rule that permits such multiemployer plans to satisfy section 401(a)(26) if the plan as a whole benefits at least 50 employees.

C. UNDERFUNDED DEFINED BENEFIT PLANS. Certain underfunded defined benefit plans are treat as satisfying the requirements of section 401(a)(26).

D. ACQUISITIONS AND DISPOSITIONS. Like the proposed regulations, the final regulations provide that rules similar to the rules in section 410(b)(6)(C) apply in the event of an acquisition or disposition.

3. MINIMUM PARTICIPATION REQUIREMENTS.

 If a plan does not satisfy one of the exceptions mentioned above, the plan must satisfy section 401(a)(26) for the plan year. A plan generally satisfies section 401(a)(26) for a plan year if the plan benefits the lesser of 50 employees of the employer or 40 percent of the employees of the employer.

 A defined contribution plan satisfies this requirement if it provides current benefits to the requisite number of employees of the employer or if it does not currently benefit any employees or former employees. A defined benefit plan must satisfy section 401(a)(26) with respect to both its current accruals and its prior benefit structure. A defined benefit plan satisfies this requirement with respect to current accruals by providing a current benefit to the requisite number of employees of the employer and with respect to its prior benefit structure if the requisite number of employees either have a meaningful accrued benefit or are currently receiving a meaningful benefit accrual. For purposes of testing the prior benefit structure, former employees may be aggregated with employees in establishing that the requisite number of employees have a meaningful accrued benefit under the plan.

 A defined benefit plan that is a multiemployer plan is not required to satisfy the prior benefit structure rule unless the multiemployer plan benefits employees who are not included in a unit of employees covered by a collective bargaining agreement. In that case, however, the multiemployer plan satisfies the prior benefit structure rule for a plan year if the multiemployer plan either provides meaningful benefits to at least 50 employees for a plan year, or 50 employees have meaningful accrued benefits under the plan. For purposes of this rule, all employees benefiting under the multiemployer plan may be considered.

 The determination of whether the plan is providing (or has provided) meaningful benefits is based on all of the facts and circumstances in a manner consistent with the section 401(a)(26) policy objective of limiting the extent to which a defined benefit plan operates as an individual account for one employee or a small group of employees. Accordingly, and ongoing defined benefit plan will typically satisfy the prior benefit structure requirements concurrently with satisfaction of the general plan requirements. A plan that satisfies one of the six prior benefit structure tests in section 1.401(a)(26)-6 of the February 14, 1989, proposed regulations is deemed to satisfy this requirement.

4. TESTING FORMER EMPLOYEES.

 Like the proposed regulations, the final regulations provide that if a defined benefit plan provides additional benefits to former employees during a plan year, the plan must satisfy section 401(a)(26) with respect to former employees. The final regulations retain a special former employee testing rule provided in the proposed regulations. This special rule is satisfied if a plan benefits at least 5 former employees and either benefits more than 95 percent of all former employees with vested accrued benefits under the plan or at least 60 percent of the former employees receiving an additional benefit are non-highly compensated employees.

5. TESTING METHODS.

 Section 401(a)(26) requires that a plan satisfy section 401(a)(26) on each day of the plan year. Like the proposed regulations, however, the final regulations provide a simplified testing method. Under this method, a plan is treated as satisfying section 401(a)(26) if the plan satisfies section 401(a)(26) on a single day during the plan year as long as the day selected is reasonably representative of the employer's employees and the plan's coverage.

6. RETROACTIVE CORRECTION

 A number of commentators requested a revision to the regulations permitting a retroactive correction period extending beyond the end of the plan year for purposes of satisfying section 401(a)(26). In response, the final regulations provide a retroactive correction mechanism permitting employers to make certain retroactive amendments in order to achieve compliance with the section 401(a)(26) minimum participation requirements at any point up to the 15th day of the 10th month after the end of the plan year. This retroactive correction provision parallels similar provisions for sections 401(a)(4) and 410(b), both in scope and duration.

7. TRANSITION RULES

 The final regulations retain special transition rules for governmental plans and certain section 403(b) annuities, plans that have a minimum-period-of-service requirement or a last-day-of-the- year requirement, and plans that provided certain early retirement "window period" benefits. Although the need for the "window benefit" transition rule was substantially eliminated with the elimination of separate benefit structure testing, the transition relief is still potentially necessary for an otherwise frozen plan that was amended to provide a subsidized window benefit.

8. PLANS MAINTAINED BY MORE THAN ONE EMPLOYER.

 Generally, multiple employer plans must satisfy section 401(a)(26) on an employer-by-employer basis rather than on the basis of participating employers in the aggregate. Failure to satisfy section 401(a)(26) with respect to any component of this testing process may result in disqualification of the plan for all participating employers. Any noncollectively bargained portion of a multiemployer plan is generally a multiple employer plan for purposes of nondiscrimination testing and, thus, is subject to section 401(a)(26) on an employer-by-employer basis. The final regulations, like the proposed regulations, provide a special testing rule under which the noncollectively bargained portion of a multiemployer plan nevertheless may be test on an aggregate basis taking the collectively bargained employees of the multiemployer plan into account. The Commissioner, in a proper case, could retain the qualified status for innocent employers in a multiple employer plan that fails to satisfy section 401(a)(26). In such a case, the Commissioner would require corrective and remedial action with respect to the plan, such as allowing the withdrawal of an offending employer, allowing a disqualifying defect to be cured within a reasonable time after the plan administrator has or should have knowledge of the disqualifying defects, or requiring plan amendments to prevent future disqualifying events.

9. EFFECTIVE DATE.

 Section 401(a)(26) generally is effective with respect to plan years beginning on or after January 1, 1989. A deferred effective date applies with respect to certain collectively bargained plans.

Effect on other laws

 Compliance with the provision of these regulations do not ensure compliance with other applicable Federal laws, including, but not limit to, the provisions of Title I of the Employee Retirement Income Security Act of 1974, which are administered by the Secretary of Labor pursuant to Reorganization Plan Number 4 of 1978. Employers should note that plan amendments pursuant to these regulations may necessitate reporting and disclosure under such Act, including requirements related to summary plan descriptions and summaries of material modifications.

Special Analyses

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

Drafting Information

 The principal author of these regulations is Nancy J. Marks, 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 1.401-0 through 1.419A-2T

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

Treasury Decision 8375

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

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

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

Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805 * * * sections 1.401(a)(26)-1 through (a)(26)-9 also issued under 26 U.S.C. 401(a)(26). * * *

Par. 2. New sections 1.401(a)(26)-0 through 1.401(a)(26)-9 are added to read as follows:

SECTION 1.401(a)(26)-0 TABLE OF CONTENTS.

This section contains a listing of the headings of section 1.401(a)(26)-1 through 1.401(a)(26)-9.

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

 (a) General rule.

(a) GENERAL RULE. A plan is a qualified plan for a plan year only if the plan satisfies section 401(a)(26) for the plan year. A plan that satisfies any of the exceptions described in paragraph (b) of this section passes section 401(a)(26) automatically for the plan year. A plan that does not satisfy one of the exceptions in paragraph (b) of this section must satisfy section 1.401(a)(26)-2(a). In addition, a defined benefit plan must satisfy section 1.401(a)(26)-3 with respect to its prior benefit structure. Finally, a defined benefit plan that benefits former employees (for example, a defined benefit plan that is amended to provide an ad hoc cost-of-living adjustment to former employees) must separately satisfy section 1.401(a)(26)-4 with respect to its former employees.

(b) EXCEPTIONS TO SECTION 401(a)(26) -- (1) PLANS THAT DO NOT BENEFIT ANY HIGHLY COMPENSATED EMPLOYEES. A plan, other than a frozen defined benefit plan as defined in section 1.401(a)(26)-2(b), satisfies section 401(a)(26) for a plan year if the plan is not a top-heavy plan under section 416 and the plan meets the following requirements:

(i) The plan benefits no highly compensated employee or highly compensated former employee of the employer; and

(ii) The plan is not aggregated with any other plan of the employer to enable the other plan to satisfy section 401(a)(4) or 410(b). The plan may, however, be aggregated with the employer's other plans for purposes of the average benefit percentage test in section 410(b)(2)(A)(ii).

(2) MULTIEMPLOYER PLANS -- (i) IN GENERAL. The portion of a multiemployer plan that benefits only employees included in a unit of employees covered by a collective bargaining agreement may be treated as a separate plan that satisfies section 401(a)(26) for a plan year.

(ii) MULTIEMPLOYER PLANS COVERING NONCOLLECTIVELY BARGAINED EMPLOYEES -- (A) IN GENERAL. The rule provided in paragraph (b)(2)(i) does not apply to the portion of a multiemployer plan that benefits employees who are not included in any collective bargaining unit covered by a collective bargaining agreement. Thus, the portion of the plan benefiting these employees must separately satisfy section 401(a)(26).

(B) SPECIAL TESTING RULE. A multiemployer plan that benefits employees who are not included in any collective bargaining unit covered by a collective bargaining agreement satisfies section 401(a)(26) if the plan benefits 50 employees. For purposes of this special testing rule, employees who are included in a unit of employees covered by a collective bargaining agreement may be included in determining whether the plan benefits 50 employees.

(3) CERTAIN UNDERFUNDED DEFINED BENEFIT PLANS -- (i) IN GENERAL. A defined benefit plan is deemed to satisfy section 401(a)(26) for a plan year if all of the conditions of paragraphs (b)(3)(ii) through (b)(3)(iv) of this section are satisfied with respect to the plan for the plan year.

(ii) ELIGIBLE PLAN. This condition is satisfied for a plan year only if the plan is subject to Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) for the plan year or, if the plan is not a Title IV plan under ERISA, it is not a top-heavy plan within the meaning of section 416. This condition does not apply for plan years beginning before January 1, 1992.

(iii) ACTUARIAL CERTIFICATION. This condition is satisfied for a plan year only if the employer's timely filed actual report, as required by section 6059, evidences that the plan does not have sufficient assets to satisfy all liabilities under the plan (determined in accordance with section 401(a)(2)).

(iv) CESSATION OF ALL BENEFIT ACCRUALS. This condition is satisfied for a plan year only if, for the plan year, no employee or former employee is benefiting within the meaning of section 1.401(a)(26)-5(a) or (b). For this purpose, an employee is not treated as benefiting solely by reason of being a non-key employee receiving minimum benefit accruals required by section 416.

(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 section 401(k) plan. A section 401(k) plan or a section 401(m) plan that consists solely of employer matching contributions or employee after-tax contributions that are tied to elective contributions under 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.

(5) CERTAIN ACQUISITIONS OR DISPOSITIONS -- (i) GENERAL RULE. Rules similar to the rules prescribed under section 410(b)(6)(C) apply under section 401(a)(26). Pursuant to these rules, the requirements of section 401(a)(26) are treated as satisfied for certain plans of an employer involved in an acquisition or disposition (transaction) for the transition period. The transition period begins on the date of the transaction and ends on the last day of the first plan year beginning after the date of the transaction.

(ii) SPECIAL RULE FOR TRANSACTIONS THAT OCCUR IN THE PLAN YEAR PRIOR TO THE FIRST PLAN YEAR TO WHICH SECTION 401(a)(26) APPLIES. Where there has been a transaction described in section 410(b)(6)(C) in the plan year prior to the first plan year in which section 401(a)(26) applies to a plan, the plan satisfies section 401(a)(26) for the transition period if the plan benefited 50 employees or 40 percent of the employees of the employer immediately prior to the transaction.

(iii) DEFINITION OF "ACQUISITION" AND "DISPOSITION." For purposes of this paragraph (b)(5), 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.

(c) ADDITIONAL RULES. The Commissioner may, in revenue rulings, notices, and other guidance of general applicability, provide any additional rules that may be necessary or appropriate in applying the minimum participation requirements of section 401(a)(26).

SECTION 1.401(a)(26)-2 MINIMUM PARTICIPATION RULE.

(a) GENERAL RULE. A plan satisfies this paragraph (a) for a plan year only if the plan benefits at least the lesser of --

(1) 50 employees of the employer, or

(2) 40 percent of the employees of the employer.

(b) FROZEN PLANS. A plan under which no employee or former employee benefits (within the meaning of section 1.401(a)(26)-5(a) or (b)), is a frozen plan for purposes of this section and satisfies paragraph (a) of this section automatically. Thus, a frozen defined contribution plan satisfies section 401(a)(26) automatically and a frozen defined benefit plan satisfies section 401(a)(26) for a plan year by satisfying the prior benefit structure requirements in section 1.401(a)(26)-3. For purposes of the rule in this paragraph (b), a defined benefit plan that provides only the minimum benefits for non-key employees required by section 416 is a frozen defined benefit plan.

(c) PLAN. "Plan" means a plan within the meaning of section 1.410(b)-7(a) and (b), after the application of the mandatory disaggregation rules of paragraph (d)(1) of this section and, if applicable, the permissive disaggregation rules of paragraph (d)(2) of this section.

(d) DISAGGREGATION OF CERTAIN PLANS -- (1) MANDATORY DISAGGREGATION -- (i) ESOPs AND NON-ESOPs. The portion of a plan that is an ESOP and the portion of the plan that is not an ESOP are treated as separate plans for purposes of section 401(a)(26), except as otherwise permitted under section 54.4975-11(e) of this Chapter.

(ii) PLANS MAINTAINED BY MORE THAN ONE EMPLOYER -- (A) MULTIPLE EMPLOYER PLANS. If a plan benefits employees of more than one employer and those employees are not included in a unit of employees covered by one or more collective bargaining agreements, the plan is a multiple employer plan. A multiple employer plan is treated as separate plans, each of which is maintained by a separate employer and must separately satisfy section 401(a)(26) by reference only to that employer's employees.

(B) MULTIEMPLOYER PLANS. The portion of a multiemployer plan that benefits employees who are included in one or more units of employees covered by one or more collective bargaining agreements and the portion of that plan that benefits employees who are not included in a unit of employees covered pursuant to any collective bargaining agreement are treated as separate plans. The portion of a multiemployer plan that benefits employees who are not included in a unit of employees covered by a collective bargaining agreement is a multiple employer plan as described in paragraph (d)(1)(ii)(A) of this section. This paragraph (d)(1)(ii)(B) does not apply to the extent that the special testing rule in section 1.401(a)(26)- 1(b)(2)(ii) applies. Also, this paragraph (d)(1)(B)(2) does not apply for purposes of prior benefit structure testing under section 1.401(a)(26)-3.

(iii) DEFINED BENEFIT PLANS WITH OTHER ARRANGEMENTS -- (A) IN GENERAL. A defined benefit plan is treated as comprising separate plans if, under the facts and circumstances, there is an arrangement (either under or outside the plan) that has the effect of providing any employee with a greater interest in a portion of the assets of a plan in a way that has the effect of creating separate accounts. Separate plans are not created, however, merely because a partnership agreement provides for allocation among partners, in proportion to their partnership interests, of either the cost of finding the plan or surplus assets upon plan termination.

(B) EXAMPLES. The following examples illustrate certain situations in which other arrangements relating to a defined benefit plan are or are not treated as creating separate plans:

EXAMPLE 1. Employer A maintains a defined benefit plan under which each highly compensated employee can direct the investment of the portion of the plan's assets that represents the accumulated contributions with respect to that employee's plan benefits. In addition, by agreement outside the plan, if the product of the employee's investment direction exceeds the value needed to fund that employee's benefits, Employer A agrees to make a special payment to the participant. In this case, each separate portion of the pool of assets over which an employee has investment authority is a separate plan for the employee.

EXAMPLE 2. Employer B is a partnership that maintains a defined benefit plan. The partnership agreement provides that, upon termination of the plan, a special allocation of any excess plan assets after reversion is made to the partnership on the basis of partnership share. This arrangement does not create separate plans with respect to the partners.

(iv) PLANS BENEFITING EMPLOYEES OF QUALIFIED SEPARATE LINES OF BUSINESS. If an employer is treated as operating qualified separate lines of business for purposes of section 401(a)(26) in accordance with section 1.414(r)-1(b), the portion of a plan that benefits employees of one qualified separate line of business is treated as a separate plan from the portions of the same plan that benefit employees of the other qualified separate lines of business of the employer. See sections 1.414(r)-1(c)(3) and 1.414(r)-9 (separate application of section 401(a)(26) to the employees of a qualified separate line of business). The rule in this paragraph (d)(6) does not apply to a plan that is tested under the special rule for employer-wide plans in section 1.414(r)-1(c)(3)(ii) for a plan year.

(2) PERMISSIVE DISAGGREGATION -- (i) PLANS BENEFITING COLLECTIVELY BARGAINING EMPLOYEES. For purposes of section 401(a)(26), an employer may treat the portion of a plan that benefits employees who are included in a unit of employees covered by a collective bargaining agreement as a plan separate from the portion of a plan that benefits employees who are not included in such a collective bargaining unit. This paragraph (d)(2)(i) applies separately to each collective bargaining agreement. Thus, for example, the portion of a plan that benefits employees included in a unit of employees covered by one collective bargaining agreement may be treated as a plan that is separate from the portion of the plan that benefits employees included in a unit of employees covered by another collective bargaining agreement.

(ii) PLANS BENEFITING OTHERWISE EXCLUDABLE EMPLOYEES. If an employer applies section 401(a)(26) separately to the portion of a plan that benefits only employees who satisfy age and service conditions under the plan that are lower than the greatest minimum age and service conditions permissible under section 410(a), the plan is treated as comprising separate plans, one benefiting the employees who have not satisfied the lower minimum age and service but not the greatest minimum age and service conditions permitted under section 410(a) and one benefiting employees who have satisfied the greatest minimum age and service conditions permitted under section 410(a). See section 1.401(a)(26)-6(b)(1)(ii) for rules concerning testing of otherwise excludable employees.

SECTION 1.401(a)(26)-3 RULES APPLICABLE TO A DEFINED BENEFIT PLAN'S PRIOR BENEFIT STRUCTURE.

(a) GENERAL RULE. A defined benefit plan that does not meet one of the exceptions in section 1.401(a)(26)-1(b) must satisfy paragraph (c) of this section with respect to its prior benefit structure. Defined contribution plans are not subject to this section.

(b) PRIOR BENEFIT STRUCTURE. Each defined benefit plan has only one prior benefit structure, and all accrued benefits under the plan as of the beginning of a plan year (including benefits rolled over or transferred to the plan) are included in the prior benefit structure for the year.

(c) TESTING A PRIOR BENEFIT STRUCTURE -- (1) GENERAL RULE. A plan's prior benefit structure satisfies this paragraph if the plan provides meaningful benefits to a group of employees that includes the lesser of 50 employees or 40 percent of the employer's employees. Thus, a plan satisfies the requirements of this paragraph (c) if at least 50 employees or 40 percent of the employer's employees currently accrue meaningful benefits under the plan. Alternatively, a plan satisfies this paragraph if at least 50 employees and former employees or 40 percent of the employer's employees and former employees have meaningful accrued benefits under the plan.

(2) MEANINGFUL BENEFITS. Whether a plan is providing meaningful benefits, or whether individuals have meaningful accrued benefits under a plan, is determined on the basis of all the facts and circumstances. The relevant factors in making this determination include, but are not limited to, the following: the level of current benefit accruals; the comparative rate of accruals under the current benefit formula compared to prior rates of accrual under the plan; the projected accrued benefits under the current benefit formula compared to accrued benefits as of the close of the immediately preceding plan year; the length of time the current benefit formula has been in effect; the number of employees with accrued benefits under the plan; and the length of time the plan has been in effect. A rule for determining whether an offset plan provides meaningful benefits is provided in section 1.401(a)(26)-5(a)(2). A plan does not satisfy this paragraph (c) if it exists primarily to preserve accrued benefits for a small group of employees and thereby functions more as a individual plan for the small group of employees or for the employer.

(d) MULTIEMPLOYER PLAN RULE. A multiemployer plan is deemed to satisfy the prior benefit structure rule in paragraph (c)(1) of this section for a plan year if the multiemployer plan provides meaningful benefits to at least 50 employees for a plan year, or 50 employees have meaningful accrued benefits under the plan. For purposes of this paragraph, all employees benefiting under the multiemployer plan may be considered, whether or not these employees are included in a unit of employees covered pursuant to any collective bargaining agreement.

SECTION 1.401(a)(26)-4 TESTING FORMER EMPLOYEES.

(a) SCOPE. This section applies to any defined benefit plan that benefits former employees in a plan year within the meaning of section 1.401(a)(26)-5(b) and does not meet one of the exceptions in section 1.401(a)(26)-1(b).

(b) MINIMUM PARTICIPATION RULE FOR FORMER EMPLOYEES. Except as set forth in paragraph (c) of this section, a plan that is subject to this section must benefit at least the lesser of:

(1) 50 former employees of the employer, or

(2) 40 percent of the former employees of the employer.

(c) SPECIAL RULE. A plan satisfies the minimum participation rule in paragraph (b) of this section if the plan benefits at least five former employees, and if either:

(1) More than 95 percent of all former employees with vested accrued benefits under the plan benefit under the plan for the plan year, or

(2) At least 60 percent of the former employees who benefit under the plan for the plan year are nonhighly compensated former employees.

(d) EXCLUDABLE FORMER EMPLOYEES -- (1) GENERAL RULE. Whether a former employee is an excludable former employee for purposes of this section is determined under section 1.401(a)(26)-6(c).

(2) EXCEPTION. Solely for purposes of paragraph (c) of this section, the rule in section 1.401(a)(26)-6(c)(4) (regarding vested accrued benefits eligible for mandatory distribution) does not apply to any former employee having a vested accrued benefit. Thus, a former employee who has a vested accrued benefit is not an excludable former employee merely because that vested accrued benefit does not exceed $3,500.

SECTION 1.401(a)(26)-5 EMPLOYEES WHO BENEFIT UNDER A PLAN.

(a) EMPLOYEES BENEFITING UNDER A PLAN -- (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, the employee would be treated as benefiting under the provisions of section 1.410(b)-3(a), without regard to section 1.410(b)-3(a)(iv).

(2) SEQUENTIAL OR CURRENT BENEFIT OFFSET ARRANGEMENT -- (i) IN GENERAL. An employee is treated as accruing a benefit under a plan that includes an offset or reduction of benefits that satisfies either paragraph (a)(2)(ii) or (a)(2)(iii) of this section if either the employee accrues a benefit under the plan for the year, or the employee would have accrued a benefit if the offset or reduction portion of the benefit formula were disregarded. In addition, an employee is treated as accruing a meaningful benefit for purposes of prior benefit structure testing under section 1.401(a)(26)-3 if the employee would have accrued a meaningful benefit if the offset or reduction portion of the benefit formula were disregarded.

(ii) OFFSET BY SEQUENTIAL OR GRANDFATHERED BENEFITS. An offset or reduction of benefits under a defined benefit plan satisfies this paragraph (a)(2) if the benefit formula provides that an employee will not accrue additional benefits under the current portion of the benefit formula until the employee has accrued, under such portion, a benefit in excess of such employee's benefit under one or more formulas in effect for prior years that are based wholly on prior years of service. The prior benefit may have accrued under the same or a separate plan, may be provided under the same or a separate plan and may relate to service with the same or previous employers. Benefits will not fail to be treated as based wholly on prior years if they are based, directly or indirectly, on compensation earned after such prior years (including compensation earned in the current year), if they are adjusted to reflect increases in the section 415 limitations, or if they are increased to provide an ad hoc cost of living adjustment designed to adjust, in whole or in part, for inflation. Furthermore, benefits do not fall to be treated as based wholly on prior years merely because the benefits (e.g., early retirement benefits) are subject to an age or years-of-service condition and, in applying the condition or conditions, the current and prior years are taken into account.

(iii) CONCURRENT BENEFIT OFFSET ARRANGEMENTS -- (A) GENERAL RULE. An offset or reduction of benefits under a defined benefit plan satisfies the requirements of this paragraph (a)(2)(iii) if the benefit formula provides a benefit that is offset or reduced by contributions or benefits under another plan that is maintained by the same employer and the following additional requirements are met:

(1) The contributions or benefits under a plan that are used to offset or reduce the benefits under the positive portion of the formula being tested accrued under such other plan;

(2) The employees who benefit under the formula being tested also benefit under the other plan on a reasonable and uniform basis; and

(3) The contributions or benefits under the plan that are used to offset or reduce the benefits under the formula being tested are not used to offset or reduce that employee's benefits under any other plan or any other formula.

(B) SPECIAL RULES FOR CERTAIN SECTION 414(n) EMPLOYER- RECIPIENTS. The same employer requirement in the concurrent benefit offset rule in paragraph (a)(2)(iii)(A) of this section is waived for certain section 414(n) employer-recipients. Under this exception, an employer-recipient (within the meaning of sections 414(n) and (o)) may treat contributions or benefits under a plan maintained by a leasing organization as contributions or benefits accrued under the recipient organization plan provided the following requirements are met: the employer-recipient maintains a plan covering leased employees (which employees are treated as employees of the employer- recipient within the meaning of sections 414(n)(2) and 414(o)(2)); the leased employees are also covered under a plan maintained by the leasing organization; and contributions or benefits under the plan maintained by the employer-recipient are offset or reduced by the contributions or benefits under the leasing organization plan that are attributable to service with the recipient organization. Also, for purposes of the benefiting condition requirement in paragraph (a)(2)(iii)(A)(2) of this section, the employees of the employer- recipient who are not leased from the leasing organization are not required to benefit under the plan of the leasing organization.

(b) FORMER EMPLOYEES BENEFITING UNDER A PLAN. A former employee is treated as benefiting for a plan year if and only if the former employee would be treated as benefiting under the rules in section 1.410(b)-3(b).

SECTION 1.401(a)(26)-6 EXCLUDABLE EMPLOYEES.

(a) IN GENERAL. For purposes of applying section 401(a)(26) with respect to either employees, former employees, or both employees and former employees, as applicable, all employees other than excludable employees described in paragraph (b) of this section, all former employees other than excludable former employees described in paragraph (c) of this section, or both, as the case may be, must be taken into account. Except as specifically provided otherwise in this section, the rules of this section are applied by reference only to the particular plan and must be applied on a uniform and consistent basis.

(b) EXCLUDABLE EMPLOYEES. An employee is an excludable employee if the employee is covered by one or more of the following exclusions:

(1) MINIMUM AGE AND SERVICE EXCLUSIONS -- (i) 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 may be treated as excludable employees with respect to that plan. An employee is treated as meeting the age and service requirements on the date any employee with the same age and service would be eligible to commence participation in the plan, as provided in section 410(b)(4)(C).

(ii) PLANS BENEFITING OTHERWISE EXCLUDABLE EMPLOYEES. An employer may treat a plan benefiting otherwise excludable employees as two separate plans, one for the otherwise excludable employees and one for the other employees benefiting under the plan. The effect of this rule is that employees who would be excludable under paragraph (b)(1) of this section (applied without regard to section 410(a)(1)(B)), but for the fact that the plan does not apply the greatest permissible minimum age and service conditions, may be treated as excludable employees with respect to the plan. This treatment is only available if each of the following conditions is satisfied:

(A) The plan under which the otherwise excludable employees benefit also benefits employees who are not otherwise excludable.

(B) The plan under which the otherwise excludable employees benefit satisfies section 401(a)(26), both by reference only to otherwise excludable employees and by reference only to employees who are not otherwise excludable.

(C) The contributions or benefits provided to the otherwise excludable employees (expressed as percentages of compensation) are not greater than the contributions or benefits provided to the employees who are not otherwise excludable under the plan.

(D) No highly compensated employee is included in the group of otherwise excludable employees for more than one plan year.

(iii) EXAMPLES. The following examples illustrate some of the minimum-aged-and-service exclusion requirements:

EXAMPLE 1. Employer X maintains a defined contribution plan, Plan X, under which employees who have not completed 1 year of service are not eligible to participate. Employer X has six employees) Two of the employees participate in Plan X. The other four employees have not completed 1 year of service and are therefore not eligible to participate in Plan X. The four employees who have not completed 1 year of service are excludable employees and may be disregarded for purposes of applying the minimum participation test. Therefore, Plan X satisfies section 401(a)(26) because both of the two employees who must be considered are participants in Plan X.

EXAMPLE 2. Employer Y has 100 employees and maintains two plans, Plan 1 and Plan 2. Plan 1 provides that employees who have not completed 1 year of service are not eligible to participate. plan 2 has no minimum age or service requirement. Twenty of Y's employees do not meet the minimum service requirement under Plan 1. Each plan satisfies the ratio test under section 410(b)(1)(B). In testing Plan 1 to determine whether it satisfies section 401(a)(26), the 20 employees not meeting the minimum age and service requirement under Plan 1 are treated as excludable employees. In testing Plan 2 to determine whether it satisfies section 401(a)(26), no employees are treated as excludable employees because Plan 2 does not have a minimum age or service requirement.

(2) CERTAIN AIR PILOTS. An employee who is excluded from consideration under section 410(b)(3)(B) (relating to certain air pilots) may be treated as an excludable employee.

(3) CERTAIN NONRESIDENT ALIENS -- (i) IN GENERAL. An employee who is excluded from consideration under section 410(b)(3)(C) (relating to certain nonresident aliens) may be treated as an excludable employee.

(ii) SPECIAL TREATY RULE. In addition, an employee who is a nonresident alien (within the meaning of section 7701(b)(1)(B)) and who does receive earned income (within the meaning of section 911(d)(2)) from the employer that constitutes income from sources within the United States (within the meaning of section 861(a)(3)) is permitted to be excluded, if all of the employee's earned income from the employer from sources within the United States is exempt from United States income tax under an applicable income tax convention. This paragraph (b)(3)(ii) applies only if all employees described in the preceding sentence are so excluded.

(4) EMPLOYEES COVERED PURSUANT TO A COLLECTIVE BARGAINING AGREEMENT. When testing a plan benefiting only noncollectively bargained employees, an employee who is excluded from consideration under section 410(b)(3)(A) (exclusion for employees included in a unit of employees covered by a collective bargaining agreement) may be treated as an excludable employee. This rule may be applied separately to each collective bargaining agreement. See section 1.401(a)(26)-8 for the definitions of the terms "collective bargaining agreement", "collectively bargained employee," and "covered pursuant to a collective bargaining agreement".

(5) EMPLOYEES NOT COVERED PURSUANT TO COLLECTIVE BARGAINING AGREEMENT. When testing a plan that benefits only employees who are included in a group of employees who are covered pursuant to a collective bargaining agreement, an employee who is not included in the group of employees who are covered by the collective bargaining agreement may be treated as an excludable employee.

(6) EXAMPLES. The following examples illustrate the excludable employee rules that relate to employees covered pursuant to collective bargaining agreements. For purposes of these examples assume that no other exclusion rules are applicable.

EXAMPLE 1. Employer W has 70 collectively bargained employees and 30 non-collectively bargained employees. Employer W maintains Plan W, which benefits only the 30 non-collectively bargained employees. The 70 collectively bargained employees may be treated as excludable employees and thus may be disregarded in applying section 401(a)(26) to Plan W.

EXAMPLE 2. Assume the same facts as EXAMPLE 1, except that the Commissioner has determined that the employee representative is not a bona fide employee representative under section 7701 (a)(46) and thus there are no "collectively bargained employees." In this case, all employees of W must be considered in determining whether section 401(a)(26) is met.

EXAMPLE 3. Employer X has 30 collectively bargained employees and 70 non-collectively bargained employees. Employer X maintains Plan X, which benefits only the 30 collectively bargained employees. Employer X may treat the non-collectively bargained employees as excludable employees and disregard them in applying section 401(a)(26) to the collectively bargained plan.

EXAMPLE 4. Assume the same facts as EXAMPLE 3, except that the Commissioner has determined that the employee representative is not a bona fide employee representative under section 7701(a)(46) and thus there is no recognized collective bargaining agreement. In this case, Employer X may not treat the non-collectively bargained employees of X as excludable employees.

EXAMPLE 5. Assume the same facts as EXAMPLE 3, except that 3 percent of the 30 collectively bargained employees are professionals. In this case, Employer X may not treat the non- collectively bargained employees of X as excludable employees.

EXAMPLE 6. Employer Y has 100 collectively bargained employees. Thirty of Y's employees are represented by Collective Bargaining Unit 1 and covered under Plan 1. Seventy of Y's employees are represented by Collective Bargaining Unit 2 and covered under Plan 2. For purposes of testing Plan 1, the employees of Collective Bargaining Unit 2 may be treated as excludable employees. Similarly, for purposes of testing Plan 2, the employees of Collective Bargaining Unit 1 may be treated as excludable employees.

(7) CERTAIN TERMINATING EMPLOYEES -- (i) IN GENERAL. An employee may be treated as an excludable employee for a plan year with respect to a particular plan if --

(A) The employee does not benefit under the plan for the plan year,

(B) The employee is eligible to participate in the plan,

(C) The plan has a minimum period of service requirement or a requirement that an employee be employed on the last day of the plan year (last-day requirement) in order for an employee to accrue a benefit or receive an allocation for the plan year,

(D) The employee fails to accrue a benefit or receive an allocation under the plan solely because of the failure to satisfy the minimum period of service or last-day requirement,

(E) The employee terminates employment during the plan year with no more than 500 hours of service, and the employee is not an employee as of the last day of the plan year (for purposes of this paragraph (b)(7)(i)(E), a plan that uses the elapsed time method of determining years of service may use either 91 consecutive calendar days or 3 consecutive calendar months instead of 500 hours of service, provided it uses the same convention for all employees during a plan year), and

(F) If this paragraph (b)(7) is applied with respect to any employee with respect to a plan for a plan year, it is applied with respect to all employees with respect to the plan for the plan year.

(ii) HOURS OF SERVICE. For purposes of this paragraph (b)(7), the term "hour of service" has the same meaning as set forth in 29 CFR section 2530.200b-2 under the general method of crediting service for the employee. If one of the equivalencies set forth in 29 CFR section 2530.200b-3 is used for crediting service under the plan, the 500-hour requirement must be adjusted accordingly.

(8) EMPLOYEES OF QUALIFIED SEPARATE LINES OF BUSINESS. If an employer is treated as operating qualified separate lines of business for purposes of section 401(a)(26) in accordance with section 1.414(r)-1(b), in testing a plan that benefits employees of one qualified separate line of business, the employees of the other qualified separate lines of business of the employer are treated as excludable employees. See sections 1.414(r)-1(c)(3) and 1.414(r)-9 (separate application of section 401(a)(26) to the employees of a qualified separate line of business). The rule in this paragraph (b)(8) does not apply to a plan that is tested under the special rule for employer-wide plans in section 1.414(r)-1(c)(3)(ii) for a plan year.

(c) FORMER EMPLOYEES -- (1) IN GENERAL. For purposes of applying section 401(a)(26) with respect to former employees, all former employees of the employer are taken into account, except that the employer may treat a former employee described in paragraphs (c)(2) through (c)(4) of this section as an excludable former employee. If any of the former employee exclusion rules under paragraphs (c)(2) through (c)(4) of this section is applied, it must be applied to all former employees for the plan year on a consistent basis.

(2) EMPLOYEES TERMINATED BEFORE A SPECIFIED DATE. The employer may treat a former employee as excludable if --

(i) The former employee became a former employee either prior to January 1, 1984, or prior to the tenth calendar year preceding the calendar year in which the current plan year begins, and

(ii) The former employee became a former employee in a calendar year that precedes the earliest calendar year in which any former employee who benefits under the plan in the current plan year became a former employee.

(3) PREVIOUSLY EXCLUDABLE EMPLOYEES. The employer may treat a former employee as excludable if the former employee was an excludable employee (or would have been an excludable employee if these regulations had been in effect) under the rules of paragraphs (a) and (b) of this section during the plan year in which the former employee became a former employee. If the employer treats a former employee as excludable pursuant to this paragraph (c)(3), the former employee is not taken into account with respect to a plan even if the former employee is benefiting under the plan.

(4) VESTED ACCRUED BENEFITS ELIGIBLE FOR MANDATORY DISTRIBUTION. A former employee may be treated as an excludable former employee if the present value of the former employee's vested accrued benefit does not exceed $3,500. This determination is made in accordance with the rules of sections 411(a)(11) and 417(e).

(d) CERTAIN POLICE OR FIREFIGHTERS. An employer may apply section 401(a)(26) separately with respect to any classification of qualified public safety employees for whom a separate plan is maintained. Thus, for purposes of testing a separate plan covering a class of qualified public safety employees, all employees who are not in that classification are treated as excludable employees. Also, such employees need not be taken into account in determining whether or not any other plan satisfies section 401(a)(26). For purposes of this paragraph (d), "qualified public safety employee" means any employee of any police department or the department organized and operated by a State or political subdivision if the employee provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of a State or political subdivision.

SECTION 1.401(a)(26)-7 TESTING METHODS:

(a) TESTING ON EACH DAY OF THE PLAN YEAR. A plan satisfies section 401(a)(26) for a plan year only if the plan satisfies section 401(a)(26) on each day of the plan year. An employee benefits on a day if the employee is a participant for such day and the employee benefits under the plan for the year under the rules in section 1.401(a)(26)-5.

(b) SIMPLIFIED TESTING METHOD. A plan is treated as satisfying the requirements of paragraph (a) of this section if it satisfies section 401(a)(26) on any single plan day during the plan year, but only if that day is reasonably representative of the employer's workforce and the plan's coverage. A plan does not have to be tested on the same day each plan year.

(c) RETROACTIVE CORRECTION. If a plan falls to satisfy section 401(a)(26) for a plan year, the plan may be retroactively amended during the same period and under the same conditions as provided for in section 1.401(a)(4)-11(g)(3) through (g)(5) to satisfy section 401(a)(26). A plan merger that occurs by the end of the period provided in section 1.401(a)(4)-11(g)(3)(iv) is treated solely for purposes of section 401(a)(26) as if it were effective as of the first day of the plan year. The rule of this paragraph (c) may be illustrated by the following example.

EXAMPLE. Assume that an employer with 500 employees maintains two defined contribution plans. Plan A benefits 45 employees. Plan B benefits 50 employees. Immediately before the end of the period provided for in section 1.401(a)(4)- 11(g)(3)(iv), the employer expands coverage under Plan A to benefit 20 more employees retroactively for the plan year. Thus, Plan A satisfies paragraph (a) of this section for the plan year. Alternatively, before the end of the period provided for in section 1.401(a)(4)-11(g)(3)(iv), or later if a later period is applicable under section 401(b), the employer could merge Plan A with Plan B to satisfy section 401(a)(26).

SECTION 1.401(a)(26)-8 DEFINITIONS.

In applying this section and sections 1.401(a)(26)-1 through 1.401(a)(26)-9 the definitions in this section govern unless otherwise provided.

COLLECTIVE BARGAINING AGREEMENT. "Collective bargaining agreement" means an agreement that the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and the employer that satisfies section 301.7701-17T. Employees described in section 413(b)(8) who are employees of the union or the plan and are treated as employees of an employer are not employees covered pursuant to a collective bargaining agreement for purposes of section 401(a)(26) unless the employees are actually covered pursuant to such an agreement.

COLLECTIVELY BARGAINED EMPLOYEE. "Collectively bargained employee" means a collectively bargained employee within the meaning of section 1.410(b)-6(d)(2).

COVERED BY A COLLECTIVE BARGAINING AGREEMENT. "Covered by a collective bargaining agreement" means covered by a collective bargaining agreement within the meaning of section 1.410(b)- 6(d)(2)(iii).

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

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

EMPLOYEE. "Employee" means an employee, within the meaning of section 1.410(b)-9.

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

ESOP. "ESOP" means an employee stock ownership plan within the meaning of section 4975(e)(7) or a tax credit employee stock ownership plan within the meaning of section 409(a).

FORMER EMPLOYEE. "Former employee" means a former employee within the meaning of section 1.410(b)-9.

HIGHLY COMPENSATED EMPLOYEE. "Highly compensated employee" means an employee who is highly compensated within the meaning of section 414(q).

HIGHLY COMPENSATED FORMER EMPLOYEE. "Highly compensated former employee" means a former employee who is highly compensated within the meaning of section 414(q)(9).

MULTIEMPLOYER PLAN. "Multiemployer plan" means a multiemployer plan within the meaning of section 414(f).

NONCOLLECTIVELY BARGAINED EMPLOYEE. "Noncollectively bargained employee" means an employee who is not a collectively bargained employee.

NONHIGHLY COMPENSATED EMPLOYEE. "Nonhighly compensated employee" means an employee who is not a highly compensated employee.

NONHIGHLY COMPENSATED FORMER EMPLOYEE. "Nonhighly compensated former employee" means a former employee who is not a highly compensated former employee.

PLAN. "Plan" means plan as defined in section 1.401(a)(26)-2(c).

PLAN YEAR. "Plan year" means the plan year of the plan as defined in the written plan document. In the absence of a specifically designated plan year, the plan year is deemed to be the calendar year.

PROFESSIONAL EMPLOYEE. "Professional employee" means a professional employee as defined in section 1.410(b)-9.

SECTION 401(k) PLAN. "Section 401(k) plan" means a plan consisting of elective contributions described in section 1.401(k)- 1(g)(3) under a qualified cash or deferred arrangement described in section 1.401(k)-1(a)(4)(i).

SECTION 401(m) PLAN. "Section 401(m) plan" means a plan consisting of employee contributions described in section 1.401(m)- 1(f)(6) or matching contributions described in section 1.401(m)- 1(f)(12), or both.

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

(a) IN GENERAL. Except as provided in paragraphs (b), (c), and (d) of this section, section 401(a)(26) and the regulations thereunder apply to plan years beginning on or after January 1, 1989.

(b) TRANSITION RULES -- (1) GOVERNMENTAL PLANS AND CERTAIN SECTION 403(b) ANNUITIES. Section 401(a)(26) is treated as satisfied for plan years beginning before January 1, 1993, in the case of a plan maintained by the government of any State or political subdivision thereof, or by any agency or instrumentality of either of the foregoing. Also, a section 403(b) plan for employees who perform services for an educational organization described in section 170(b)(1)(A)(ii), maintained by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing is deemed to satisfy section 401(a)(26) for plan years beginning before January 1, 1993.

(2) EARLY RETIREMENT "WINDOW-PERIOD" BENEFITS. Early retirement benefits available under a plan only to employees who retire within a limited period of time, not to exceed one year, are treated as satisfying section 401(a)(26) if such benefits are provided under plan terms that were adopted and in effect on or before March 14, 1989.

(3) EMPLOYEES WHO DO NOT BENEFIT BECAUSE OF A MINIMUM-PERIOD-OF- SERVICE OR A LAST-DAY REQUIREMENT. For the first plan year beginning after December 31, 1988, and before January 1, 1990, employees who are eligible to participate under the plan and who fail to accrue a benefit solely because of the failure to satisfy either a minimum- period-of-service requirement of 1000 hours of service or less or a last-day requirement may be treated as benefiting under the plan.

(4) CERTAIN PLAN TERMINATIONS -- (i) IN GENERAL. Except as provided in paragraph (b)(4)(ii) of this section, if a plan terminates after section 401(a)(26) becomes effective with respect to the plan (as determined under paragraph (a) of this section), the plan is not treated as a qualified plan upon termination unless it complies with section 401(a)(26) and the regulations thereunder (to the extent they are applicable) for all periods for which section 401(a)(26) is effective with respect to the plan.

(ii) EXCEPTION. Notwithstanding paragraphs (a) and (b)(4)(i) of this section, a plan does not fail to be treated as a qualified plan upon termination merely because the plan fails to satisfy the requirements of section 401(a)(26) and the regulations thereunder if the plan is terminated with a termination date on or before December 31, 1989, and either of the following conditions is satisfied:

(A) In the case of a defined benefit plan, no highly compensated employee has an accrued benefit under the plan exceeding the lesser of either the benefit the employee had accrued as of the close of the last plan year beginning before January 1, 1989, or the benefit the employee would have accrued as of the close of the last plan year under the terms of the plan in effect and applicable with respect to the employee on December 13, 1988.

(B) In the case of a defined contribution plan, no highly compensated employee receives a contribution allocation for any plan year beginning after December 31, 1988. For this purpose, a contribution allocation with respect to an employee for a plan year beginning before January 1, 1989, may be treated as a contribution allocation for a plan year beginning after December 31, 1988, if the allocation for the prior year exceeds the allocation that the employee would have received for such year under the terms of the plan in effect and applicable with respect to the employee on December 13, 1988. An allocation of forfeitures to highly compensated employees with respect to contributions made for plan years beginning before January 1, 1988, does not cause a defined contribution plan to fail to satisfy the conditions of this paragraph (b)(4)(ii)(B).

(5) ESOPs AND NON-ESOPs. Notwithstanding paragraph (a) of this section and section 54.4975-11(a)(5) of this Chapter, an employer may treat the rule in section 1.401(a)(26)-2(d)(1)(i), regarding mandatory disaggregation of ESOPs and non-ESOPs as not effective for plan years beginning before January 1, 1990.

(c) WAIVER OF EXCISE TAX ON REVERSIONS -- (1) IN GENERAL. Pursuant to section 1112(e)(3) of the Tax Reform Act of 1986 (TRA '86), if certain conditions are satisfied, a waiver of the excise tax under section 4980 applies with respect to any employer reversion that occurs by reason of the termination or merger of a plan before the first year to which section 401(a)(26) applies to the plan. In general, the applicable conditions are that the plan must have been in existence on August 16, 1986; that if section 401(a)(26) was in effect for the plan year including August 16, 1986, the plan would have failed to satisfy the requirements of section 401(a)(26) and would have continued to fall the requirements at all times thereafter; that the plan satisfies the applicable conditions in paragraph (b)(4)(ii)(A) or (B) of this section; and that certain requirements regarding asset or liability transfers and mergers and spinoffs involving the plan after August 16, 1986, are satisfied.

(2) TERMINATION DATE. An employer reversion with respect to a plan is eligible for the section 4980 excise tax waiver only if the employer reversion occurs by reason of the termination of the plan with a termination date prior to the first plan year for which section 401(a)(26) applies to the plan. Solely for purposes of this waiver, the employer reversion is treated as satisfying this paragraph (c)(2) even though the plan's termination date is during the first plan year for which section 401(a)(26) applies to the plan if the plan's termination date is on or before May 31, 1989. If the termination date occurs in the first plan year for which section 401(a)(26) applied to the plan and the employer receives a reversion that is eligible for the waiver of the section 4980 tax, the plan is subject to the interest rate restriction set forth in section 1112(e)(3)(B) of TRA '86 as amended.

(3) FAILURE TO SATISFY SECTION 401(a)(26). An employer reversion with respect to a plan is eligible for the excise tax waiver only if the plan was in existence on August 16, 1986, and, if section 401(a)(26) had applied to the plan for the plan year including such date, the plan would have failed to satisfy section 401(a)(26) for the plan year and continuously thereafter until the plan's termination or merger. For purposes of this paragraph (c)(3), a plan is treated as though it would have failed to satisfy section 401(a)(26) before such section actually applied to the plan only if the plan (as defined under section 414(l)) failed to benefit at least the lesser of 50 employees or 40 percent of the employer's employees. In general, this determination is to be made on the basis of only the applicable statutory provisions, without regard to the regulations under section 401(a)(26). Thus, for example, the prior benefit structure rules in section 1.401(a)(26)-3 do not apply in determining whether a plan would have failed to satisfy section 401(a)(26) for plan years beginning prior to the effective date of section 401(a)(26) with respect to the plan.

(d) SPECIAL RULE FOR COLLECTIVE BARGAINING AGREEMENTS. In the case of a plan maintained pursuant to one or more collective bargaining agreements (as defined in section 1.401(a)(26)-8(a)) that were ratified before March 1, 1986, section 401(a)(26) and the regulations thereunder shall not apply to plan years beginning before the earlier of --

(1) January 1, 1991, or

(2) The later of --

(i) January 1, 1989, or

(ii) The date on which the last of such collective bargaining agreements terminates. For purposes of this paragraph (d), any extension or renegotiation of any collective bargaining agreement that is ratified after February 28, 1986, is disregarded in determining the date on which such collective bargaining agreement terminates.