rr-01-30.pdf

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# Part I

Section 401 .-- Qualified Pension, Profit Sharing and Stock Bonus Plans
26 CFR 1.401(a)(4)-8 Cross-testing.

Rev. Rul. 2001-30

## I. PURPOSE

This revenue ruling provides guidance with respect to the application of
1.401(a)(4)-8(b) of the Income Tax Regulations relating to compliance of certain new
comparability and similar defined contribution plans with the nondiscrimination
requirements of 401(a)(4) of the Internal Revenue Code.

Under those regulations, a qualified defined contribution plan that has broadly
available allocation rates can be tested for nondiscrimination based on plan benefits
(rather than contributions) whether or not it meets the minimum allocation gateway. In
determining whether a plan has broadly available allocation rates, the regulations
permit an allocation to be disregarded to the extent that it is a defined benefit
replacement allocation or other transition allocation. Allocations are defined benefit
replacement allocations if they satisfy the basic conditions in the regulations and the
specific conditions prescribed in this revenue ruling.

# II. BACKGROUND

Under final regulations (TD 8954) amending 1.401(a)(4)-8(b), published in the
Federal Register on June 29, 2001, a defined contribution plan must satisfy a minimum
allocation gateway in order to be eligible to meet the nondiscrimination requirements of
401(a)(4) on the basis of plan benefits rather than contributions, unless, for the plan
year, the plan has broadly available allocation rates (as defined in the regulations) or
certain age-based allocations.

Section 1.401(a)(4)-8(b)(1)(iii)(A) provides that a plan has broadly available
allocation rates for a plan year if each allocation rate under the plan is currently
available during the plan year (within the meaning of 1.401(a)(4)-4(b)(2)) to a group of
employees that satisfies 410(b) (without regard to the average benefit percentage test
of 1.410(b)-5). In determining whether a plan has broadly available allocation rates
for the plan year, an employee s allocation may be disregarded to the extent that it is a
transition allocation. In order to be treated as a transition allocation, the allocation must
be either a defined benefit replacement allocation (DBRA) described in 1.401(a)(4)-
8(b)(1)(iii)(D), or a pre-existing replacement allocation or pre-existing merger and
acquisition allocation described in 1.401(a)(4)-8(b)(1)(iii)(E). Plan provisions relating
to transition allocations must meet the requirements of 1.401(a)(4)-8(b)(1)(iii)(C).

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Under 1.401(a)(4)-8(b)(1)(iii)(D), in order for an allocation to be a DBRA it must
be provided in accordance with guidance prescribed by the Commissioner in the
Internal Revenue Bulletin (see III. Specific Conditions below) and the basic conditions
set forth in 1.401(a)(4)-8(b)(1)(iii)(D)(1)-(4).

# III. SPECIFIC CONDITIONS

(1) This revenue ruling sets forth the specific conditions that an allocation must
satisfy to be treated as a DBRA under 1.401(a)(4)-8(b)(1)(iii)(D). These specific
conditions are designed to permit employers to provide, in a nondiscriminatory manner,
allocations replacing the retirement benefits that would have been provided under a
defined benefit plan, without having to satisfy the minimum allocation gateway. At the
same time, the specific conditions are designed to prevent the inappropriate avoidance
of the gateway in the case of plans that provide special allocations for employees who
formerly benefited under a defined benefit plan.

(2) Pursuant to this revenue ruling, to be treated as a DBRA, an allocation must
meet the following conditions for a plan year:

(a) To satisfy the basic condition in 1.401(a)(4)-8(b)(1)(iii)(D)(1) that the
allocations are provided to a group of employees who formerly benefitted under
an established nondiscriminatory defined benefit plan of the employer or of a
prior employer that provided age-based equivalent allocation rates, the
allocations must be based on a defined benefit plan that satisfies the following
specific conditions:

(i) The defined benefit plan s benefit formula applicable to the group of
employees generated equivalent normal allocation rates (determined
without regard to changes in accrual rates attributable to changes in an
employee s years of service) that increased from year to year as
employees attained higher ages.

(ii) The defined benefit plan satisfied 410(b) and 401(a)(4), without
regard to 410(b)(6)(C) and without aggregating with any other plan, for
the plan year immediately preceding the first plan year for which the
allocation is provided to the employees. If the defined benefit plan was
sponsored by a prior employer, but not by the employer, this condition
does not apply.

(iii) The defined benefit plan was in effect for at least the 5-year period
ending on the date benefit accruals for the employees under the defined
benefit plan cease (with one year substituted for 5 years in the case of a
defined benefit plan of a former employer), and neither the plan formula

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nor the coverage of the plan has been substantially changed during such
period.

(b) To satisfy the basic condition in 1.401(a)(4)-8(b)(1)(iii)(D)(2) that the
allocations for each employee in the group were reasonably calculated, in a
consistent manner, to replace the retirement benefits that the employee would
have been provided under a defined benefit plan of the employer or of the prior
employer, the allocation must be reasonably calculated to replace the
employee s retirement benefits under the defined benefit plan based on the
terms of the defined benefit plan (including the 415(b)(1)(A) limit) as in effect
immediately prior to the date benefit accruals under the defined benefit plan
ceased.

(c) To satisfy the basic condition in 1.401(a)(4)-8(b)(1)(iii)(D)(4) that the
composition of the group of employees who receive the allocations for the plan
year is nondiscriminatory, the group of employees who receive the allocations
must satisfy 410(b) (determined without regard to the average benefit
percentage test of 1.410(b)-5) for the plan year.

# DRAFTING INFORMATION

The principal authors of this revenue ruling are Kenneth R. Conn of the
Employee Plans, Tax Exempt and Government Entities Division and John T. Ricotta
and Linda S. F. Marshall of the Office of Division Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). For further information regarding this revenue
ruling, please contact the Employee Plans taxpayer assistance telephone service
between the hours of 1:30 and 3:30 p.m. Eastern time, Monday through Thursday, by
calling (202) 283-9516. Mr. Conn s number is (202) 283-9526. Mr. Ricotta s number
is (202) 622-6060. Ms. Marshall s number is (202) 622-6090. (These telephone
numbers are not toll-free.)