Internal Revenue Bulletin 2005-5 (PDF rendition): IRS Notices

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Bulletin No. 200
5-5
January 31, 2005
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2005–5, page 445.
LIFO; price indexes; department stores.The November
2004 Bureau of Labor Statistics price indexes are accepted
for use by department stores employing the retail inventory
and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference to, November 30,
2004.
Notice 20
05–6, page 448.
This notic
e announces that the Treasury Department and the
Service w
ill issue regulations providing that certain exchanges
describe
d in section 354 of the Code by a U.S. person involv-
ing secur
ities of a foreign or domestic corporation will not be
subject t
o section 367(a).
EMPLOYEE PLANS
T.D. 9169, page 381.
Final regulations provide guidance for certain retirement plans
containing cash or deferred arrangements under section
401(k) of the Code, and provide for matching contributions or
employee contributions under section 401(m).
ADMINISTRATIVE
Notice 2005–3, page 447.
Presidentially declared disasters.This notice advises tax-
payers that Rev. Proc. 2004–13, 2004–4 I.R.B. 335, will be
modified retroactively to provide additional tax relief to taxpay-
ers (transferors) involved in section 1031 like-kind exchange
transactions affected by a Presidentially declared disaster (in-
cluding Hurricanes Charley, Frances, Ivan, and Jeanne, and
Tropical Storm Bonnie), terroristic or military action, or ser-
vice in a combat zone or contingency operation. Rev. Proc.
2004–13 modified.
Announcement 2005–10, page 450.
This document contains a notice of public hearing on pro-
posed regulations (REG–114726–04, 2004–47 I.R.B. 857)
under section 401(a) of the Code that provide rules permitting
distributionstobemadefromapensionplanunderaphased
retirement program and set forth requirements for abona fide
phased retirement program. The public hearing is scheduled
for March 14, 2005.
Announcement 2005–11, page 451.
This document contains a correction to proposed regulations
(REG–149519–03, 2004–5 I.R.B. 1009) which relate to the
treatment of transactions between a partnership and its part-
ners as disguised sales of partnership interests between the
partners.
A
nnouncements of Disbarments and Suspensions begin on page 450.
Finding Lists begin on page ii.
Index for January begins on page iv.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
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contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
January 31, 20052005–5 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 401.—Qualified
Pension, Profit-Sharing,
and Stock Bonus Plans
26 CFR 1.401(k)–1: Certain cash or deferred ar-
rangements.
T.D. 9169
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1 and 601
Retirement Plans; Cash or
Deferred Arrangements Under
Section 401(k) and Matching
Contributions or Employee
Contributions Under Section
401(m) Regulations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations that provide guidance for cer-
tain retirement plans containing cash or de-
ferred arrangements under section 401(k)
and providing for matching contributions
or employee contributions under section
401(m). These regulations affect spon-
sors of plans that contain cash or deferred
arrangements or provide for employee or
matching contributions, and participants in
these plans.
EFFECTIVE DATE: December 29, 2004.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
R. Lisa Mojiri-Azad or John T. Ricotta at
(202) 622–6060 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–1669. Responses to this collection
of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
The estimated annual burden per re-
spondent varies from .033 hour to 2.5
hours, depending on the individual cir-
cumstances, with an estimated average of
1 hour, 10 minutes.
Comments concerning the accuracy
of this burden estimate and sugges-
tions for reducing this burden should
be sent to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224, and to theOffice of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to a collection
of information must be retained as long
as their contents might become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
This document contains final regu-
lations setting forth the requirements
(including the nondiscrimination require-
ments) for cash or deferred arrangements
under section 401(k) and for matching
contributions and employee contributions
under section 401(m) of the Internal Rev-
enue Code (Code).
Comprehensive final regulations un-
der sections 401(k) and 401(m) of the
Code were last published in theFederal
Registerin T.D. 8357, 1991–2 C.B. 181,
(published August 9, 1991) and T.D. 8376,
1991–2 C.B. 245, (published December 2,
1991) and amended by T.D. 8581, 1995–1
C.B. 54, published on December 22, 1994
(the pre-SBJPA regulations). Since 1994,
many significant changes have been made
to sections 401(k) and 401(m) by the Small
Business Job Protection Act of 1996,
Public Law 104–188 (110 Stat. 1755)
(SBJPA), the Taxpayer Relief Act of 1997,
Public Law 105–34 (111 Stat. 788) (TRA
’97), and the Economic Growth and Tax
Relief Reconciliation Act of 2001, Public
Law 107–16 (115 Stat. 38) (EGTRRA).
The most substantial changes to the
statutory provisions of section 401(k) and
section 401(m) were made to the method-
ology for testing the amount of elective
contributions, matching contributions,
and employee contributions for nondis-
crimination. Section 401(a)(4) prohibits
discrimination in contributions or benefits
in favor of highly compensated employ-
ees, within the meaning of section 414(q)
(HCEs). Section 401(k) provides a spe-
cial nondiscrimination test for elective
contributions under a cash or deferred
arrangement that is part of a profit-shar-
ing plan, stock bonus plan, pre-ERISA
money purchase plan, or rural cooperative
plan, called the actual deferral percentage
(ADP) test. Section 401(m) provides a
parallel test for matching contributions
and employee contributions under a de-
fined contribution plan, called the actual
contribution percentage (ACP) test. These
special nondiscrimination standards are
provided in recognition of the fact that
the amount of elective contributions and
employee contributions (and correspond-
ing matching contributions) is determined
by the employee’s utilization of the con-
tribution opportunity offered under the
plan. This is in contrast to the situation
in other defined contribution plans where
the amount of contributions is determined
by the amount the employer decides to
contribute.
Sections 401(k) and 401(m) provide al-
ternative methods for satisfying the appli-
cable nondiscrimination rules: a mathe-
matical comparisonand a number of de-
sign-based methods. The inherent varia-
tion in the amount of contributions among
employees, and the fact that the economic
situation of HCEs may make them more
likely to make elective or employee contri-
butions, means that the usual nondiscrim-
ination test under section 401(a)(4) — un-
der which, for each HCE with a contribu-
tion level, there must be a specified num-
ber of nonhighly compensated employees
2005–5 I.R.B.381January 31, 2005

(NHCEs) with equal or greater contribu-
tions — is not appropriate. Instead, aver-
age rates of contributions are used in the
ADP and ACP tests (with a built-in differ-
ential permitted for HCEs) and minimum
standards for nonelective or matching con-
tributions are provided in the design-based
alternatives.
Prior to the enactment of SBJPA, sec-
tions 401(k) and 401(m) provided only for
mathematical comparison. Specifically,
the ADP and ACP tests compare the av-
erage of the rates of contributions of the
HCEs to the average of the rates of contri-
butions of the NHCEs. For this purpose,
the rate of contributions for an employee
is the amount of contributions for an em-
ployee divided by the employee’s compen-
sation for the plan year. These tests are
satisfied if the average rate of HCE contri-
butions does not exceed 1.25 times the av-
erage rate of contributions of the NHCEs.
Alternatively, these tests are satisfied if the
average rate of HCE contributions does not
exceed the average rate of contributions
of the NHCEs by more than 2 percentage
points and is no more than 2 times the aver-
age rate of contributions of the NHCEs. To
theextentthatthesetestsarenotsatisfied,
the statute provides for correction through
distribution to HCEs (or forfeiture of non-
vested matching contributions) or, to the
extent provided in regulations, recharac-
terization of elective contributions as af-
ter-tax contributions. In addition, to the
extent provided in regulations, nonelective
contributions can be made to NHCEs and
elective contributions and certain match-
ing contributions can be moved between
the ADP and ACP tests, in order to re-
duce the discrepancy between the average
rates of contribution for the HCEs and the
NHCEs.
SBJPA added design-based alterna-
tive methods of satisfying the ADP and
ACP tests. Under these methods, if a plan
meets certain contribution and notice re-
quirements, the plan is deemed to satisfy
the nondiscrimination rules without regard
to actual utilization of the contribution op-
portunity offered under the plan. These
regulations reflect this change and the
other changes that were made to sections
401(k) and 401(m) under SBJPA, TRA
’97 and EGTRRA since the issuance of
the pre-SBJPA regulations.
SBJPA made the following significant
changes affecting section 401(k) and sec-
tion 401(m) plans:
•The ADP test and ACP test were
amended to allow the use of prior year
data for NHCEs.
•The method of distributing to correct
failures of the ADP test or ACP test
was changed to require distribution to
the HCEs with the highest contribu-
tions.
•Tax-exempt organizations and Indian
tribal governments are permitted to
maintain section 401(k) plans.
•Safe harbor alternatives to the ADP
test and ACP test were introduced in
order to provide design-based methods
to satisfy the nondiscrimination tests.
•The SIMPLE 401(k) plan (an alterna-
tive design-based method to satisfy the
nondiscrimination tests for small em-
ployers that corresponds to the provi-
sions of section 408(p) for SIMPLE
IRA plans by providing for smaller
contributions) was added.
•A special testing option was provided
for plans that permit participation be-
fore employees meet the minimum age
and service requirements, in order to
encourage employers to permit em-
ployees to start participating sooner.
TRA ’97 made the following significant
changes affecting section 401(k) and sec-
tion 401(m) plans:
•Grandfathered state and local govern-
mental plans are treated as automat-
ically satisfying the ADP and ACP
tests.
•Matching contributions for self-em-
ployed individuals are no longer
treated as elective contributions.
EGTRRA made the following signifi-
cant changes affecting section 401(k) and
section 401(m) plans:
•Catch-up contributions were added to
provide for additional elective contri-
butions for participants age 50 or older.
•The Secretary is directed to change the
section 401(k) regulations to shorten
the period of time that an employee is
stopped from making elective contri-
butions under the safe harbor rules for
hardship distributions.
•Beginning in 2006, section 401(k)
plans will be permitted to allow em-
ployees to designate their elective
contributions as “Roth contributions”
that will generally be subject to taxa-
tion under the rules applicable to Roth
IRAs under section 408A.
•Section 401(k) plans using the design-
based safe harbor and providing no ad-
ditional contributions in a year are ex-
empted from the top-heavy rules of
section 416.
•Distributions from section 401(k)
plans are permitted upon “severance
from employment” rather than “sepa-
ration from service.”
•The multiple use test formerly speci-
fied in section 401(m)(9) is repealed.
•Faster vesting is required for matching
contributions.
•Matching contributions are taken into
account in satisfying the top-heavy re-
quirements of section 416.
In addition, since publication of the pre-
SBJPA regulations, a number of items of
guidance affecting section 401(k) and sec-
tion 401(m) plans addressing these statu-
tory changes and other issues have been re-
leased by the IRS, including:
•Notice 97–2, 1997–1 C.B. 348, pro-
vides initial guidance on prior year
ADP and ACP testing and guidance
on correction of excess contributions
and excess aggregate contributions, in-
cluding distribution to the HCEs with
the highest contributions.
•Rev. Proc. 97–9, 1997–1 C.B.
624, provides model amendments for
SIMPLE 401(k) plans.
•Notice 98–1, 1998–1 C.B. 327, pro-
vides additional guidance on prior year
testing issues.
•Notice 98–52, 1998–2 C.B. 632, and
Notice 2000–3, 2000–1 C.B. 413, pro-
vides guidance on safe harbor section
401(k) plans.
•Rev. Rul. 2000–8, 2000–1 C.B. 617,
addresses the use of automatic enroll-
ment features in section 401(k) plans.
•Notice 2001–56, 2001–2 C.B. 277, and
Notice 2002–4, 2002–1 C.B. 298, pro-
vided initial guidance related to the
changes made by EGTRRA.
These items of guidance, with some
modification, were incorporated into the
January 31, 20053822005–5 I.R.B.

proposed regulations (REG–108639–99,
2003–2 C.B. 431) under section 401(k)
and section 401(m) which were published
in theFederal Registeron July 17, 2003.
68 Fed. Reg. 42,476.
On November 12, 2003, a public hear-
ing was held on the proposed regulations.
After consideration of the comments, these
final regulations adopt the provisions of
the proposed regulations with certain mod-
ifications, the most significant of which are
highlighted below.
Explanation of Provisions
1.Rules Applicable to All Cash or
Deferred Arrangements
Section 401(k)(1) provides that a profit-
sharing, stock bonus, pre-ERISA money
purchase or rural cooperative plan will not
fail to qualify under section 401(a) merely
because it contains a qualified cash or de-
ferred arrangement. As under the pro-
posed regulations, §1.401(k)–1 sets forth
the general definition of a cash or deferred
arrangement (CODA), the additional re-
quirements that a CODA must satisfy in or-
der to be a qualified CODA, and the treat-
ment of contributions made under a quali-
fied or nonqualified CODA.
As under the proposed regulations, the
final regulations define a CODA as an
arrangement under which employees can
make a cash or deferred election with re-
spect to contributions to, or accruals or
benefits under, a plan intended to satisfy
the requirements of section 401(a). A cash
or deferred election is any direct or indi-
rect election by an employee (or modifica-
tion of an earlier election) to have the em-
ployer either: 1) provide an amount to the
employee in the form of cash or some other
taxable benefit that is not currently avail-
able; or 2) contribute an amount to a trust,
or provide an accrual or other benefit, un-
der a plan deferring the receipt of compen-
sation. These final regulations retain the
definition of a CODA from the proposed
regulations, with some minor modifica-
tions. First, the exclusion of an arrange-
ment under which employees make after-
tax contributions from the definition of a
CODA does not encompass an arrange-
ment under which employees make desig-
nated Roth contributions.
1
Second, the fi-
nal regulations clarify that the regulatory
provision specifying that compliance with
section 401(k) and section 402(e)(3) is the
only means of providing a cash or deferred
election to an employee without violating
the constructive receipt rules is limited to
cash or deferred elections under which the
contribution or accrual is made under a
qualified plan or trust.
As under the proposed regulations,
these final regulations incorporate prior
guidance on automatic enrollment and thus
reflect the fact that a CODA can specify
that the default that applies in the absence
of an affirmative election by an employee
can be a contribution to a trust, as de-
scribed in Rev. Rul. 2000–8. Although
the facts of Rev. Rul. 2000–8 specified
a certain percentage of compensation that
would apply as a default, the percentage
chosen was merely illustrative. Thus,
the final regulations do not constrain the
choice of default provisions.
2
However, in
order to be a qualified CODA, as indicated
in Rev. Rul. 2000–8, it is essential that the
employee have an effective opportunity to
elect to receive cash in lieu of the default
employer contribution.
These final regulations also clarify the
rules relating to one-time irrevocable elec-
tions that are not treated as cash or de-
ferred elections. First, the final regula-
tions replace the requirement that the elec-
tion be made upon commencement of em-
ployment or first becoming eligible under
the plan or any plan of the employer with
the requirement that the election be made
no later than first becoming eligible under
the plan or any other plan of the employer.
Second, the final regulations define any
other plan of the employer for this purpose
to mean any plan or arrangement that is de-
scribed in section 219(g)(5)(D), which in-
cludes a section 457(b) governmental plan
and a section 403(b) plan, as well as a qual-
ified plan.
The final regulations retain the rule that
a contribution is made pursuant to a cash
or deferred election only if the contribu-
tion is made after the relevant election.
Thus, a contribution made in anticipation
of an employee’s election is not treated
as an elective contribution. A number of
commentators indicated that the rule in the
proposed regulation requiring that elective
contributions not precede the services to
which they relate (or the date when the
compensation would otherwise be paid, if
earlier than the date when the services are
performed) was too broad. Some of these
commentators suggested the addition of an
exception to cover instances where the em-
ployer has administrative reasons for de-
positing the contributions before the em-
ployee’s services or pay day (for example,
the temporary absence of the bookkeeper
responsible for transmitting funds to the
plan), while others suggested loosening the
rule where the early contribution does not
result in an accelerated deduction.
After considering these comments, the
IRS and Treasury have concluded that
the prefunding of elective contributions
and matching contributions is inconsistent
with sections 401(k) and 401(m) and that
the restrictions on the timing of contribu-
tions are consistent with the fundamental
premise of elective contributions (i.e.,
these are contributions that are paid to the
plan as a result of an employee election
not to receive those amounts in cash).
Accordingly, the final regulations gener-
ally provide that contributions are made
pursuant to a cash or deferred election
only if the contributions are made after
the employee’s performance of services
which relate to the compensation that, but
for the election, would have been paid to
the employee. Amounts contributed in
anticipation of future performance of ser-
vices generally are not treated as elective
contributions under these final regula-
tions. Thus, an employer is not able to
prefund elective contributions in order
to accelerate the deductions for elective
contributions; and employer contributions
made under the facts in Notice 2002–48,
2002–2 C.B. 130, are no longer permitted
to be taken into account under the ADP
test or the ACP test and would not satisfy
1
A designated Roth contribution is an elective contribution that is included in income. The Treasury and the IRS expect to issue guidance on designatedRoth contributions in the near future.
2
The Department of Labor has advised Treasury and the IRS that, under Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”) (88 Stat. 829), Public Law 93–406,
fiduciaries of a plan must ensure that the plan is administered prudently and solely in the interest of plan participants and beneficiaries. While ERISA section 404(c) may serve to relieve
certain fiduciaries from liability when participants or beneficiaries exercise control over the assets in their individual accounts, the Department of Labor has taken the position that a participant
or beneficiary will not be considered to have exercised control when the participant or beneficiary is merely apprised of investments that will be made on his or her behalf in the absence of
instructions to the contrary. See 29 CFR 2550.404c–1 and 57 FR 46924.
2005–5 I.R.B.383January 31, 2005

any plan requirement to provide elective
contributions or matching contributions.
The proposed regulations contained an
exception to the rule precluding the fund-
ing of elective contributions before the per-
formance of services in the situation where
the compensation would also have been
paid, but for the election, before the perfor-
mance of services and that exception has
been retained in the final regulations. Af-
ter consideration of the administrative con-
cerns raised by the comments, these final
regulations also include an exception for
occasionalbona fideadministrative con-
siderations. Under this exception, em-
ployer contributions will not fail to satisfy
the regulatory requirements relating to the
timing of elective contributions merely be-
cause contributions for an occasional pay
period are made before the services with
respect to that pay period are performed,
provided that the early contributions are
made forbona fideadministrative consid-
erations and are not made early with a
principal purpose of accelerating deduc-
tions. In addition, the final regulations in-
clude changes to the rules precluding the
prefunding of matching contributions dis-
cussed below.
One commentator asked for clarifica-
tion of the interaction between these tim-
ing rules and the rule under the regulations
that treats a self-employed individual’s
earned income as being currently avail-
able on the last day of the individual’s
taxable year and whether this last day rule
precludes a partner from making elective
contributions during the year through a
reduction in the partner’s draw. The re-
striction on the timing of contributions
is not intended to prevent a partner from
deferring amounts that are paid to the
partner throughout the year on account of
services performed by the partner during
the year, and the final regulations have
been modified to clarify this point. How-
ever, self-employed individuals who take
advantage of this opportunity to defer
amounts during the year must make sure
that the amount contributed during the
year will not exceed the limits (such as the
limits of section 415) that will apply to the
individual, based on the individual’s ac-
tual earned income for the relevant period.
2.Qualified CODAs
A.General rules relating to qualified
CODAs
Elective contributions under a qualified
CODA are treated as employer contribu-
tions for purposes of the Internal Revenue
Code.
3
Elective contributions under a
qualified CODA generally are not in-
cluded in the employee’s gross income at
the time the cash would have been received
(but for the cash or deferred election) or at
the time contributed to the plan. Elective
contributions under a qualified CODA are
included in the employee’s gross income,
however, if the contributions are in ex-
cess of the section 402(g) limit for a year,
are designated Roth contributions (under
section 402A, effective for tax years be-
ginning after December 31, 2005), or are
recharacterized as after-tax contributions
as part of a correction of an ADP test fail-
ure.
A CODA is not qualified unless it is
part of a profit sharing plan, stock bonus
plan, pre-ERISA money purchase plan,
or rural cooperative plan and provides for
an election between contributions to the
plan or payments directly in cash. In ad-
dition, a CODA is not qualified unless it
meets the following requirements: 1) the
elective contributions under the CODA
satisfy either the ADP test set forth in sec-
tion 401(k)(3) or one of the design-based
alternatives in section 401(k)(11) or (12);
2) elective contributions under the CODA
are nonforfeitable at all times; 3) elective
contributions are distributable only on the
occurrence of certain events, including
attainment of age 59
1
/2, hardship, death,
disability, severance from employment,
or termination of the plan; 4) the group
of employees eligible to participate in the
CODA satisfies the coverage requirements
of section 410(b)(1); 5) no other benefit
(other than matching contributions and
certain other specified benefits) is con-
ditioned, directly or indirectly, upon the
employee’s making or not making elective
contributions under the CODA; and 6) no
more than 1 year of service is required
for eligibility to elect to make a cash or
deferred election.
Subject to certain exceptions, State and
local governmental plans are not allowed
to include a qualified CODA. Plans spon-
sored by Indian tribal governments and ru-
ral cooperatives are allowed to include a
qualified CODA.
B.Nondiscrimination rules applicable to
qualified CODAs
As under the proposed regulations,
these final regulations provide that the
special nondiscrimination standards set
forth in section 401(k) (the ADP test,
the ADP safe harbor and the SIMPLE
401(k) plan) are the exclusive means by
which a qualified CODA can satisfy the
nondiscriminatory amount of contribution
requirement of section 401(a)(4). Pursuant
to section 401(k)(3)(G), a State or local
governmental plan is deemed to satisfy the
ADP test.
These final regulations retain the rule
that the plan must satisfy the requirements
of §1.401(a)(4)–4 with respect to benefits,
rights and features in addition to the re-
quirements that contributions satisfy the
nondiscrimination requirements of section
401(k). In addition to stating that the avail-
ability of each level of elective contribu-
tion is a right or feature subject to the re-
quirements of section 401(a)(4), the final
regulations point out that the right to make
a designated Roth contribution is a right or
feature.
The proposed regulations included an
anti-abuse rule which provided that a plan
will not be treated as satisfying the require-
ments of section 401(k) if there are re-
peated changes to plan testing procedures
or plan provisions that have the effect of
distorting the ADP so as to increase signif-
icantly the permitted deferrals for HCEs,
or otherwise manipulate the nondiscrimi-
nation rules of section 401(k), if a princi-
pal purpose of the changes was to achieve
such a result.
Several commentators suggested elimi-
nating the anti-abuse rule in the proposed
regulations. One of these commentators
suggested that the proposed regulation’s
restrictions on ADP testing (including the
restriction on the use of targeted QNECs
and changes in testing method discussed
below) made the anti-abuse rule unneces-
sary and noted that there may be legiti-
mate reasons (for example, change in par-
ticipant demographics or merger of plans
3
The Department of Labor has advised Treasury and the IRS that its view is that amounts a participant pays to or has withheld by an employer, whether pursuant to a cash or deferred election
or otherwise, for contribution to an employee benefit plan constitute participant contributions for purposes of Subtitle A and Part 4 of Subtitle B ofTitle I of ERISA.
January 31, 20053842005–5 I.R.B.

for administrative reasons) for changes to
a section 401(k) plan’s testing procedures.
Another commentator suggested that the
anti-abuse rule be replaced with guidance
addressing various specific abusive trans-
actions.
After considering these comments, IRS
and Treasury have determined that the
need for rules to prevent abuse associated
with changes in plan testing procedures or
other plan provisions to inflate inappropri-
ately the ADP for NHCEs or to otherwise
manipulate the nondiscrimination pro-
visions of section 401(k) outweighs the
concerns raised by these commentators.
In addition, IRS and Treasury do not be-
lieve that the anti-abuse provisions of the
proposed regulations constrain legitimate
testing procedure changes. Therefore,
these final regulations retain the anti-abuse
provisions of the proposed regulations.
C.Aggregation and disaggregation of
plans
As under the proposed regulations,
these final regulations consolidate the
rules regarding identification of CODAs
and plans for purposes of demonstrating
compliance with the requirements of sec-
tion 401(k) and retain the rule that all
CODAs included in a plan are treated as a
single CODA for purposes of applying the
nondiscrimination tests. For this purpose,
a plan is generally defined by reference to
§1.410(b)–7(a) and (b) after application
of the mandatory disaggregation rules of
§1.410(b)–7(c) (other than the mandatory
disaggregation of section 401(k) and sec-
tion 401(m) plans) and permissive aggre-
gation rules of §1.410(b)–7(d), as modi-
fied under these regulations. For example,
if a plan covers collectively bargained
employees and noncollectively bargained
employees, the elective contributions for
the separate groups of employees must
be treated separately for nondiscrimina-
tion under section 401(k). As under the
proposed regulations, the final regulations
retain the special rules in the pre-SBJPA
regulations that permit the aggregation of
certain employees in different collective
bargaining units and the prohibition on
restructuring under §1.401(a)(4)–9(c).
The proposed regulations included a
change to the treatment of a CODA un-
der a plan that includes an ESOP. Under
the pre-SBJPA regulations, such a plan
must be disaggregated into the ESOP and
non-ESOP portions and apply two sepa-
rate ADP and ACP tests: one for elective
contributions going into the ESOP por-
tion (and invested in employer stock) and
one for elective contributions going in
the non-ESOP portion of the plan. The
proposed regulations eliminated the dis-
aggregation of the ESOP and non-ESOP
portions of a single section 414(l) plan
for purposes of ADP and ACP testing and
allowedanemployertopermissivelyag-
gregate two section 414(l) plans, one that
is an ESOP and one that is not.
Commentators responded favorably to
this change. Therefore, the final regula-
tions retain the rule of the proposed reg-
ulations that eliminates the disaggregation
of the ESOP and non-ESOP portions for
the ADP and ACP tests. Several of these
commentators suggested that plans be per-
mitted to implement this change before the
effective date of the regulations. After
considering these comments, the IRS and
Treasury have determined that it would not
be in the best interest of plan administra-
tion to allow this change to be made before
the effective date of the entire regulations.
However, as discussed below, a plan is per-
mitted to implement this change for plan
years that end after December 29, 2004,
provided the plan applies all the rules of
these final regulations, to the extent appli-
cable, for that plan year and all subsequent
plan years.
These final regulations retain the pro-
posed regulations’ requirement that a
single testing method must apply to all
CODAs under a plan (after application
of the aggregation and disaggregation
rules as modified). This has the effect of
restricting an employer’s ability to aggre-
gate section 414(l) plans for purposes of
section 410(b) if those plans apply incon-
sistent testing methods. For example, a
plan that applies the ADP test of section
401(k)(3) may not be aggregated with
a plan that uses the ADP safe harbor of
section 401(k)(12) for purposes of section
410(b). However, the final regulations
make clear that if a plan is disaggregated
into separate plans under the rules of sec-
tion 410(b), each separate plan can apply
a different testing method. Thus, for ex-
ample, if an employer maintaining a plan
that covers otherwise excludible employ-
ees is using the optional rule of section
410(b)(4)(B) to determine whether the
plan satisfies the requirements of section
410(b), then the plan is treated as com-
prising two separate plans for purposes of
section 410(b) and the plan covering the
employees who have satisfied the min-
imum age and service requirements of
section 410(a)(1)(A) can use the ADP safe
harbor of section 401(k)(12), while the
plan covering the remaining employees
uses the ADP test of section 401(k)(3).
D.Requirement that the elective
contributions be immediately
nonforfeitable
The final regulations reflect the statu-
tory requirement that elective contribu-
tions to a qualified CODA be immediately
nonforfeitable. However, the final regu-
lations clarify that the reference to these
contributions being “disregarded for pur-
posesofapplyingsection411(a)toother
contributions” is limited to being disre-
garded for purposes of section 411(a)(2).
Thus, for example, elective contributions
under a qualified CODA are taken into ac-
count for purposes of determining whether
a participant is a nonvested participant for
purposes of section 411(a)(6)(D)(iii).
E.Restrictions on withdrawals
As discussed above, a qualified CODA
must provide that elective contributions
may only be distributed after certain
events, including hardship and severance
from employment. EGTRRA amended
section 401(k)(2)(B)(i)(I) by replacing
“separation from service” with “severance
from employment.” This change elimi-
nated the “same desk rule” as a standard
for distributions under section 401(k)
plans.
In addition, EGTRRA amended sec-
tion 401(k)(10) by deleting disposition
by a corporation of substantially all of
the assets of a trade or business and dis-
position of a corporation’s interest in a
subsidiary, leaving termination of the plan
as the only distributable event described
in section 401(k)(10). Further, EGTRRA
directs the Secretary of the Treasury to
revise the regulations relating to distri-
butions under section 401(k)(2)(B)(i)(IV)
to provide that the period during which
an employee is prohibited from making
elective and employee contributions fol-
lowing a hardship distribution is 6 months
2005–5 I.R.B.385January 31, 2005

(instead of 12 months as required un-
der §1.401(k)–1(d)(2)(iv)(B)(4)ofthe
pre-SBJPA regulations).
4
Finally, sec-
tion 662 of EGTRRA amended section
404(k)(2) to allow a deduction for divi-
dends paid on employer securities held by
an ESOP if those dividends are reinvested
in employer securities pursuant to an elec-
tion by the participant or beneficiary to
reinvest the dividends or have them paid
in cash. Section 662 of EGTRRA is ef-
fective for taxable years of a corporation
beginning on or after January 1, 2002.
Notice 2001–56, Notice 2002–2,
2002–1 C.B. 285, and Notice 2002–4
provided guidance on these EGTRRA
changes to the distribution rules for elec-
tive contributions. That guidance was
generally incorporated in the proposed
regulations. These final regulations adopt
the rules in the proposed regulations but
clarify that the requirement that a partici-
pant must have obtained all distributions
currently available under all qualified
plans of the employer in order to qualify
for a hardship distribution applies equally
to a distribution of an ESOP dividend.
This implements the rule set forth in No-
tice 2002–2.
Comments were requested on whether a
change in status from a common law em-
ployee to a leased employee described in
section 414(n) should be treated as a sev-
erance from employment that would per-
mit a distribution to be made. After re-
viewing the comments, these final regula-
tions do not add the change to leased em-
ployee to the list of distributable events
and retain the use of the section 410(b) def-
inition of employee for purposes of sec-
tion 401(k). Because an individual who
is a leased employee (as defined in sec-
tion 414(n)) is treated as an employee of
the recipient of the individual’s services
for purposes of section 410(b) (unless the
safe harbor plan requirements described in
section 414(n)(5) are met), the individual
does not incur a severance from employ-
ment as a result of becoming a leased em-
ployee.
In addition to the statutory changes,
the rules relating to hardship distributions
were reorganized in the proposed regula-
tions in order to clarify certain ambigu-
ities, including the relationship between
the generally applicable rules, employee
representations, and the safe harbors pro-
vided under the pre-SBJPA regulations.
The final regulations adopt the rules in
the proposed regulations with some minor
modifications. In response to comments,
the final regulations add funeral expenses
and certain expenses relating to the repair
of damage to the employee’s principal res-
idence to the list of events that are deemed
to be immediate and heavy financial needs.
The pre-SBJPA regulations and the
proposed regulationstreated medical ex-
penses for an employee’s spouse or depen-
dent described in section 152 as a deemed
heavy and financial need. The Working
Families Tax Relief Act of 2004 (118 Stat.
1166), Public Law 108–311, modified
section 152’s definition of dependent, ef-
fective for tax years beginning in 2005.
These final regulations revise the proposed
regulations to disregard certain provisions
in section 152’s definition of dependent
in the case of post-secondary educational
expenses. These final regulations also
revise the proposed regulations to treat
expenses for (or necessary to obtain) med-
ical care that would be deductible under
section 213(d) (determined without regard
to whether the expenses exceed 7.5% of
adjusted gross income) as a deemed heavy
and financial need. These changes have
the effect of allowing medical expenses
and post-secondary educational expenses
for an employee, spouse, or dependent
(without regard to the change in the def-
inition of dependent under the Working
Families Tax Relief Act of 2004) to be
treated as a deemed heavy and financial
need. The modifications in these final reg-
ulations also effectively expand the defini-
tion of dependent for medical expenses to
include a non-custodial child who is sub-
ject to the special rule of section 152(e),
but would exclude nonprescription drugs
or medicine (other than insulin). Prior to
the effective date of these regulations with
respect to a plan, a sponsor can continue to
interpret the plan terms and the pre-SBJPA
regulations without regard to the statutory
change in the definition of dependent.
Some commentators asked for specific
guidance on the documentation and verifi-
cation requirements for a hardship distri-
bution. The final regulations do not ad-
dress this issue. However, taxpayers are
reminded that section 6001 requires that
they keep the records necessary to demon-
strate compliance with the qualification re-
quirements of section 401 and the rules of
section 401(k) and 401(m).
F.Other rules for qualified CODAs
The final regulations retain the addi-
tional requirements set forth in the pre-
SBJPA regulations that a CODA must sat-
isfy in order to be qualified, with some
minor modifications. First, in order to be
a qualified CODA, the arrangement must
provide an employee with an effective op-
portunity to elect to receive the amount
in cash no less than once during the plan
year. Whether an employee has an effec-
tive opportunity is determined based on all
the relevant facts and circumstances, in-
cluding adequacy of notice of the avail-
ability of the election, the period of time
before the cash is currently available dur-
ing which an election may be made, and
any other conditions on elections.
The final regulations also require a plan
to provide for satisfaction of one of the
specific nondiscrimination alternatives de-
scribed in section 401(k). As with the pre-
SBJPA regulations, the plan may accom-
plish this by incorporating by reference the
ADP test of section 401(k)(3) and the regu-
lations under proposed §1.401(k)–2(a) and
(b), if that is the nondiscrimination alter-
native being used. If, with respect to the
nondiscrimination alternative being used,
there are optional choices available, the
plan must provide which of the optional
choices will apply. For example, a plan
that uses the ADP test of section 401(k)(3)
must specify whether it is using the cur-
rent year testing method or prior year test-
ing method. Additionally, a plan that uses
the prior year testing method must specify
whether the ADP for eligible NHCEs for
the first plan year is 3% or the actual ADP
for the eligible NHCEs for the first plan
year. The final regulations also provide
that the Commissioner may, in guidance
of general applicability, specify the default
options that will apply under the plan if the
nondiscrimination test is incorporated by
reference in accordance with the final reg-
ulations.
4
Under section 402(c), as amended by the IRS Restructuring and Reform Act of 1998, Public Law 105–206 (112 Stat. 685), and EGTRRA, a hardship distribution is not an eligible rollover
distribution. While the change affects distributions from a section 401(k)plan, there is no specific reference tothe change in these regulations because these regulations are under sections
401(k) and (m).
January 31, 20053862005–5 I.R.B.

Additionally, a plan that uses the safe
harbor method must specify whether the
safe harbor contribution will be the non-
elective safe harbor contribution or the
matching safe harbor contribution and is
not permitted to provide that ADP testing
will be used if the requirements for the safe
harbor are not satisfied. The safe harbors
are intended to provide employees with
a minimum threshold in benefits in ex-
change for easier compliance for the plan
sponsor. It would be inconsistent with this
approach to providing benefits to allow
an employer to deliver smaller benefits
to NHCEs and revert to testing. Accord-
ingly, if, at the beginning of the plan year,
a plan contains an allocation formula that
includes safe harbor matching or nonelec-
tive contributions, these regulations clarify
that, except to the extent permitted under
§1.401(k)–3 and §1.401(m)–3, the plan
may not be amended to revert to testing
for the plan year.
The final regulations retain the existing
rules relating to the section 401(k)(4)(A)
prohibition on having benefits (other than
a match) contingent on making or not mak-
ing an elective contribution. These final
regulations also reflect the amendment to
section 416(c)(2)(A) (under which match-
ing contributions can be taken into account
for purposes of satisfying the top-heavy
minimum contribution requirement with-
out violating the prohibition on making
benefits contingent on making or not mak-
ing elective contributions), the amendment
of section 401(k)(4)(B) by SBJPA (allow-
ing tax exempt organizations to maintain
section 401(k) plans), and the enactment
of section 402(g)(8) (providing that match-
ing contributions with respect to partners
and sole proprietors are no longer treated
as elective contributions).
3.The Actual Deferral Percentage (ADP)
Test
A.General rules relating to the ADP test
Section 1.401(k)–2 sets forth the rules
for a CODA that is applying the ADP test
contained in section 401(k)(3). Under the
ADP test, the percentage of compensation
deferred for the eligible HCEs is compared
annually to the percentage of compensa-
tion deferred for eligible NHCEs, and if
certain limits are exceeded by the HCEs,
corrective action must be taken by the plan.
Correction can be made through the distri-
bution of excess contributions, the rechar-
acterization of excess contributions, or ad-
ditional employer contributions.
Section 401(k)(3)(A), as amended by
SBJPA, generally provides for the use of
prior year data in determining the ADP of
NHCEs, while current year data is used for
HCEs. This testing option is referred to
as the prior year testing method. Alter-
natively, a plan may provide for the use
of current year data for determining the
ADPs for both NHCEs and HCEs, which is
known as the current year testing method.
The regulations use the term applicable
year to describe the year for which the
ADP is determined for the NHCEs.
Section 401(k)(3)(F), as added by
SBJPA, provides that a plan benefiting
otherwise excludable employees and that,
pursuant to section 410(b)(4)(B), is being
treated as two separate plans for purposes
of section 410(b), is permitted to disregard
NHCEs who have not met the minimum
age and service requirements of section
410(a)(1)(A). Thus, the regulations permit
such a plan to perform the ADP test by
comparing the ADP for all eligible HCEs
for the plan year and the ADP of eligible
NHCEs for the applicable year, disre-
garding all NHCEs who have not met the
minimum age and service requirements
of section 410(a)(1)(A). Because section
401(k)(3)(F) is permissive, the final reg-
ulations follow the proposed regulations
and do not eliminate the existing test-
ing option under which a plan benefiting
otherwise excludable employees is dis-
aggregated into separate plans where the
ADP test is performed separately for all el-
igible employees who have completed the
minimum age and service requirements of
section 410(a)(1)(A)and for all eligible
employees who have not completed the
minimum age and service requirements.
B.Elective contributions used in the ADP
test
The regulations generally follow the
proposed regulations in defining which
elective contributionsare reflected in the
ADP test and which ones are not. Thus,
these regulations reflect the rule contained
in the regulations under section 414(v),
under which catch-up contributions that
are in excess of a statutory limit or an
employer-provided limit are not taken
into account under the ADP test. See
§1.414(v)–1. The final regulations add
a comparable rule for additional elective
contributions that are made by reason of
an eligible employee’s qualified military
service pursuant to section 414(u). The
final regulations retain the rule that elec-
tive contributions must be paid to the trust
within 12 months after the end of the plan
year. However, for plans subject to Title
I of ERISA, contributions must be paid to
the trust much sooner in order to satisfy
the Department of Labor’s regulations
relating to when elective contributions
become plan assets.
Section 401(k)(3) provides that the
actual deferral ratio (ADR) of an HCE
whoiseligibletoparticipatein2ormore
CODAs of the same employer is calcu-
lated by treating all CODAs in which
the employee is eligible to participate as
one CODA. These final regulations adopt
the provision in the proposed regulations
that provides that the ADR for each HCE
participatinginmorethanoneCODA
is determined by aggregating the HCE’s
elective contributions that are within the
plan year of the CODA being tested.
C.Additional employer contributions used
in the ADP test
The final regulations generally retain
the rules in the proposed regulations per-
mitting a plan to take qualified nonelec-
tive contributions or qualified matching
contributions (i.e., nonelective or match-
ing contributions that satisfy the vesting
and distribution limitations of section
401(k)(2)(B) and (C)) into account under
the ADP test, except as described below.
Thus, an employer whose CODA has
failed the ADP test can correct this failure
by making additionalqualified nonelec-
tive contributions (QNECs)orqualified
matching contributions (QMACs) for its
NHCEs.
As under the pre-SBJPA regulations,
these final regulations provide that QNECs
must satisfy four requirements in addition
to the vesting and distribution rules de-
scribed above before they can be taken
into account under the ADP test: 1) The
amount of nonelective contributions, in-
cluding the QNECs that are used under
the ADP test or the ACP test, must sat-
isfy section 401(a)(4); 2) the amount of
nonelective contributions, excluding the
2005–5 I.R.B.387January 31, 2005

QNECs that are used under the ADP
test or the ACP test, must satisfy section
401(a)(4); 3) the plan to which the QNEC
or QMAC is made must be a plan that can
be aggregated with the plan maintaining
the CODA; and 4) the QNECs or QMACs
must not be contingent on the performance
of services after the allocation date and
must be contributed within 12 months af-
ter the end of the plan year within which
the contribution is to be allocated.
5
Thus,
in the case of a plan using prior year ADP
testing, any QNECs that are to be allocated
to the NHCEs for the prior plan year must
be contributed before the last day of the
current plan year in order to be taken into
account.
Some plans provide a correction mech-
anism for a failed ADP test that targets
QNECs to certain NHCEs in order to re-
duce the total contributions to NHCEs un-
der the correction. Under the method that
minimizes the total QNECs allocated to
NHCEs under the correction, the employer
makes a QNEC to the extent permitted by
the section 415 limits to the NHCE with
the lowest compensation during the year
in order to raise that NHCE’s ADR. If the
plan still fails to pass the ADP test, the em-
ployer continues expanding the group of
NHCEs who receive QNECs to the next
lowest-paid NHCE until the ADP test is
satisfied. By using this bottom-up level-
ing technique, the employer can pass the
ADP test by contributing small amounts of
moneytoNHCEswhohaveverylowcom-
pensation for the plan year (for example,
an employee who terminated employment
in early January with$300 of compensa-
tion). This is because of the fact that the
ADP test is based on an unweighted aver-
age of ADRs and a small dollar (but high
percentage of compensation) contribution
to a terminated or other partial-year em-
ployee has a larger impact on the ADP test
than the same contribution to a full-year
employee.
The IRS and Treasury have been con-
cerned that, by using this type of tech-
nique, employers may pass the ADP
test by making high percentage QNECs
to a small number of employees with
low compensation rather than provid-
ing contributions to a broader group of
NHCEs. In addition, the legislative his-
tory to EGTRRA expresses Congressional
intent that the Secretary of the Treasury
will use his existing authority to address
situations where qualified nonelective
contributions are targeted to certain partic-
ipants with lower compensation in order
to increase the ADP of the NHCEs. (See
EGTRRA Conference Report, H.R. Conf.
Rep. 107–84, 240).
Accordingly, the proposed regulations
added a new requirement that a QNEC
mustsatisfyinordertobetakenintoac-
count under the ADP test. This require-
ment, designed to limit the use of targeted
QNECs, generally prohibited a plan from
counting QNECs for purposes of the ADP
testtotheextentthatQNECsaremorethan
double the QNECs at least half of the other
NHCEs are receiving, when expressed as a
percentage of compensation.
The restriction on targeting QNECs is
implemented by providing that a QNEC
for an NHCE that exceeds 5% of compen-
sation could be taken into account for the
ADP test only to the extent the contribu-
tion, when expressed as a percentage of
compensation, does not exceed two times
the plan’s representative contribution rate.
The plan’s representative contribution rate
is defined as the lowest contribution rate
(i.e., the sum of QNECs made and QMACs
taken into account for an employee divided
by the employee’s compensation) among a
group of NHCEs that is half of all the el-
igible NHCEs under the arrangement (or
the lowest contribution rate among all eli-
gible NHCEs under the arrangement who
areemployedonthelastdayoftheyear,if
greater).
While some commentators applauded
the restriction on targeted QNECs, a num-
ber of commentators suggested that certain
types of contributions be exempted from
the definition of targeted QNECs. In
particular, commentators suggested that
QNECs equal to a flat dollar amount that
are made to all NHCEs and QNECs that
are made in connection with an employer’s
obligation to pay a prevailing wage under
the Davis-Bacon Act (46 Stat. 1494), Pub-
lic Law 71–798, Service Contract Act of
1965 (79 Stat. 1965), Public Law 89–386,
or similar legislation should be able to
be taken into account under the ADP test
(even though such contributions create
widely different contribution percentages
among the NHCE population) because
they are not “targeted”.
After reviewing the comments, the IRS
and Treasury believe that the restrictions
on targeting QNECs should apply essen-
tially as they were proposed. While flat
dollar QNEC contributions may not have
the appearance of targeting, allowing those
contributions to skew the results of the
ADP test undermines the integrity of the
ADP test. However, the final regulations
provide more flexibility for QNECs that
are made in connection with an employer’s
obligation to pay a prevailing wage under
the Davis-Bacon Act (46 Stat. 1494), Pub-
lic Law 71–798, Service Contract Act of
1965 (79 Stat. 1965), Public Law 89–286,
or similar legislation by allowing a QNEC
of up to 10% of compensation to be taken
into account under the ADP test in such a
case.
The final regulations under section
401(m) provide parallel restrictions on
QNECs taken into account in ACP test-
ing, and a QNEC cannot be taken into
account under both the ADP and ACP
test (including for purposes of determin-
ing the representativecontribution rate).
As discussed more fully below, the final
regulations generally retain the proposed
regulations limitation on targeting match-
ing contributions, which limits the extent
to which QMACs can be targeted as a
means of avoiding the restrictions on tar-
geted QNECs.
D.Correction
Section 401(k)(8)(C), as amended by
SBJPA, provides that, for purposes of
correcting a plan’s failure to meet the
nondiscrimination requirements of sec-
tion 401(k)(3), the distribution of excess
contributions is made on the basis of the
amount of the contributions by, or on be-
half of, each HCE. The final regulations
implement this correction procedure in the
same manner as set forth in Notice 97–2.
Thus, the total amount of excess contribu-
tions is determined using the rules under
the pre-SBJPA regulations (i.e., based
on high percentages). Then, that total
amount is apportioned among the HCEs
by assigning the excess to be distributed
5
With respect to this timing requirement, it should be noted that in order to be taken into account for purposes of section 415(c) for a limitation year, the contributions will need to be made
within the time frame set forth in the regulations under section 415 (generally, no later than 30 days after the end of the section 404(a)(6) period applicable to the taxable year with or within
which the limitation year ends).
January 31, 20053882005–5 I.R.B.

first to those HCEs who have the greatest
dollar amount of contributions taken into
account under the ADP test (as opposed to
the highest deferral percentage). If these
amounts are distributed or recharacterized
in accordance with these regulations, the
plan complies with the ADP test for the
plan year with no obligation to recalculate
the ADP test.
The final regulations generally follow
the rules in the proposed regulations on
the determination of net income attribut-
able to excess contributions. However, the
regulatory language regarding the calcu-
lation of gap period income (i.e.,income
for the period after the plan year) has been
clarified to specify that gap period income
needs to be included only to the extent the
employee is or would be credited with al-
locable gain or loss on those excess con-
tributions for that period, if the total ac-
count were to be distributed. In addition, in
response to administrative concerns raised
by comments, the final regulations provide
that a distribution of excess contributions
is not required to include the income allo-
cable to the excess contributions for a pe-
riod that is no more than 7 days before the
distribution. As under the pre-SBJPA reg-
ulations, the determination of the income
for the gap period could be based on the
income determined using the alternative
method for the aggregate of the plan year
andthegapperiodorusing10%ofthein-
come for the plan year(determined under
the alternative method) for each month in
the gap period.
The final regulations retain the rules
in the proposed regulations regarding the
timing and tax treatment of distributions
of excess contributions, coordination with
the distribution of excess deferrals and the
treatment of matches attributable to excess
contributions. However, the final regu-
lations clarify that if excess contributions
are distributed, they are includible in in-
come on the dates the elective contribu-
tions would have been received by the em-
ployee had the employee originally elected
to receive the amounts in cash, treating
the excess contributions that are being dis-
tributed as the first elective contributions
for the plan year.
4.Safe Harbor Section 401(k) Plans
Section 401(k)(12) provides a de-
sign-based safe harbor method under
which a CODA is treated as satisfying
the ADP test if the arrangement meets
certain contribution and notice require-
ments. Section 1.401(k)–3 of these final
regulations, which sets forth the require-
ments for these arrangements, generally
follows the rules set forth in Notice 98–52
and Notice 2000–3. Thus, a plan satis-
fies the section 401(k) safe harbor if it
makes specified QMACs for all eligible
NHCEs. The matching contributions can
be under a basic matching formula that
provides for QMACs equal to 100% of the
first 3% of elective contributions and 50%
of the next 2% or an enhanced matching
formula that is at least as generous in the
aggregate, providedthe rate of match-
ing contributions under the enhanced
matching formula does not increase as the
employee’s rate of elective contributions
increases. In lieu of QMACs, the plan is
permitted to provide QNECs equal to 3%
of compensation for all eligible NHCEs.
In addition, notice must be provided to
each eligible employee, within a reason-
able time before the beginning of the year,
of the employee’s right to defer under the
plan.
The proposed regulations did not in-
clude any exception to the requirements
for safe harbor matching contributions
with respect to catch-up contributions.
As part of the proposed regulations the
IRS and Treasury solicited comments on
the specific circumstances under which
elective contributions by an NHCE to a
safe harbor plan would be less than the
amount required to be matched,e.g.,less
than 5% of safe harbor compensation, but
would be treated by the plan as catch-up
contributions, and on the extent to which
a safe harbor plan should be required
to match catch-up contributions under
such circumstances. After reviewing the
comments and the applicable statutory
provisions (including the amendments to
section 414(v)(3)(B) made by the Job Cre-
ation and Worker Assistance Act of 2002,
(JCWAA) (Public Law 107–147)), the
IRS and Treasury have determined that no
such exception is appropriate.
Section 401(k)(12)(D) contains a re-
quirement that each eligible employee
be provided with a written notice of the
employee’s rights and obligations under
the plan. These final regulations provide
that the notice can be provided in writing
or through another medium that is pre-
scribed by the Commissioner as satisfying
the requirement for a written notice. As
reflected in the priority guidance plan,
the IRS and Treasury are currently de-
veloping guidance setting forth the extent
to which the notice described in section
401(k)(12)(D), as well as other notices
under the various requirements relating to
qualified retirement plans, can be provided
electronically, taking into account the ef-
fect of the Electronic Signatures in Global
and National Commerce Act (E-SIGN)
(114 Stat. 464), Public Law 106–229.
Until that guidance is issued, plan admin-
istrators and employers may continue to
rely on the interim guidance in Q&A–7
of Notice 2000–3 on the use of electronic
media to satisfy the notice requirement in
section 401(k)(12)(D).
These final regulations specify that a
section 401(k) safe harbor plan must gen-
erally be adopted before the beginning of
the plan year and be maintained through-
out a full 12-month plan year. This re-
quirement is consistent with the notion that
the statute specifies acertain contribution
level for NHCEs in order to be deemed to
pass the nondiscrimination requirements.
If the contribution level is not maintained
for a full 12-month year, the employer
contributions made on behalf of NHCEs
should not support what could be a full
year’s contribution by the HCEs.
The final regulations adopt the excep-
tions to this 12-month rule that were set
forth in the proposed regulations. Thus, a
section 401(k) safe harbor plan could have
a short plan year in the year the plan termi-
nates, provided the plan termination is in
connection with a merger or acquisition in-
volving the employer, or the employer in-
curs a substantial business hardship com-
parable to a substantial business hardship
described in section 412(d). A section
401(k) safe harbor plan could also have
a short plan year in the year the plan ter-
minates (without regard to the reason for
the termination or the financial condition
of the employer) if the employer makes
the safe harbor contributions for the short
year, employees are provided notice of the
change, and the plan passes the ADP test.
In either case, the employer must make the
safe harbor contributions through the date
of plan termination.
In addition, a safe harbor plan could
have a short plan year if it is preceded and
followed by plan years as a section 401(k)
2005–5 I.R.B.389January 31, 2005

safe harbor plan. Under these final regula-
tions, the following plan year is permitted
to be shorter than 12 months if the short
plan year is as a result of a plan termination
(whether or not the plan termination is in
connection with a merger or acquisition in-
volving the employer). These final regula-
tions clarify that this treatment is unavail-
able if in the following plan year safe har-
bor matching contributions are reduced or
suspended. In the event that the short plan
year is followed by another short plan year,
this treatment is available if the plan sat-
isfies the 401(k) safe harbor requirements
for the 12 month period immediately fol-
lowing the first short plan year.
5.SIMPLE 401(k) Plans
Pursuant to section 401(k)(11), a
SIMPLE 401(k) plan is treated as sat-
isfying the requirements of section
401(k)(3)(A)(ii) if the contribution, vest-
ing, notice and exclusive plan require-
ments of section 401(k)(11) are satisfied.
Section 1.401(k)–4 of these regulations re-
flects the provisions ofsection 401(k)(11)
in a manner that follows the positions re-
flected in the model amendments set forth
in Rev. Proc. 97–9.
6.Matching Contributions and Employee
Contributions
Section 401(m)(2) sets forth a nondis-
crimination test, the ACP test, with re-
spect to matching contributions and em-
ployee contributions that is parallel to
the nondiscrimination test for elective
contributions set forth in section 401(k).
Section 1.401(m)–1 of the regulations sets
forth this test in a manner that is con-
sistent with the nondiscrimination test
set forth in §1.401(k)–1(b). Thus, sat-
isfaction of the ACP test, the ACP safe
harbor or the SIMPLE 401(k) provisions
is the exclusive means that can be used to
satisfy the nondiscrimination in amount
of contribution requirements of section
401(a)(4) with respect to employee con-
tributions and matching contributions.
An anti-abuse provision comparable to
that provided in connection with the reg-
ulations under section 401(k) limits the
ability of an employer to make repeated
changes in plan provisions or testing pro-
cedures that have the effect of distorting
the ACP so as to increase significantly the
permitted ACP for HCEs, or otherwise
manipulate the nondiscrimination rules of
section 401(m), if a principal purpose of
the changes was to achieve such a result.
The final regulations also include provi-
sions regarding planaggregation and dis-
aggregation that are similar to those that
apply for CODAs under section 401(k).
For example, matching contributions made
under the portion of a plan that is an ESOP
and the portion of the same plan that is not
an ESOP are not disaggregated under these
final regulations.
The definitions of matching contri-
bution and employee contribution under
§1.401(m)–1 of the regulations generally
follow the definitions in the pre-SBJPA
regulations. Thus, whether an employer
contribution is on account of an elective
deferral or employee contribution — and
thus is a matching contribution — is deter-
mined based on all the relevant facts and
circumstances.
The final regulations generally follow
the proposed regulations in providing that
a contribution is not treated as a match-
ing contribution on account of an elective
deferral if it is contributed before the em-
ployee’s performance of services with re-
spect to which the elective deferral is made
(or when the cash that is subject to the
cash or deferred election would be cur-
rently available, if earlier) and an employer
contribution is not a matching contribution
made on account of an employee contribu-
tion if it is contributed before the employee
contribution. Thus, under these regula-
tions, an employer would not be able to
prefund matching contributions to acceler-
ate the deduction for those contributions;
and, as noted above with respect to the
timing of elective contributions, employer
contributions made under the facts in No-
tice 2002–48 would not be taken into ac-
count under the ACP test and would not
satisfy any plan requirement to provide
matching contributions.
However, in response to comments, the
final regulations make an exception to this
prefunding restriction for forfeitures and
for contributions that result in a matching
allocation of employer securities released
from encumbrance under a securities ac-
quisition loan in a leveraged ESOP, pro-
vided that the contributions are for a re-
quired payment that is due under the loan
terms and are not made early with a prin-
cipal purpose of accelerating deductions.
7.ACP Test for Matching Contributions
and Employee Contributions
Section 1.401(m)–2 of the final reg-
ulations provides rules for the ACP test
that generally parallel the rules applica-
ble to the ADP test in §1.401(k)–2. Thus,
for example, the ACP test may be run by
comparing the ACP for eligible HCEs for
the current year with the ACP for eligi-
ble NHCEs for either the current plan year
or the prior plan year. The determination
of the actual contribution ratio (ACR) for
an eligible employee,and the contributions
that are taken into account in determining
that ACR, under the final regulations are
comparable to the rules under the section
401(k) regulations. Thus, for example, the
ACR for an HCE who has matching con-
tributions or employee contributions under
two or more plans is determined by adding
together matching contributions and em-
ployee contributions under all plans of the
employer during the plan year of the plan
being tested, in a manner comparable to
that for determining the ADR of an HCE
who participates in two or more CODAs.
The final regulations allow QNECs
to be taken into account for ACP test-
ing, but would provide essentially the
same restrictions on targeting QNECs to
a small number of NHCEs as is provided
in §1.401(k)–2. The only difference in the
rules is that the contribution percentages
used to determine the lowest contribu-
tion percentage is based on the sum of
the QNECs and those matching contribu-
tions taken into account in the ACP test,
rather than the sum of the QNECs and
the QMACs taken into account under the
ADP test. Because QNECs that do not
exceed 5% are not subject to the limits on
targeted QNECs under either the ADP test
or the ACP test, an employer is permitted
to take into account up to 10% in QNECs
for an eligible NHCE, 5% in ADP testing
and 5% in ACP testing, without regard to
how many NHCEs receive QNECs (with
each of those numbers doubled for QNECs
that are made in connection with an em-
ployer’s obligation to provide a prevailing
wage under the Davis-Bacon Act (46 Stat.
1494), Public Law 71–798, Service Con-
tract Act of 1965 (79 Stat. 1965), Public
Law 89–286, or similar legislation).
In addition, to prevent an employer
from using targeted matching contribu-
tions to circumvent the limitation on tar-
January 31, 20053902005–5 I.R.B.

geted QNECs, the proposed regulations
provided a parallel rule to limit targeted
matching contributions for NHCEs from
being taken into account in the ACP test
to the extent the matching rate for the
contribution exceeds the greater of 100%
and 2 times the representative matching
rate. These final regulations retain this
basic rule with modifications to make it
more consistent with the rule for QNECs.
First, similar to the rule for QNECs, under
these final regulations, a contribution that
matches an elective contribution may be
taken into account to the extent it does not
exceed the greater of 5% of compensation.
Only then does the rate of matching con-
tribution rate become relevant. Further, in
determining the representative matching
rate these final regulations provide a new
rule if the matching rate is not the same
for all levels of elective contributions for
an employee. In that case, the employee’s
matching rate is determined assuming that
an employee’s elective deferrals are equal
to 6 percent of compensation. There is
also a parallel rule for matching contribu-
tions for employee contributions.
8.Changes to other regulations
These regulations include a number
of cross-reference changes to other reg-
ulations to reflect the structure of these
final regulations. However, no changes
were made to the regulations under section
401(a)(26) and the rule relating to treating
matching contributions as employer con-
tributions for purposes of section 416 (see
§1.416–1, Q&A M–19) because these reg-
ulations have not been updated to reflect
recent statutory changes.
Effective Date
These final regulations apply for plan
years beginning on or after January 1,
2006. However, plan sponsors are per-
mitted to apply these final regulations to
any plan year that ends after December
29, 2004, provided the plan applies all
the rules of these final regulations, to the
extent applicable, for that plan year and
all subsequent plan years. Taxpayers are
cautioned, however, that a decision to ap-
ply these regulations in the middle of a
plan year could only be successfully im-
plemented if the plan has been operated in
accordance with these regulations for that
year.
For plan years beginning before the ef-
fective date of these regulations with re-
spect to a plan, the plan must apply the
rules of the prior regulations (as they ap-
peared in the April 1, 2004 edition of 26
CFR part 1), the statutory provisions of
section 401(k) and (m), and applicable IRS
notices.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. It
is hereby certified that the collection of
information in these regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is basedupon the conclusion
that few plans containing qualified cash
or deferred arrangements will correct ex-
cess contributions through the recharac-
terization of these amounts as employee
contributions under §1.401(k)–2(b)(3) of
these regulations. The collection of in-
formation contained in §1.401(k)–3(d), (f),
and §1.401(m)–3(e) are required by statu-
tory provisions. However, the IRS has
considered alternatives that would lessen
the impact of these statutory requirements
on small entities. Thus, the collection
of information in these regulations will
only have a minimal economic impact on
most small entities. Therefore, an anal-
ysis under the Regulatory Flexibility Act
(5 U.S.C. chapter 6) is not required. Pur-
suant to section 7805(f) of the Code, the
proposed regulations preceding these reg-
ulations were submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal authors of these reg-
ulations are R. Lisa Mojiri-Azad and
John T. Ricotta of the Office of the Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and Treasury participated in their devel-
opment.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 601
are amended to read as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.401(k)–1 also issued under 26
U.S.C. 401(m)(9).
§1.401(k)–2 also issued under 26
U.S.C. 401(m)(9).
§1.401(k)–3 also issued under 26
U.S.C. 401(m)(9).
§1.401(k)–4 also issued under 26
U.S.C. 401(m)(9).
§1.401(k)–5 also issued under 26
U.S.C. 401(m)(9).
§1.401(k)–6 also issued under 26
U.S.C. 401(m)(9).
*****
§1.401(m)–1 also issued under 26
U.S.C. 401(m)(9).
§1.401(m)–2 also issued under 26
U.S.C. 401(m)(9).
§1.401(m)–3 also issued under 26
U.S.C. 401(m)(9).
§1.401(m)–4 also issued under 26
U.S.C. 401(m)(9).
§1.401(m)–5 also issued under 26
U.S.C. 401(m)(9).
*****
Par. 2. For each section set forth be-
low, remove the text that appears in the col-
umn labeled “Remove” and replace with
the text that appears in the column labeled
“Insert”:
2005–5 I.R.B.391January 31, 2005

Regulation citeRemoveInsert
§1.72(p)–1, Q&A–12“1.401(k)–1(d)(6)(ii)”“1.401(k)–1(d)(5)(iii)”
§1.401(a)(4)–1(b)(2)(ii)(B)“1.401(k)–1(b)(4)”“1.401(k)–2(a)(5)(i)”
§1.401(a)(4)–1(b)(2)(ii)(B)“1.401(k)–1(b)(4)(i)”“1.401(k)–2(a)(4)(i)”
§1.401(a)(4)–1(b)(2)(ii)(B)“1.401(m)–1(b)(4)(ii)(A)”“1.401(m)–2(a)(4)(iii)”
§1.401(a)(4)–1(b)(2)(ii)(B)“1.401(k)–1(b)(5)”“1.401(k)–2(a)(6)”
§1.401(a)(4)–1(b)(2)(ii)(B)“1.401(m)–1(b)(5)”“1.401(m)–2(a)(6)”
§1.401(a)(4)–4(e)(3)(iii)(D)“1.401(k)–1(g)(3)”“1.401(k)–6”
§1.401(a)(4)–4(e)(3)(iii)(F)“1.401(m)–1(f)(6)”“1.401(m)–1(a)(3)”
§1.401(a)(4)–4(e)(3)(iii)(G)“1.401(m)–1(f)(12)”“1.401(m)–1(a)(2)”
§1.401(a)(4)–4(e)(3)(iii)(G)“1.401(k)–1(f)(1)(i)”“1.401(k)–2(b)(1)(i)”
§1.401(a)(4)–4(e)(3)(iii)(G)“1.401(m)–1(e)(1)(i), and
1.401(m)–2(c)”
“1.401(m)–2(b)(1)(i)”
§1.401(a)(4)–9(c)(3)(ii)“1.401(k)–1(b)(3)(ii) and
1.401(m)–1(b)(3)(ii)”
“1.401(k)–1(b)(4)(iv)(B) and
1.401(m)–1(b)(4)(iv)(B)”
§1.401(a)(4)–11(g)(3)(vii)(A)“1.401(k)–1(g)(13)(ii)”“1.401(k)–6”
§1.401(a)(4)–11(g)(3)(vii)(A)“1.401(k)–1(g)(4)”“1.401(k)–6”
§1.401(a)(4)–11(g)(3)(vii)(A)“1.401(m)–1(f)(4)”“1.401(m)–5”
§1.401(a)(4)–11(g)(6), Example 7“1.401(k)–1(f)”“1.401(k)–2(b)”
§1.401(a)(17)–1(b)(3)(iii)(B)“1.401(k)–1(g)(3)”“1.401(k)–6”
§1.401(a)(17)–1(b)(3)(iii)(B)“1.401(m)–1(f)(12)”“1.401(m)–5”
§1.401(a)(17)–1(b)(3)(iii)(B)“1.401(m)–1(f)(6)”“1.401(m)–5”
§1.401(a)(17)–1(d)(5)(ii)“1.401(m)-(f)(6)”“1.401(m)–1(a)(3)”
§1.401(l)–1(a)(4)(iii)“1.401(k)–1(g)(3)”“1.401(k)–6”
§1.401(l)–1(a)(4)(iii)“1.401(m)–1(f)(6) or (f)(12)”“1.401(m)–1(a)(3) or (a)(2)”
§1.402(a)–1(d)(1)“1.401(k)–1(a)(3)(iii) and (2)(i)”“1.401(k)–1(a)(3)(iv) and (2)(iv)”
§1.402(a)–1(d)(2)(i)“1.401(k)–1(g)(3)”“1.401(k)–6”
§1.402(a)–1(d)(2)(i)“1.401(k)–1(a)(4)(i)”“1.401(k)–1(a)(4)(i)”
§1.402(a)–1(d)(2)(i)“1.401(k)–1(a)(7)”“1.401(k)–1(a)(5)(iv)(B)”
§1.402(a)–1(d)(2)(ii)“1.401(m)–1(f)(12)”“1.401(m)–1(a)(2)”
§1.402(a)–1(d)(2)(iii)“1.401(k)–1(a)(4)(iv)”“1.401(k)–1(a)(3)(v)”
§1.402(a)–1(d)(2)(iii)“1.401(k)–1(a)(6)(ii)(C)”“1.401(k)–1(a)(3)(v)(B)”
§1.402(a)–1(d)(3)(ii)(A)“1.401(k)-(g)(12)”“1.401(k)–6”
§1.402(a)–1(d)(3)(iv)“1.401(k)–1(a)(7)”“1.401–1(a)(5)(iv)(B)”
§1.402(c)–2, Q&A–4(c)“1.401(k)–1(f)”“1.401(k)–2(b)(2)”
§1.402(c)–2, Q&A–4(c)“1.401(m)–1(e)(3)”“1.401(m)–2(b)(2)”
§1.402(g)–1(c)(2)“1.401(k)–1(a)(3)(iv)”“1.401(k)–1(a)(3)(v)”
§1.402(g)–1(e)(6)“1.401(k)–1(f)(5)(i)”“1.401(k)–2(b)(4)(i)”
§1.410(b)–3(a)(3), Example 2“1.401(k)–1(g)(4)”“1.401(k)–6”
§1.410(b)–3(a)(3), Example 3“1.401(m)–1(f)(4)”“1.401(m)–5”
January 31, 20053922005–5 I.R.B.

Regulation citeRemoveInsert
§1.410(b)–7(c)(1)“1.401(k)–1(b)(4)(iv)”“1.401(k)–2(a)(5)”
§1.410(b)–9“1.401(k)–1(g)(3)”“1.401(k)–6”
§1.410(b)–9“1.401(k)–1(a)(4)(i)”“1.401(k)–1(a)(4)(i)”
§1.410(b)–9“1.401(k)–1(b)(5)”“1.401(k)–1(a)(6)”
§1.410(b)–9“1.401(m)–1(f)(12)”“1.401(m)–1(a)(2)”
§1.410(b)–9“1.401(m)–1(e)(1)”“1.401(m)–2(b)(1)”
§1.410(b)–9“1.401(k)–1(f)(2)”“1.401(k)–6”
§1.410(b)–9“1.401(m)–1(f)(8)”“1.401(m)–5”
§1.411(a)–4(b)(7)“1.401(m)–1(f)(12)”“1.401(m)–1(a)(2)”
§1.411(a)–4(b)(7)“1.401(m)–1(e)(1)”“1.401(m)–2(b)(1)”
§1.411(a)–4(b)(7)“1.401(k)–1(f)(2) and (g)(7)”“1.401(k)–2(b)(2)(ii) and §1.401(k)–6”
§1.411(a)–4(b)(7)“1.401(m)–1(f)(8)”“1.401(m)–5”
§1.411(d)–4(d), Q&A–2(b)(2)(x)“1.401(k)–1(d)(2)”“1.401(k)–1(d)(3)”
§1.411(d)–4(d), Q&A–2(b)(2)(x)“1.401(k)–1(d)(2)”“1.401(k)–1(d)(3)”
§1.414(r)–5(g)(2)(iv)(A)“1.401(m)–1(f)(12)”“1.401(m)–1(a)(2)”
§1.414(r)–5(g)(2)(iv)(A)“1.401(k)–1(g)(3)”“1.401(k)–6”
§1.414(r)–5(g)(2)(iv)(B)“1.401(m)–1(f)(12)”“1.401(m)–1(a)(2)”
§1.414(r)–5(g)(3)(iv)“1.401(k)–1(g)(3)”“1.401(k)–6”
§54.4979–1(b)(1)“1.401(m)–1(f)(8)”“1.401(m)–5”
§54.4979–1(b)(2)“1.401(k)–1(g)(7)”“1.401(k)–6”
§54.4979–1(c)(1)“1.401(k)–1(b)(5)”“1.401(k)–2(a)(6)”
§54.4979–1(c)(1)“1.401(m)–1(b)(5)”“1.401(m)–2(a)(6)”
§54.4979–1(c)(1)“1.401(k)–1(f)(1)(i) and (6)(i)”“1.401(m)–2(b)(1)(i) and (5)(i)”
§54.4979–1(c)(1)“1.401(m)–1(e)(1)(i)”“1.401(m)–2(b)(1)(i)”
§54.4979–1(c)(2)“1.401(k)–1(f)(1)(i) and (6)(i)”“1.401(k)–2(b)(1)(i) and (6)(i)”
§54.4979–1(c)(2)“1.401(k)–1(f)(3)(ii) and (4)(v)”“1.401(k)–2(b)(3)(ii) and (2)(vi)”
§54.4979–1(c)(2)“1.401(m)–1(e)(3)(v)”“1.401(m)–2(b)(2)(vi)”
§54.4979–1(c)(3)“1.401(k)–1(f)(4)(ii)”“1.401(k)–2(b)(2)(iv)”
§54.4979–1(c)(3)“1.401(m)–1(e)(3)(ii)”“1.401(m)–2(b)(2)(iv)”
Par. 3. In §1.410(b)–3, paragraph
(a)(2)(i) is revised to read a follows:
Employees and former employees who
benefit under a plan.
(a) * * *
(2)***(i)Exceptions to allocation or
accrual requirement—(i)Section 401(k)
and 401(m) plans. Notwithstanding para-
graph (a)(1) of this section, an employee is
treated as benefiting under a section 401(k)
plan for a plan year if and only if the em-
ployee is an eligible employee as defined
in §1.401(k)–6 under the plan. Similarly,
an employee is treated as benefiting un-
der a section 401(m) plan for a plan year
if and only if the employee is an eligible
employee as defined in §1.401(m)–5 un-
der the plan for the plan year.
***
Par. 4. Sections 1.401(k)–0 and
1.401(k)–1 are revised and §§1.401(k)–2
through 1.401(k)–6 are added to read as
follows:
§1.401(k)–0 Table of contents.
This section contains first a list of sec-
tion headings and then a list of the para-
graphs in each section in §§1.401(k)–1
through 1.401(k)–6.
LIST OF SECTIONS
§1.401(k)–1 Certain cash or deferred
arrangements.
§1.401(k)–2 ADP test.
§1.401(k)–3 Safe harbor requirements.
§1.401(k)–4 SIMPLE 401(k) plan re-
quirements.
§1.401(k)–5 Special rules for mergers,
acquisitions and similar events. [Re-
served].
§1.401(k)–6 Definitions.
2005–5 I.R.B.393January 31, 2005

LIST OF PARAGRAPHS
§1.401(k)–1 Certain cash or deferred
arrangements.
(a) General rules.
(1) Certain plans permitted to include
cash or deferred arrangements.
(2) Rules applicable to cash or deferred
arrangements generally.
(i) Definition of cash or deferred ar-
rangement.
(ii) Treatment of after-tax employee
contributions.
(iii) Treatment of ESOP dividend elec-
tion.
(iv) Treatment of elective contributions
as plan assets.
(3) Rules applicable to cash or deferred
elections generally.
(i) Definition of cash or deferred elec-
tion.
(ii) Automatic enrollment.
(iii) Rules related to timing.
(A) Requirement that amounts not be
currently available.
(B) Contribution may not precede elec-
tion.
(C) Contribution may not precede ser-
vices.
(iv) Current availability defined.
(v) Certain one-time elections not
treated as cash or deferred elections.
(vi) Tax treatment of employees.
(vii) Examples.
(4) Rules applicable to qualified cash or
deferred arrangements.
(i) Definition of qualified cash or de-
ferred arrangement.
(ii) Treatment of elective contributions
as employer contributions.
(iii) Tax treatment of employees.
(iv) Application of nondiscrimination
requirements to plan that includes a quali-
fied cash or deferred arrangement.
(A) Exclusive means of amounts test-
ing.
(B) Testing benefits, rights and features.
(C) Minimum coverage requirement.
(5) Rules applicable to nonqualified
cash or deferred arrangements.
(i) Definition of nonqualified cash or
deferred arrangement.
(ii) Treatment of elective contributions
as nonelective contributions.
(iii) Tax treatment of employees.
(iv) Qualification of plan that includes
a nonqualified cash or deferred arrange-
ment.
(A) In general.
(B) Application of section 401(a)(4) to
certain plans.
(v) Example.
(6) Rules applicable to cash or deferred
arrangements of self-employed individu-
als.
(i) Application of general rules.
(ii) Treatment of matching contribu-
tions made on behalf of self-employed
individuals.
(iii) Timing of self-employed individ-
ual’s cash or deferred election.
(iv) Special rule for certain payments to
self-employed individuals.
(b) Coverage and nondiscrimination re-
quirements.
(1) In general.
(2) Automatic satisfaction by certain
plans.
(3) Anti-abuse provisions.
(4) Aggregation and restructuring.
(i) In general.
(ii) Aggregation of cash or deferred ar-
rangements within a plan.
(iii) Aggregation of plans.
(A) In general.
(B) Plans with inconsistent ADP testing
methods.
(iv) Disaggregation of plans and sepa-
rate testing.
(A) In general.
(B) Restructuring prohibited.
(v) Modifications to section 410(b)
rules.
(A) Certain disaggregation rules not ap-
plicable.
(B) Permissive aggregation of collec-
tive bargaining units.
(C) Multiemployer plans.
(vi) Examples.
(c) Nonforfeitability requirements.
(1) General rule.
(2) Definition of immediately nonfor-
feitable.
(3) Example.
(d) Distribution limitation.
(1) General rule.
(2) Rules applicable to distributions
upon severance from employment.
(3) Rules applicable to hardship distri-
butions.
(i) Distribution must be on account of
hardship.
(ii) Limit on maximum distributable
amount.
(A) General rule.
(B) Grandfathered amounts.
(iii) Immediate and heavy financial
need.
(A) In general.
(B) Deemed immediate and heavy fi-
nancial need.
(iv) Distribution necessary to satisfy fi-
nancial need.
(A) Distribution may not exceed
amount of need.
(B) No alternative means available.
(C) Employer reliance on employee
representation.
(D) Employee need not take counter-
productive actions.
(E) Distribution deemed necessary to
satisfy immediate and heavy financial
need.
(F) Definition of other plans.
(v) Commissioner may expand stan-
dards.
(4) Rules applicable to distributions
upon plan termination.
(i) No alternative defined contribution
plan.
(ii) Lump sum requirement for certain
distributions.
(5) Rules applicable to all distributions.
(i) Exclusive distribution rules.
(ii) Deemed distributions.
(iii) ESOP dividend distributions.
(iv) Limitations apply after transfer.
(6) Examples.
(e) Additional requirements for quali-
fied cash or deferred arrangements.
(1) Qualified plan requirement.
(2) Election requirements.
(i) Cash must be available.
(ii) Frequency of elections.
(3) Separate accounting requirement.
(i) General rule.
(ii) Satisfaction of separate accounting
requirement.
(4) Limitations on cash or deferred
arrangements of state and local govern-
ments.
(i) General rule.
(ii) Rural cooperative plans and Indian
tribal governments.
(iii) Adoption after May 6, 1986.
(iv) Adoption before May 7, 1986.
(5) One-year eligibility requirement.
(6) Other benefits not contingent upon
elective contributions.
(i) General rule.
January 31, 20053942005–5 I.R.B.

(ii) Definition of other benefits.
(iii) Effect of certain statutory limits.
(iv) Nonqualified deferred compensa-
tion.
(v) Plan loans and distributions.
(vi) Examples.
(7) Plan provision requirement.
(f) Special rules for designated Roth
contributions. [Reserved].
(g) Effective dates.
(1) General rule.
(2) Early implementation permitted.
(3) Collectively bargained plans.
(4) Applicability of prior regulations.
§1.401(k)–2 ADP test.
(a) Actual deferral percentage (ADP)
test.
(1) In general.
(i) ADP test formula.
(ii) HCEs as sole eligible employees.
(iii) Special rule forearly participation.
(2) Determination of ADP.
(i) General rule.
(ii) Determination of applicable year
under current year and prior year testing
method.
(3) Determination of ADR.
(i) General rule.
(ii) ADR of HCEs eligible under more
than one arrangement.
(A) General rule.
(B) Plans not permitted to be aggre-
gated.
(iii) Examples.
(4) Elective contributions taken into ac-
count under the ADP test.
(i) General rule.
(ii) Elective contributions for partners
and self-employed individuals.
(iii) Elective contributions for HCEs.
(5) Elective contributions not taken into
account under the ADP test.
(i) General rule.
(ii) Elective contributions for NHCEs.
(iii) Elective contributions treated as
catch-up contributions.
(iv) Elective contributions used to sat-
isfy the ACP test.
(v) Additional elective contributions
pursuant to section 414(u).
(6) Qualified nonelective contributions
and qualified matching contributions that
may be taken into account under the ADP
test.
(i) Timing of allocation.
(ii) Requirement that amount satisfy
section 401(a)(4).
(iii) Aggregation must be permitted.
(iv) Disporportionate contributions not
taken into account.
(A) General rule.
(B) Definition of representative contri-
bution rate.
(C) Definition of applicable contribu-
tion rate.
(D) Special rule for prevailing wage
contributions.
(v) Qualified matching contributions.
(vi) Contributions only used once.
(7) Examples.
(b) Correction of excess contributions.
(1) Permissible correction methods.
(i) In general.
(A) Qualified nonelective contributions
or qualified matching contributions.
(B) Excess contributions distributed.
(C) Excess contributions recharacter-
ized.
(ii) Combination of correction methods.
(iii) Exclusive means of correction.
(2) Corrections through distribution.
(i) General rule.
(ii) Calculation of total amount to be
distributed.
(A) Calculate the dollar amount of ex-
cess contributions for each HCE.
(B) Determination of the total amount
of excess contributions.
(C) Satisfaction of ADP.
(iii) Apportionment of total amount of
excess contributions among the HCEs.
(A) Calculate the dollar amount of ex-
cess contributions for each HCE.
(B) Limit on amount apportioned to any
individual.
(C) Apportionment to additional HCEs.
(iv) Income allocable to excess contri-
butions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating
plan year income.
(D) Safe harbor method of allocating
gapperiodincome.
(E) Alternative method for allocating
plan year and gap period income.
(v) Distribution.
(vi) Tax treatment of corrective distri-
butions.
(A) General rule.
(B) Rule forde minimisdistributions.
(vii) Other rules.
(A) No employee or spousal consent re-
quired.
(B) Treatment of corrective distribu-
tions as elective contributions.
(C) No reduction of required minimum
distribution.
(D) Partial distributions.
(viii) Examples.
(3) Recharacterization of excess contri-
butions.
(i) General rule.
(ii) Treatment of recharacterized excess
contributions.
(iii) Additional rules.
(A) Time of recharacterization.
(B) Employee contributions must be
permitted under plan.
(C) Treatment of recharacterized excess
contributions.
(4) Rules applicable to all corrections.
(i) Coordination with distribution of ex-
cess deferrals.
(A) Treatment of excess deferrals that
reduce excess contributions.
(B) Treatment of excess contributions
that reduce excess deferrals.
(ii) Forfeiture of match on distributed
excess contributions.
(iii) Permitted forfeiture of QMAC.
(iv) No requirement for recalculation.
(v) Treatment of excess contributions
that are catch-up contributions.
(5) Failure to timely correct.
(i) Failure to correct within 2
1
/2months
after end of plan year.
(ii) Failure to correct within 12 months
after end of plan year.
(c) Additional rules for prior year test-
ing method.
(1) Rules for change in testing method.
(i) General rule.
(ii) Situations permitting a change to the
prior year testing method.
(2) Calculation of ADP under the prior
year testing method for the first plan year.
(i) Plans that are not successor plans.
(ii) First plan year defined.
(iii) Successor plans.
(3) Plans using different testing meth-
ods for the ADP and ACP test.
(4) Rules for plan coverage changes.
(i) In general.
(ii) Optional rule for minor plan cover-
age changes.
(iii) Definitions.
(A) Plan coverage change.
(B) Prior year subgroup.
2005–5 I.R.B.395January 31, 2005

(C) Weighted average of the ADPs for
the prior year subgroups.
(iv) Examples.
§1.401(k)–3 Safe harbor requirements.
(a) ADP test safe harbor.
(b) Safe harbor nonelective contribu-
tion requirement.
(1) General rule.
(2) Safe harbor compensation defined.
(c) Safe harbor matching contribution
requirement.
(1) In general.
(2) Basic matching formula.
(3) Enhanced matching formula.
(4) Limitation on HCE matching contri-
butions.
(5) Use of safe harbor match not pre-
cluded by certain plan provisions.
(i) Safe harbor matching contributions
on employee contributions.
(ii) Periodic matching contributions.
(6) Permissible restrictions on elective
contributions by NHCEs.
(i) General rule.
(ii) Restrictions on election periods.
(iii) Restrictions on amount of elective
contributions.
(iv) Restrictions on types of compensa-
tion that may be deferred.
(v) Restrictions due to limitations under
the Internal Revenue Code.
(7) Examples.
(d) Notice requirement.
(1) General rule.
(2) Content requirement.
(i) General rule.
(ii) Minimum content requirement.
(iii) References to SPD.
(3) Timing requirement.
(i) General rule.
(ii) Deemed satisfaction of timing re-
quirement.
(e) Plan year requirement.
(1) General rule.
(2) Initial plan year.
(3) Change of plan year.
(4) Final plan year.
(f) Plan amendments adopting safe har-
bor nonelective contributions.
(1) General rule.
(2) Contingent notice provided.
(3) Follow-up notice requirement.
(g) Permissible reduction or suspension
of safe harbor matching contributions.
(1) General rule.
(2) Notice of suspension requirement.
(h) Additional rules.
(1) Contributions taken into account.
(2) Use of safe harbor nonelective con-
tributions to satisfy other nondiscrimina-
tion tests.
(3) Early participation rules.
(4) Satisfying safe harbor contribution
requirement under another defined contri-
bution plan.
(5) Contributions used only once.
§1.401(k)–4 SIMPLE 401(k) plan
requirements.
(a) General rule.
(b) Eligible employer.
(1) General rule.
(2) Special rule.
(c) Exclusive plan.
(1) General rule.
(2) Special rule.
(d) Election and notice.
(1) General rule.
(2) Employee elections.
(i) Initial plan year of participation.
(ii) Subsequent plan years.
(iii) Election to terminate.
(3) Employee notices.
(e) Contributions.
(1) General rule.
(2) Elective contributions.
(3) Matching contributions.
(4) Nonelective contributions.
(5) SIMPLE compensation.
(f) Vesting.
(g) Plan year.
(h) Other rules.
§1.401(k)–5 Special rules for mergers,
acquisitions and similar events.
[Reserved].
§1.401(k)–6 Definitions.
§1.401(k)–1 Certain cash or deferred
arrangements.
(a)General rules—(1)Certain plans
permitted to include cash or deferred
arrangements. A plan, other than a
profit-sharing, stock bonus, pre-ERISA
money purchase pension, or rural coopera-
tive plan, does not satisfy the requirements
of section 401(a) if the plan includes a cash
or deferred arrangement. A profit-sharing,
stock bonus, pre-ERISA money purchase
pension, or rural cooperative plan does
not fail to satisfy the requirements of
section 401(a) merely because the plan
includes a cash or deferred arrangement.
A cash or deferred arrangement is part of
a plan for purposes of this section if any
contributions to the plan, or accruals or
other benefits under the plan, are made or
provided pursuant to the cash or deferred
arrangement.
(2)Rules applicable to cash or deferred
arrangements generally—(i)Definition of
cash or deferred arrangement. Except as
provided in paragraphs (a)(2)(ii) and (iii)
of this section, a cash or deferred arrange-
ment is an arrangement under which an el-
igible employee may make a cash or de-
ferred election with respect to contribu-
tions to, or accruals or other benefits un-
der, a plan that is intended to satisfy the
requirements of section 401(a) (including
a contract that is intended to satisfy the re-
quirements of section 403(a)).
(ii)Treatment of after-tax employee
contributions. A cash or deferred arrange-
ment does not include an arrangement
under which amounts contributed under a
plan at an employee’s election are desig-
nated or treated at the time of contribution
as after-tax employee contributions (e.g.,
by treating the contributions as taxable
income subject to applicable withholding
requirements). See also section 414(h)(1).
A designated Roth contribution, however,
is not treated as an after-tax contribution
for purposes of this section, §1.401(k)–2
through §1.401(k)–6 and §1.401(m)–1
through §1.401(m)–5. A contribution can
be an after-tax employee contribution un-
der the rule of this paragraph (a)(2)(ii)
even if the employee’s election to make
after-tax employee contributions is made
before the amounts subject to the election
are currently available to the employee.
(iii)Treatment of ESOP dividend elec-
tion. A cash or deferred arrangement
does not include an arrangement under
an ESOP under which dividends are ei-
ther distributed or invested pursuant to
an election made by participants or their
beneficiaries in accordance with section
404(k)(2)(A)(iii).
(iv)Treatment of elective contributions
as plan assets. The extent to which elec-
tive contributions constitute plan assets
for purposes of the prohibited transaction
provisions of section 4975 and Title I of
the Employee Retirement Income Secu-
rity Act of 1974 (88 Stat. 829), Public
Law 93–406, is determined in accordance
with regulations and rulings issued by
January 31, 20053962005–5 I.R.B.

the Department of Labor. See 29 CFR
2510.3–102.
(3)Rules applicable to cash or deferred
elections generally—(i)Definition of cash
or deferred election. A cash or deferred
election is any direct or indirect election
(or modification of an earlier election) by
an employee to have the employer either—
(A) Provide an amount to the employee
in the form of cash (or some other taxable
benefit) that is not currently available; or
(B) Contribute an amount to a trust, or
provide an accrual or other benefit, under a
plan deferring the receipt of compensation.
(ii)Automatic enrollment. For pur-
poses of determiningwhether an election
is a cash or deferred election, it is irrel-
evant whether the default that applies in
the absence of an affirmative election
is described in paragraph (a)(3)(i)(A) of
this section (i.e., the employee receives
an amount in cash or some other taxable
benefit) or in paragraph (a)(3)(i)(B) of this
section (i.e., the employer contributes an
amount to a trust or provides an accrual
or other benefit under a plan deferring the
receipt of compensation).
(iii)Rules related to timing—(A)Re-
quirement that amounts not be currently
available. A cash or deferred election can
only be made with respect to an amount
that is not currently available to the em-
ployee on the date of the election. Fur-
ther, a cash or deferred election can only be
made with respect to amounts that would
(but for the cash or deferred election) be-
come currently available after the later of
the date on which the employer adopts the
cash or deferred arrangement or the date on
which the arrangement first becomes ef-
fective.
(B)Contribution may not precede elec-
tion. A contribution is made pursuant to a
cash or deferred election only if the contri-
bution is made after the election is made.
(C)Contribution may not precede ser-
vices—(1)General rule. Contributions are
made pursuant to a cash or deferred elec-
tion only if the contributions are made af-
ter the employee’s performance of service
with respect to which the contributions are
made (or when the cash or other taxable
benefit would be currently available, if ear-
lier).
(2)Exception for bona fide administra-
tive considerations. The timing of con-
tributions will not be treated as failing to
satisfy the requirements of this paragraph
(a)(3)(iii)(C) merelybecause contributions
for a pay period are occasionally made be-
fore the services with respect to that pay
period are performed, provided the contri-
butions are made early in order to accom-
modatebona fideadministrative consider-
ations (for example, the temporary absence
of the bookkeeper with responsibility to
transmit contributions to the plan) and are
not paid early with a principal purpose of
accelerating deductions.
(iv)Current availability defined.Cash
or another taxable benefit is currently
available to the employee if it has been
paid to the employee or if the employee is
able currently to receive the cash or other
taxable benefit at the employee’s discre-
tion. An amount is not currently available
to an employee if there is a significant
limitation or restriction on the employee’s
right to receive the amount currently. Sim-
ilarly, an amount is not currently available
as of a date if the employee may under no
circumstances receivethe amount before a
particular time in the future. The determi-
nation of whether an amount is currently
available to an employee does not depend
on whether it has been constructively re-
ceived by the employee for purposes of
section 451.
(v)Certain one-time elections not
treated as cash or deferred elections.A
cash or deferred election does not include
a one-time irrevocable election made no
later than the employee’s first becoming
eligible under the plan or any other plan
or arrangement of the employer that is de-
scribedinsection219(g)(5)(A)(whether
or not such other plan or arrangement has
terminated), to have contributions equal
to a specified amount or percentage of
the employee’s compensation (including
no amount of compensation) made by the
employer on the employee’s behalf to the
plan and a specified amount or percentage
of the employee’s compensation (includ-
ing no amount of compensation) divided
among all other plans or arrangements of
the employer (including plans or arrange-
ments not yet established) for the duration
of the employee’s employment with the
employer, or in the case of a defined bene-
fit plan to receive accruals or other benefits
(including no benefits) under such plans.
Thus, for example, employer contributions
made pursuant to a one-time irrevocable
election described inthis paragraph are
not treated as having been made pursuant
to a cash or deferred election and are not
includible in an employee’s gross income
by reason of §1.402(a)–1(d). In the case of
an irrevocable election made on or before
December 23, 1994—
(A) The election does not fail to be
treated as a one-time irrevocable election
under this paragraph(a)(3)(v) merely be-
cause an employee was previously eligi-
ble under another plan of the employer
(whether or not such other plan has termi-
nated); and
(B) In the case of a plan in which part-
ners may participate, the election does not
fail to be treated as a one-time irrevoca-
ble election under this paragraph (a)(3)(v)
merely because the election was made af-
ter commencement of employment or af-
ter the employee’s first becoming eligible
under any plan of the employer, provided
that the election was made before the first
day of the first plan year beginning af-
ter December 31, 1988, or, if later, March
31,1989.
(vi)Tax treatment of employees.An
amount generally is includible in an em-
ployee’s gross income for the taxable
year in which the employee actually or
constructively receives the amount. But
for section 402(e)(3), an employee is
treated as having received an amount that
is contributed to an exempt trust or plan
described in section 401(a) or 403(a) pur-
suant to the employee’s cash or deferred
election. This is the case even if the elec-
tion to defer is made before the year in
which the amount is earned, or before
the amount is currently available. See
§1.402(a)–1(d).
(vii)Examples. The following exam-
ples illustrate the application of this para-
graph (a)(3):
Example 1. (i) An employer maintains a profit-
sharing plan under which each eligible employee has
an election to defer an annual bonus payable on Jan-
uary 30 each year. The bonus equals 10% of compen-
sation during the previous calendar year. Deferred
amounts are not treated as after-tax employee contri-
butions. The bonus is currently available on January
30.
(ii) An election made prior to January 30 to defer
all or part of the bonus is a cash or deferred election,
and the bonus deferral arrangement is a cash or de-
ferred arrangement.
Example 2. (i) An employer maintains a profit-
sharing plan which provides for discretionary profit
sharing contributions and under which each eligible
employee may elect to reduce his compensation by
up to 10% and to have the employer contribute such
amount to the plan. The employer pays each em-
ployee every two weeks for services during the imme-
2005–5 I.R.B.397January 31, 2005

diately preceding two weeks. The employee’s elec-
tion to defer compensation for a payroll period must
be made prior to the date the amount would otherwise
be paid. The employer contributes to the plan the
amount of compensation that each employee elected
todefer,atthetimeitwouldotherwisebepaidtothe
employee, and does not treat the contribution as an
after-tax employee contribution.
(ii) The election is a cash or deferred election and
the contributions are elective contributions.
Example 3. (i) The facts are the same as inExam-
ple 2, except that the employer makes a $10,000 con-
tribution on January 31 of the plan year that is in ad-
dition to the contributions that satisfy the employer’s
obligation to make contributions with respect to cash
or deferred elections for prior payroll periods. Em-
ployeeAmakesanelectiononFebruary15todefer
$2,000 from compensation that is not currently avail-
able and the employer reduces the employee’s com-
pensation to reflect the election.
(ii) None of the additional $10,000 contributed
January 31 is a contribution made pursuant to Em-
ployee A’s cash or deferred election, because the con-
tribution was made before the election was made. Ac-
cordingly, the employer must make an additional con-
tribution of $2,000 in order to satisfy its obligation
to contribute an amount to the plan pursuant to Em-
ployee A’s election. The $10,000 contribution may
be allocated under the plan terms providing for dis-
cretionary profit sharing contributions.
Example 4. (i)ThefactsarethesameasinEx-
ample 3, except that Employee A had an outstand-
ing election to defer $500 from each payroll period’s
compensation. The $10,000 additional payment that
is contributed early is not made early in order to ac-
commodatebona fideadministrative considerations.
(ii) None of the additional $10,000 contributed
January 31 is a contribution made pursuant to Em-
ployee A’s cash or deferred election for future payroll
periods, because the contribution was made before
the earlier of Employee A’s performance of services
to which the contribution is attributable or when the
compensation would be currently available. Further-
more, the exception for early contributions in para-
graph (a)(3)(iii)(C)(2) of this section does not apply.
Accordingly, the employer must make an additional
contribution of $500 per payroll period in order to sat-
isfy its obligation to contribute an amount to the plan
pursuant to Employee A’s election. The $10,000 con-
tribution may be allocated under the plan terms pro-
viding for discretionary profit sharing contributions.
Example 5. (i) Employer B establishes a money
purchase pension plan in 1986. This is the first qual-
ified plan established by Employer B. All salaried
employees are eligible to participate under the plan.
Hourly-paid employees are not eligible to participate
under the plan. In 2000, Employer B establishes a
profit-sharing plan under which all employees (both
salaried and hourly) are eligible. Employer B permits
all employees on the effective date of the profit-shar-
ing plan to make a one-time irrevocable election to
have Employer B contribute 5% of compensation on
their behalf to the plan and make no other contribu-
tion to any other plan of Employer B (including plans
not yet established) for the duration of the employee’s
employment with Employer B, and have their salaries
reducedby5%.
(ii) The election provided under the profit-shar-
ing plan is not a one-time irrevocable election within
the meaning of paragraph (a)(3)(v) of this section
with respect to the salaried employees of Employer
B who, before becoming eligible to participate under
the profit-sharing plan, became eligible to participate
under the money purchase pension plan. The election
under the profit-sharing plan is a one-time irrevocable
election within the meaning of paragraph (a)(3)(v) of
this section with respect to the hourly employees, be-
cause they were not previously eligible to participate
under another plan of the employer.
(4)Rules applicable to qualified cash
or deferred arrangements—(i)Definition
of qualified cash or deferred arrangement.
A qualified cash or deferred arrangement
is a cash or deferred arrangement that sat-
isfies the requirements of paragraphs (b),
(c), (d), and (e) of this section.
(ii)Treatment of elective contributions
as employer contributions. Except as
otherwise provided in §1.401(k)–2(b)(3),
elective contributions under a qualified
cash or deferred arrangement (including
designated Roth contributions) are treated
as employer contributions. Thus, for ex-
ample, elective contributions under such
an arrangement are treated as employer
contributions for purposes of sections
401(a), 401(k), 402, 404, 409, 411, 412,
415, 416, and 417.
(iii)Tax treatment of employees. Except
as provided in section 402(g), 402A (effec-
tive for taxable years beginning after De-
cember 31, 2005), or §1.401(k)–2(b)(3),
elective contributions under a qualified
cash or deferred arrangement are neither
includible in an employee’s gross income
at the time the cash would have been in-
cludible in the employee’s gross income
(but for the cash or deferred election),
nor at the time the elective contribu-
tions are contributed to the plan. See
§1.402(a)–1(d)(2)(i).
(iv)Application of nondiscrimination
requirements to plan that includes a qual-
ified cash or deferred arrangement—(A)
Exclusive means of amounts testing. Elec-
tive contributions (including elective
contributions that are designated Roth
contributions) under a qualified cash or
deferred arrangement satisfy the require-
ments of section 401(a)(4) with respect
to amounts if and only if the amount of
elective contributions satisfies the nondis-
crimination test of section 401(k) under
paragraph (b)(1) of this section. See
§1.401(a)(4)–1(b)(2)(ii)(B).
(B)Testing benefits, rights and fea-
tures. A plan that includes a qualified
cash or deferred arrangement must sat-
isfy the requirements of section 401(a)(4)
with respect to benefits, rights and fea-
tures in addition to the requirements re-
garding amounts described in paragraph
(a)(4)(iv)(A) of this section. For example,
the right to make each level of elective
contributions under a cash or deferred
arrangement and the right to make desig-
nated Roth contributions are rights or fea-
tures subject to the requirements of section
401(a)(4). See §1.401(a)(4)–4(e)(3)(i) and
(iii)(D). Thus, for example, if all employ-
ees are eligible to make a stated level
of elective contributions under a cash or
deferred arrangement, but that level of
contributions can only be made from com-
pensation in excess of a stated amount,
such as the Social Security taxable wage
base, the arrangement will generally favor
HCEs with respect to the availability of
elective contributions and thus will gener-
ally not satisfy the requirements of section
401(a)(4).
(C)Minimum coverage requirement.A
qualified cash or deferred arrangement is
treated as a separate plan that must sat-
isfy the requirements of section 410(b).
See §1.410(b)–7(c)(1) for special rules.
The determination of whether a cash or
deferred arrangement satisfies the require-
ments of section 410(b) must be made
without regard to the modifications to
the disaggregation rules set forth in para-
graph (b)(4)(v) of this section. See also
§1.401(a)(4)–11(g)(3)(vii)(A), relating to
corrective amendments that may be made
to satisfy the minimum coverage require-
ments of section 410(b).
(5)Rules applicable to nonqualified
cash or deferred arrangements—(i)Def-
inition of nonqualified cash or deferred
arrangement. A nonqualified cash or de-
ferred arrangement is a cash or deferred
arrangement that fails to satisfy one or
more of the requirements in paragraph (b),
(c), (d) or (e) of this section.
(ii)Treatment of elective contributions
as nonelective contributions. Except as
specifically provided otherwise, elective
contributions under a nonqualified cash or
deferred arrangement are treated as non-
elective employer contributions. Thus, for
example, the elective contributions under
such an arrangement are treated as non-
elective employer contributions for pur-
poses of sections 401(a) (including section
401(a)(4)) and 401(k), 404, 409, 411, 412,
January 31, 20053982005–5 I.R.B.

415, 416, and 417 and are not subject to the
requirements of section 401(m).
(iii)Tax treatment of employees. Elec-
tive contributions under a nonqualified
cash or deferred arrangement are includi-
ble in an employee’s gross income at the
time the cash or other taxable amount that
the employee would have received (but for
the cash or deferred election) would have
been includible in the employee’s gross
income. See §1.402(a)–1(d)(1).
(iv)Qualification of plan that includes
a nonqualified cash or deferred arrange-
ment—(A)In general. A profit-sharing,
stock bonus, pre-ERISA money purchase
pension, or rural cooperative plan does
not fail to satisfy the requirements of
section 401(a) merely because the plan
includes a nonqualified cash or deferred
arrangement. In determining whether
the plan satisfies the requirements of
section 401(a)(4), the nondiscrimina-
tion tests of sections 401(k), paragraph
(b)(1) of this section, section 401(m)(2)
and §1.401(m)–1(b) may not be used.
See §§1.401(a)(4)–1(b)(2)(ii)(B) and
1.410(b)–9 (definition of section 401(k)
plan).
(B)Application of section 401(a)(4) to
certain plans. The amount of employer
contributions under a nonqualified cash or
deferred arrangement is treated as satisfy-
ing section 401(a)(4) if the arrangement is
part of a collectively bargained plan that
automatically satisfies the requirements of
section 410(b). See §§1.401(a)(4)–1(c)(5)
and 1.410(b)–2(b)(7). Additionally, the
requirements of sections 401(a)(4) and
410(b) do not apply to a governmen-
tal plan (within the meaning of section
414(d)) maintained by a State or local gov-
ernment or politicalsubdivision thereof
(or agency or instrumentality thereof). See
sections 401(a)(5) and 410(c)(1)(A).
(v)Example. The following example
illustrates the application of this paragraph
(a)(5):
Example. (i) For the 2006 plan year, Employer A
maintains a collectively bargained plan that includes
a cash or deferred arrangement. Employer contribu-
tions under the cash or deferred arrangement do not
satisfy the nondiscrimination test of section 401(k)
and paragraph (b) of this section.
(ii) The arrangement is a nonqualified cash or de-
ferred arrangement. The employer contributions un-
der the cash or deferred arrangement are considered
to be nondiscriminatory under section 401(a)(4), and
the elective contributions are generally treated as em-
ployer contributions under paragraph (a)(5)(ii) of this
section. Under paragraph (a)(5)(iii) of this section
and under §1.402(a)–1(d)(1), however, the elective
contributions are includible in each employee’s gross
income.
(6)Rules applicable to cash or deferred
arrangements of self-employed individu-
als—(i)Application of general rules.Gen-
erally, a partnership or sole proprietorship
is permitted to maintain a cash or deferred
arrangement, and individual partners or
owners are permitted to make cash or de-
ferred elections with respect to compen-
sation attributable to services rendered to
the entity, under the same rules that ap-
ply to other cash or deferred arrangements.
For example, any contributions made on
behalf of an individual partner or owner
pursuant to a cash or deferred arrangement
of a partnership or soleproprietorship are
elective contributions unless they are des-
ignated or treated as after-tax employee
contributions. In the case of a partner-
ship, a cash or deferred arrangement in-
cludes any arrangement that directly or in-
directly permits individual partners to vary
the amount of contributions made on their
behalf. Consistent with §1.402(a)–1(d),
the elective contributions under such an ar-
rangement are includible in income and are
not deductible under section 404(a) unless
the arrangement is a qualified cash or de-
ferred arrangement (i.e., the requirements
of section 401(k) and this section are sat-
isfied). Also, even if the arrangement is
a qualified cash or deferred arrangement,
the elective contributions are includible in
gross income and are not deductible under
section 404(a) to the extent they exceed the
applicable limit under section 402(g). See
also §1.401(a)–30.
(ii)Treatment of matching contribu-
tions made on behalf of self-employed
individuals. Under section 402(g)(8),
matching contributions made on behalf of
a self-employed individual are not treated
as elective contributions made pursuant to
a cash or deferred election, without regard
to whether such matching contributions
indirectly permit individual partners to
vary the amount of contributions made on
their behalf.
(iii)Timing of self-employed individ-
ual’s cash or deferred election. For pur-
poses of paragraph (a)(3)(iv) of this sec-
tion, a partner’s compensation is deemed
currently available on the last day of the
partnership taxable year and a sole propri-
etor’s compensation is deemed currently
available on the last day of the individ-
ual’s taxable year. Accordingly, a self-em-
ployed individual may not make a cash
or deferred election with respect to com-
pensation for a partnership or sole propri-
etorship taxable year after the last day of
that year. See §1.401(k)–2(a)(4)(ii) for the
rules regarding when these contributions
are treated as allocated.
(iv)Special rule for certain payments
to self-employed individuals.Forpur-
poses of sections 401(k) and 401(m), the
earned income of a self-employed individ-
ual for a taxable year constitutes payment
for services during that year. Thus, for
example, if a partnership provides for
cash advance payments during the taxable
year to be made to a partner based on
the value of the partner’s services prior
tothedateofpayment(andwhichdo
not exceed a reasonable estimate of the
partner’s earned income for the taxable
year), a contribution of a portion of these
payments to a profit sharing plan in accor-
dance with an election to defer the portion
of the advance payments does not fail to
be made pursuant to a cash or deferred
election within the meaning of paragraph
(a)(3)(iii) of this section merely because
the contribution is made before the amount
of the partner’s earned income is finally
determined and reported. However, see
§1.401(k)–2(a)(4)(ii) for rules on when
earned income is treated as received.
(b)Coverage and nondiscrimination re-
quirements—(1)In general. A cash or de-
ferred arrangement satisfies this paragraph
(b) for a plan year only if—
(i) The group of eligible employees un-
der the cash or deferred arrangement (in-
cluding any employees taken into account
for purposes of section 410(b) pursuant
to §1.401(a)(4)–11(g)(3)(vii)(A)) satisfies
the requirements of section 410(b) (includ-
ing the average benefit percentage test, if
applicable); and
(ii) The cash or deferred arrangement
satisfies—
(A) The ADP test of section 401(k)(3)
described in §1.401(k)–2;
(B) The ADP safe harbor provi-
sions of section 401(k)(12) described
in §1.401(k)–3; or
(C) The SIMPLE 401(k) provi-
sions of section 401(k)(11) described
in §1.401(k)–4.
(2)Automatic satisfaction by cer-
tain plans. Notwithstanding paragraph
(b)(1) of this section, a governmental plan
2005–5 I.R.B.399January 31, 2005

(within the meaning of section 414(d))
maintained by a State or local government
or political subdivision thereof (or agency
or instrumentality thereof) shall be treated
as meeting the requirements of this para-
graph (b).
(3)Anti-abuse provisions. This sec-
tion and §§1.401(k)–1 through 1.401(k)–6
are designed to provide simple, practical
rules that accommodate legitimate plan
changes. At the same time, the rules are
intended to be applied by employers in a
manner that does not make use of changes
in plan testing procedures or other plan
provisions to inflate inappropriately the
ADP for NHCEs (which is used as a
benchmark for testing the ADP for HCEs)
or to otherwise manipulate the nondis-
crimination testing requirements of this
paragraph (b). Further, this paragraph (b)
is part of the overall requirement that ben-
efits or contributions not discriminate in
favor of HCEs. Therefore, a plan will not
be treated as satisfying the requirements
of this paragraph (b) if there are repeated
changes to plan testing procedures or plan
provisions that have the effect of distorting
the ADP so as to increase significantly the
permitted ADP for HCEs, or otherwise
manipulate the nondiscrimination rules of
this paragraph, if a principal purpose of
the changes was to achieve such a result.
(4)Aggregation and restructuring—(i)
In general. This paragraph (b)(4) contains
the exclusive rules for aggregating and dis-
aggregating plans and cash or deferred ar-
rangements for purposes of this section,
and §§1.401(k)–2 through 1.401(k)–6.
(ii)Aggregation of cash or deferred ar-
rangements within a plan. Except as oth-
erwise specifically provided in this para-
graph (b)(4), all cash or deferred arrange-
ments included in a plan are treated as a
single cash or deferred arrangement and a
plan must apply a single test under para-
graph (b)(1)(ii) of this section with re-
spect to all such arrangements within the
plan. Thus, for example, if two groups
of employees are eligible for separate cash
or deferred arrangements under the same
plan, all contributions under both cash or
deferred arrangements must be treated as
made under a single cash or deferred ar-
rangement subject to a single test, even if
they have significantly different features,
such as different limits on elective contri-
butions.
(iii)Aggregation of plans—(A)In gen-
eral. For purposes of this section and
§§1.401(k)–2 through 1.401(k)–6, the
termplanmeans a plan within the mean-
ing of §1.410(b)–7(a) and (b), after ap-
plication of the mandatory disaggregation
rules of §1.410(b)–7(c), and the permis-
sive aggregation rules of §1.410(b)–7(d),
as modified by paragraph (b)(4)(v) of this
section. Thus, for example, two plans
(within the meaning of §1.410(b)–7(b))
that are treated as a single plan pursuant
to the permissive aggregation rules of
§1.410(b)–7(d) are treated as a single plan
for purposes of sections 401(k) and (m).
(B)Plans with inconsistent ADP testing
methods. Pursuant to paragraph (b)(4)(ii)
of this section, a single testing method
must apply with respect to all cash or de-
ferred arrangements under a plan. Thus,
in applying the permissive aggregation
rules of §1.410(b)–7(d), an employer may
not aggregate plans (within the meaning
of §1.410(b)–7(b)) that apply inconsis-
tent testing methods. For example, a plan
(within the meaning of §1.410(b)–7(b))
that applies the current year testing method
may not be aggregated with another
plan that applies the prior year testing
method. Similarly, an employer may not
aggregate a plan (within the meaning of
§1.410(b)–7(b)) using the ADP safe har-
bor provisions of section 401(k)(12) and
another plan that is using the ADP test of
section 401(k)(3).
(iv)Disaggregation of plans and sepa-
rate testing—(A)In general. If a cash or
deferred arrangement is included in a plan
(within the meaning of §1.410(b)–7(b))
that is mandatorily disaggregated under
the rules of section 410(b) (as modified
by this paragraph (b)(4)), the cash or de-
ferred arrangement must be disaggregated
in a consistent manner. For example, in
the case of an employer that is treated
as operating qualified separate lines of
business under section 414(r), if the eli-
gible employees under a cash or deferred
arrangement are in more than one quali-
fied separate line of business, only those
employees within eachqualified sepa-
rate line of business may be taken into
account in determining whether each
disaggregated portion of the plan com-
plies with the requirements of section
401(k), unless the employer is applying
the special rule for employer-wide plans
in §1.414(r)–1(c)(2)(ii) with respect to
the plan. Similarly, if a cash or deferred
arrangement under which employees are
permitted to participate before they have
completed the minimum age and service
requirements of section 410(a)(1) ap-
plies section 410(b)(4)(B) for determining
whether the plan complies with section
410(b)(1), then the arrangement must be
treated as two separate arrangements, one
comprising all eligible employees who
have met the age and service requirements
of section 410(a)(1) and one comprising
all eligible employees who have not met
the age and service requirements under
section 410(a)(1), unless the plan is using
the rule in §1.401(k)–2(a)(1)(iii)(A).
(B)Restructuring prohibited.Restruc-
turing under §1.401(a)(4)–9(c) may not
be used to demonstrate compliance with
the requirements of section 401(k). See
§1.401(a)(4)–9(c)(3)(ii).
(v)Modifications to section 410(b)
rules—(A)Certain disaggregation rules
not applicable. The mandatory disag-
gregation rules relating to section 401(k)
plans and section 401(m) plans set forth
in §1.410(b)–7(c)(1) and ESOP and
non-ESOP portions of a plan set forth
in §1.410(b)–7(c)(2) shall not apply for
purposes of this section and §§1.401(k)–2
through 1.401(k)–6. Accordingly, not-
withstanding §1.410(b)–7(d)(2), an ESOP
and a non-ESOP which are different plans
(within the meaning of section 414(l), as
described in §1.410(b)–7(b)) are permitted
to be aggregated for these purposes.
(B)Permissive aggregation of collec-
tive bargaining units. Notwithstanding
the general rule under section 410(b) and
§1.410(b)–7(c) that a plan that benefits
employees who are included in a unit of
employees covered by a collective bar-
gaining agreement and employees who
are not included in the collective bargain-
ing unit is treated as comprising separate
plans, an employer can treat two or more
separate collective bargaining units as a
single collective bargaining unit for pur-
poses of this section and §§1.401(k)–2
through 1.401(k)–6, provided that the
combinations of units are determined on
a basis that is reasonable and reasonably
consistent from year to year. Thus, for
example, if a plan benefits employees in
three categories (e.g., employees included
in collective bargaining unit A, employees
included in collective bargaining unit B,
and employees who are not included in
January 31, 20054002005–5 I.R.B.

any collective bargaining unit), the plan
can be treated as comprising three sep-
arate plans, each of which benefits only
one category of employees. However, if
collective bargaining units A and B are
treated as a single collective bargaining
unit, the plan will betreated as comprising
only two separate plans, one benefiting all
employees who are included in a collec-
tive bargaining unit and another benefiting
all other employees. Similarly, if a plan
benefits only employees who are included
in collective bargaining unit A and em-
ployees who are included in collective
bargaining unit B, the plan can be treated
as comprising two separate plans. How-
ever, if collective bargaining units A and
B are treated as a single collective bar-
gaining unit, the plan will be treated as
a single plan. An employee is treated as
included in a unit of employees covered
by a collective bargaining agreement if
and only if the employee is a collectively
bargained employee within the meaning
of §1.410(b)–6(d)(2).
(C)Multiemployer plans. Notwith-
standing §1.410(b)–7(c)(4)(ii)(C), the
portion of the plan that is maintained pur-
suant to a collective bargaining agreement
(within the meaning of §1.413–1(a)(2)) is
treated as a single plan maintained by a
single employer that employs all the em-
ployees benefiting under the same benefit
computation formula and covered pur-
suant to that collective bargaining agree-
ment. The rules of paragraph (b)(4)(v)(B)
of this section (including the permissive
aggregation of collective bargaining units)
apply to the resulting deemed single plan
in the same manner as they would to a
single employer plan, except that the plan
administrator is substituted for the em-
ployer where appropriate and that appro-
priate fiduciary obligations are taken into
account. The noncollectively bargained
portion of the plan is treated as maintained
by one or more employers, depending on
whether the noncollectively bargaining
unit employees who benefit under the plan
are employed by one or more employers.
(vi)Examples. The following examples
illustrate the application of this paragraph
(b)(4):
Example 1. (i) Employer A maintains Plan V, a
profit-sharing plan that includes a cash or deferred
arrangement in which all of the employees of Em-
ployer A are eligible to participate. For purposes of
applying section 410(b), Employer A is treated as op-
erating qualified separate lines of business under sec-
tion 414(r) in accordance with §1.414(r)–1(b). How-
ever, Employer A applies the special rule for em-
ployer-wide plans in §1.414(r)–1(c)(2)(ii) to the por-
tion of its profit-sharing plan that consists of elective
contributions under the cash or deferred arrangement
(and to no other plans or portions of plans).
(ii) Under these facts, the requirements of this sec-
tion and §§1.401(k)–2 through 1.401(k)–6 must be
applied on an employer-wide rather than a qualified
separate line of business basis.
Example 2. (i) Employer B maintains Plan W, a
profit-sharing plan that includes a cash or deferred ar-
rangement in which all of the employees of Employer
B are eligible to participate. For purposes of apply-
ing section 410(b), the plan treats the cash or deferred
arrangement as two separate plans, one for the em-
ployees who have completed the minimum age and
service eligibility conditions under section 410(a)(1)
and the other for employees who have not completed
the conditions. The plan provides that it will sat-
isfy the section 401(k) safe harbor requirement of
§1.401(k)–3 with respect to the employees who have
met the minimum age and service conditions and that
it will meet the ADP test requirements of §1.401(k)–2
with respect to the employees who have not met the
minimum age and service conditions.
(ii) Under these facts, the cash or deferred ar-
rangement must be disaggregated on a consistent ba-
sis with the disaggregation of Plan W. Thus, the re-
quirements of §1.401(k)–2 must be applied by com-
paring the ADP for eligible HCEs who have not com-
pleted the minimum age and service conditions with
the ADP for eligible NHCEs for the applicable year
who have not completed the minimum age and ser-
vice conditions.
Example 3. (i) Employer C maintains Plan X, a
stock-bonus plan including an ESOP. The plan also
includes a cash or deferred arrangement for partici-
pants in the ESOP and non-ESOP portions of the plan.
(ii) Pursuant to paragraph (b)(4)(v)(A) of this
section the ESOP and non-ESOP portions of the
stock-bonus plan are a single cash or deferred
arrangement for purposes of this section and
§§1.401(k)–2 through 1.401(k)–6. However, as
provided in paragraph (a)(4)(iv)(C) of this section,
the ESOP and non-ESOP portions of the plan are still
treated as separate plans for purposes of satisfying
the requirements of section 410(b).
(c)Nonforfeitability requirements—(1)
General rule. A cash or deferred arrange-
ment satisfies this paragraph (c) only if the
amount attributable to an employee’s elec-
tive contributions are immediately nonfor-
feitable, within the meaning of paragraph
(c)(2) of this section, are disregarded for
purposes of applying section 411(a)(2) to
other contributions or benefits, and the
contributions remain nonforfeitable even
if the employee makesno additional elec-
tive contributions under a cash or deferred
arrangement.
(2)Definition of immediately non-
forfeitable. An amount is immediately
nonforfeitable if it is immediately non-
forfeitable within the meaning of section
411, and would be nonforfeitable under
the plan regardless of the age and service
of the employee or whether the employee
is employed on a specific date. An amount
that is subject to forfeitures or suspensions
permitted by section 411(a)(3) does not
satisfy the requirements of this paragraph
(c).
(3)Example. The following example
illustrates the application of this paragraph
(c):
Example. (i) Employees B and C are covered
by Employer Y’s stock bonus plan, which includes
a cash or deferred arrangement. All employees par-
ticipating in the plan have a nonforfeitable right to
a percentage of their account balance derived from
all contributions (including elective contributions) as
shown in the following table:
Years of serviceNonforfeitable percentage
Less than 10%
120%
240%
360%
480%
5ormore
100%
(ii) The cash or deferred arrangement does not
satisfy paragraph (c) of this section because elective
contributions are not immediately nonforfeitable. Thus, the cash or deferred arrangement is a nonqual-
ified cash or deferred arrangement.
2005–5 I.R.B.401January 31, 2005

(d)Distribution limitation—(1)Gen-
eral rule. A cash or deferred arrangement
satisfies this paragraph (d) only if amounts
attributable to elective contributions may
not be distributed before one of the fol-
lowing events, and any distributions so
permitted also satisfy the additional re-
quirements of paragraphs (d)(2) through
(5) of this section (to the extent applica-
ble)—
(i) The employee’s death, disability, or
severance from employment;
(ii) In the case of a profit-sharing, stock
bonus or rural cooperative plan, the em-
ployee’s attainment of age 59
1
/2,ortheem-
ployee’s hardship; or
(iii) The termination of the plan.
(2)Rules applicable to distributions
upon severance from employment.An
employee has a severance from employ-
ment when the employee ceases to be an
employee of the employer maintaining
the plan. An employee does not have a
severance from employment if, in con-
nection with a change of employment, the
employee’s new employer maintains such
plan with respect to the employee. For
example, a new employer maintains a plan
with respect to an employee by continuing
or assuming sponsorship of the plan or
by accepting a transfer of plan assets and
liabilities (within the meaning of section
414(l)) with respect to the employee.
(3)Rules applicable to hardship distri-
butions—(i)Distribution must be on ac-
count of hardship. A distribution is treated
as made after an employee’s hardship for
purposes of paragraph (d)(1)(ii) of this sec-
tion if and only if it is made on account of
the hardship. For purposes of this rule, a
distribution is made on account of hard-
ship only if the distribution both is made
on account of an immediate and heavy fi-
nancial need of the employee and is neces-
sary to satisfy the financial need. The de-
termination of the existence of an imme-
diate and heavy financial need and of the
amount necessary to meet the need must
be made in accordance with nondiscrimi-
natory and objective standards set forth in
the plan.
(ii)Limit on maximum distributable
amount—(A)General rule. A distribution
on account of hardship must be limited
to the maximum distributable amount.
The maximum distributable amount is
equal to the employee’s total elective con-
tributions as of the date of distribution,
reduced by the amount of previous distri-
butions of elective contributions. Thus,
the maximum distributable amount does
not include earnings, QNECs or QMACs,
unless grandfathered under paragraph
(d)(3)(ii)(B) of this section.
(B)Grandfathered amounts.Iftheplan
so provides, the maximum distributable
amount may be increased for amounts
credited to the employee’s account as of
a date specified in the plan that is no later
than December 31, 1988, or if later, the
end of the last plan year ending before July
1, 1989 (or in the case of a collectively
bargained plan, the earlier of—
(1) The later of January 1, 1989, or the
date on which the last of the collective bar-
gaining agreements in effect on March 1,
1986, terminates (determined without re-
gard to any extension thereof after Febru-
ary 28, 1986); or
(2) January 1, 1991, and consisting of—
(i) Income allocable to elective contri-
butions;
(ii) Qualified nonelective contributions
and allocable income; and
(iii) Qualified matching contributions
and allocable income.
(iii)Immediate and heavy financial
need—(A)In general. Whether an em-
ployee has an immediate and heavy fi-
nancial need is to be determined based on
all the relevant facts and circumstances.
Generally, for example, the need to pay
the funeral expenses of a family member
would constitute an immediate and heavy
financial need. A distribution made to
an employee for the purchase of a boat
or television would generally not consti-
tute a distribution made on account of an
immediate and heavy financial need. A fi-
nancial need may be immediate and heavy
even if it was reasonably foreseeable or
voluntarily incurred by the employee.
(B)Deemed immediate and heavy fi-
nancial need. A distribution is deemed to
be on account of an immediate and heavy
financial need of the employee if the dis-
tribution is for—
(1) Expenses for (or necessary to ob-
tain) medical care that would be deductible
under section 213(a) (determined without
regard to whether the expenses exceed
7.5% of adjusted gross income);
(2) Costs directly related to the pur-
chase of a principal residence for the em-
ployee (excluding mortgage payments);
(3) Payment of tuition, related educa-
tional fees, and room and board expenses,
for up to the next 12 months of post-sec-
ondary education for the employee, or
the employee’s spouse, children, or de-
pendents (as defined in section 152, and,
for taxable years beginning on or after
January 1, 2005, without regard to section
152(b)(1), (b)(2) and (d)(1)(B));
(4) Payments necessary to prevent the
eviction of the employee from the em-
ployee’s principal residence or foreclosure
on the mortgage on that residence;
(5) Payments for burial or funeral ex-
penses for the employee’s deceased parent,
spouse, children or dependents (as defined
in section 152, and, for taxable years be-
ginning on or after January 1, 2005, with-
out regard to section 152(d)(1)(B)); or
(6) Expenses for the repair of damage
to the employee’s principal residence that
would qualify for the casualty deduction
under section 165 (determined without re-
gard to whether the loss exceeds 10% of
adjusted gross income).
(iv)Distribution necessary to satisfy fi-
nancial need—(A)Distribution may not
exceed amount of need. A distribution
is treated as necessary to satisfy an im-
mediate and heavy financial need of an
employee only to the extent the amount
of the distribution is not in excess of the
amount required to satisfy the financial
need. For this purpose, the amount re-
quired to satisfy the financial need may in-
clude any amounts necessary to pay any
federal, state, or local income taxes or
penalties reasonably anticipated to result
from the distribution.
(B)No alternative means available.A
distribution is not treated as necessary to
satisfy an immediate and heavy financial
need of an employee to the extent the
need may be relieved from other resources
that are reasonably available to the em-
ployee. This determination generally is to
be made on the basis of all the relevant
facts and circumstances. For purposes of
this paragraph (d)(3)(iv), the employee’s
resources are deemed to include those
assets of the employee’s spouse and mi-
nor children that are reasonably available
to the employee. Thus, for example, a
vacation home owned by the employee
and the employee’s spouse, whether as
community property, joint tenants, tenants
by the entirety, or tenants in common,
generally will be deemed a resource of
January 31, 20054022005–5 I.R.B.

the employee. However, property held for
the employee’s childunder an irrevocable
trust or under the Uniform Gifts to Mi-
nors Act (or comparable State law) is not
treated as a resource of the employee.
(C)Employer reliance on employee
representation. For purposes of paragraph
(d)(3)(iv)(B) of this section, an immediate
and heavy financial need generally may
be treated as not capable of being relieved
from other resourcesthat are reasonably
available to the employee, if the employer
relies upon the employee’s representation
(madeinwritingorsuchotherformas
may be prescribed by the Commissioner),
unless the employer has actual knowledge
to the contrary, that the need cannot rea-
sonably be relieved—
(1) Through reimbursement or compen-
sation by insurance or otherwise;
(2) By liquidation of the employee’s as-
sets;
(3) By cessation of elective contribu-
tions or employee contributions under the
plan;
(4) By other currently available distri-
butions (including distribution of ESOP
dividends under section 404(k)) and non-
taxable(atthetimeoftheloan)loans,un-
der plans maintained by the employer or by
any other employer; or
(5) By borrowing from commercial
sources on reasonable commercial terms
in an amount sufficient to satisfy the need.
(D)Employee need not take counter-
productive actions. For purposes of this
paragraph (d)(3)(iv), a need cannot reason-
ably be relieved by one of the actions de-
scribed in paragraph (d)(3)(iv)(C) of this
section if the effect would be to increase
the amount of the need. For example, the
need for funds to purchase a principal res-
idence cannot reasonably be relieved by a
plan loan if the loan would disqualify the
employee from obtaining other necessary
financing.
(E)Distribution deemed necessary to
satisfy immediate and heavy financial
need. A distribution is deemed necessary
to satisfy an immediate and heavy finan-
cial need of an employee if each of the
following requirements are satisfied—
(1) The employee has obtained all other
currently available distributions (including
distribution of ESOP dividends under sec-
tion 404(k), but not hardship distributions)
and nontaxable (at the time of the loan)
loans, under the plan and all other plans
maintained by the employer; and
(2) The employee is prohibited, un-
der the terms of the plan or an otherwise
legally enforceable agreement, from mak-
ing elective contributions and employee
contributions to the plan and all other
plans maintained by the employer for at
least 6 months after receipt of the hardship
distribution.
(F)Definition of other plans. For pur-
poses of paragraph (d)(3)(iv)(C)(4)and
(E)(1) of this section, the phraseplans
maintained by the employermeans all
qualified and nonqualified plans of de-
ferred compensation maintained by the
employer, including a cash or deferred
arrangement that is part of a cafeteria plan
within the meaning of section 125. How-
ever, it does not include the mandatory
employee contribution portion of a de-
fined benefit plan or a health or welfare
benefit plan (including one that is part
of a cafeteria plan). In addition, for pur-
poses of paragraph (d)(3)(iv)(E)(2)ofthis
section, the phraseplans maintained by
the employeralso includes a stock option,
stock purchase, or similar plan maintained
by the employer. See §1.401(k)–6 for the
continued treatment of suspended employ-
ees as eligible employees.
(v)Commissioner may expand stan-
dards. The Commissioner may prescribe
additional guidance of general applicabil-
ity, published in the Internal Revenue Bul-
letin (see 601.601(d)(2) of this chapter),
expanding the list of deemed immediate
and heavy financial needs and prescribing
additional methods for distributions to be
deemed necessary to satisfy an immediate
and heavy financial need.
(4)Rules applicable to distributions
upon plan termination—(i)No alternative
defined contribution plan.Adistribu-
tion may not be made under paragraph
(d)(1)(iii) of this section if the employer
establishes or maintains an alternative
defined contribution plan. For purposes
of the preceding sentence, the defini-
tion of the term “employer” contained in
§1.401(k)–6 is applied as of the date of
plan termination, and a plan is an alterna-
tive defined contribution plan only if it is
a defined contribution plan that exists at
any time during the period beginning on
the date of plan termination and ending
12 months after distribution of all assets
from the terminated plan. However, if
at all times during the 24-month period
beginning 12 months before the date of
plan termination, fewer than 2% of the
employees who were eligible under the
defined contribution plan that includes
the cash or deferred arrangement as of
the date of plan termination are eligible
under the other defined contribution plan,
the other plan is not an alternative defined
contribution plan. In addition, a defined
contribution plan is not treated as an al-
ternative defined contribution plan if it
is an employee stock ownership plan as
defined in section 4975(e)(7) or 409(a), a
simplified employee pension as defined
in section 408(k), a SIMPLE IRA plan
as defined in section 408(p), a plan or
contract that satisfies the requirements of
section 403(b), or a plan that is described
in section 457(b) or (f).
(ii)Lump sum requirement for cer-
tain distributions. A distribution may
be made under paragraph (d)(1)(iii) of
this section only if it is a lump sum dis-
tribution. The term lump sum distribu-
tion has the meaning provided in section
402(e)(4)(D) (without regard to section
402(e)(4)(D)(i)(I), (II), (III) and (IV)). In
addition, a lump sum distribution includes
a distribution of an annuity contract from
a trust that is part of a plan described in
section 401(a) and which is exempt from
tax under section 501(a) or an annuity plan
described in 403(a).
(5)Rules applicable to all distribu-
tions—(i)Exclusive distribution rules.
Amounts attributable to elective contribu-
tions may not be distributed on account of
any event not described in this paragraph
(d), such as completion of a stated period
of plan participation or the lapse of a fixed
number of years. For example, if excess
deferrals (and income) for an employee’s
taxable year are not distributed within
the time prescribed in §1.402(g)–1(e)(2)
or (3), the amounts may be distributed
only on account of an event described in
this paragraph (d). Pursuant to section
401(k)(8), the prohibition on distributions
set forth in this section does not apply to a
distribution of excess contributions under
§1.401(k)–2(b).
(ii)Deemed distributions.Thecostof
life insurance (determined under section
72) is not treated as a distribution for pur-
poses of section 401(k)(2) and this para-
graph (d). The making of a loan is not
treated as a distribution, even if the loan
2005–5 I.R.B.403January 31, 2005

is secured by the employee’s accrued ben-
efit attributable to elective contributions or
is includible in the employee’s income un-
der section 72(p). However, the reduc-
tion, by reason of default on a loan, of an
employee’s accrued benefit derived from
elective contributions is treated as a distri-
bution.
(iii)ESOP dividend distributions.A
plan does not fail to satisfy the require-
ments of this paragraph (d) merely by rea-
son of a dividend distribution described in
section 404(k)(2).
(iv)Limitations apply after transfer.
The limitations of this paragraph (d)
generally continue to apply to amounts
attributable to elective contributions (in-
cluding QNECs and qualified matching
contributions taken into account for the
ADP test under §1.401(k)–2(a)(6)) that
are transferred to another qualified plan
of the same or another employer. Thus,
the transferee plan will generally fail to
satisfy the requirements of section 401(a)
and this section if transferred amounts may
be distributed before the times specified
in this paragraph (d). In addition, a cash
or deferred arrangement fails to satisfy
the limitations of this paragraph (d) if it
transfers amounts to a plan that does not
provide that the transferred amounts may
not be distributed before the times speci-
fied in this paragraph (d). The transferor
plan does not fail to comply with the pre-
ceding sentence if it reasonably concludes
that the transferee plan provides that
the transferred amounts may not be dis-
tributed before the times specified in this
paragraph (d). What constitutes a basis
for a reasonable conclusion is determined
under standards comparable to those under
the rules related to acceptance of rollover
distributions. See §1.401(a)(31)–1, A–14.
The limitations of this paragraph (d) cease
to apply after the transfer, however, if
the amounts could have been distributed
at the time of the transfer (other than on
account of hardship), and the transfer is an
elective transfer described in §1.411(d)–4,
Q&A–3(b)(1). The limitations of this
paragraph (d) also do not apply to amounts
that have been paid in a direct rollover to
the plan after being distributed by another
plan.
(6)Examples. The following examples
illustrate the application of this paragraph
(d):
Example 1. Employer M maintains Plan V, a
profit-sharing plan that includes a cash or deferred
arrangement. Elective contributions under the ar-
rangement may be withdrawn for any reason after
two years following the end of the plan year in which
the contributions were made. Because the plan per-
mits distributions of elective contributions before the
occurrence of one of the events specified in section
401(k)(2)(B) and this paragraph (d), the cash or de-
ferred arrangement is a nonqualified cash or deferred
arrangement and the elective contributions are cur-
rently includible in income under section 402.
Example 2. (i) Employer N maintains Plan W, a
profit-sharing plan that includes a cash or deferred
arrangement. Plan W provides for distributions upon
a participant’s severancefrom employment, death
or disability. All employees of Employer N and its
wholly owned subsidiary, Employer O, are eligible
to participate in Plan W. Employer N agrees to sell
all issued and outstanding shares of Employer O to
an unrelated entity, Employer T, effective on Decem-
ber 31, 2006. Following the transaction, Employer
O will be a wholly owned subsidiary of Employer
T. Additionally, individuals who are employed by
Employer O on the effective date of the sale con-
tinue to be employed by Employer O following the
sale. Following the transaction, all employees of
Employer O will cease to participate in Plan W and
will become eligible to participate in the cash or
deferred arrangement maintained by Employer T,
Plan X. No assets will be transferred from Plan W to
Plan X, except in the case of a direct rollover within
the meaning of section 401(a)(31).
(ii) Employer O ceases to be a member of Em-
ployer N’s controlled group as a result of the sale.
Therefore, employees of Employer O who partici-
pated in Plan W will have a severance from employ-
ment and are eligible to receive a distribution from
Plan W.
Example 3. (i) Employer Q maintains Plan Y, a
profit-sharing plan that includes a cash or deferred ar-
rangement. Plan Y, the only plan maintained by Em-
ployer Q, does not provide for loans. However, Plan
Y provides that elective contributions under the ar-
rangement may be distributed to an eligible employee
on account of hardship using the deemed immedi-
ate and heavy financial need provisions of paragraph
(d)(3)(iii)(B) of this section and provisions regard-
ing distributions necessary to satisfy financial need of
paragraphs (d)(3)(iv)(A) through (D) of this section.
Employee A is an eligible employee in Plan Y with
an account balance of $50,000 attributable to elective
contributions made by Employee A. The total amount
of elective contributions made by Employee A, who
has not previously received a distribution from Plan
Y, is $20,000. Employee A requests a $15,000 hard-
ship distribution of his elective contributions to pay
6 months of college tuition and room and board ex-
penses for his dependent. At the time of the distribu-
tion request, the sole asset of Employee A (that is rea-
sonably available to Employee A within the meaning
of paragraph (d)(3)(iv)(B) of this section) is a savings
account with an available balance of $10,000.
(ii) A distribution is made on account of hardship
only if the distribution both is made on account of an
immediate and heavy financial need of the employee
and is necessary to satisfy the financial need. Under
paragraph (d)(3)(iii)(B) of this section, a distribution
for payment of up to the next 12 months of post-sec-
ondary education and room and board expenses for
Employee A’s dependent is deemed to be on account
of an immediate and heavy financial need of Em-
ployee A.
(iii) A distribution is treated as necessary to sat-
isfy Employee A’s immediate and heavy financial
need to the extent the need may not be relieved from
other resources reasonably available to Employee A.
Under paragraph (d)(3)(iv)(B) of this section, Em-
ployee A’s $10,000 savings account is a resource that
is reasonably available to the employee and must be
taken into account in determining the amount neces-
sary to satisfy Employee A’s immediate and heavy
financial need. Thus, Employee A may receive a dis-
tribution of only $5,000 of his elective contributions
on account of this hardship, plus an amount neces-
sary to pay any federal, state, or local income taxes
or penalties reasonably anticipated to result from the
distribution.
Example 4. (i) The facts are the same as inEx-
ample 3. Employee B, another employee of Em-
ployer Q has an account balance of $25,000, attrib-
utable to Employee B’s elective contributions. The
total amount of elective contributions made by Em-
ployee B, who has not previously received a distribu-
tion from Plan Y, is $15,000. Employee B requests
a $10,000 distribution of his elective contributions to
pay 6 months of college tuition and room and board
expenses for his child. Employee B makes a writ-
ten representation (with respect to which Employer
Q has no actual knowledge to the contrary) that the
need cannot reasonably be relieved:
A) Through reimbursement or compensation by
insurance or otherwise;
B) By liquidation of the employee’s assets;
C) By cessation of elective contributions or em-
ployee contributions under the plan;
D) By other distributions or nontaxable (at the
time of the loan) loans from plans maintained by the
employer or by any other employer; or
E) By borrowing from commercial sources on
reasonable commercial terms in an amount sufficient
to satisfy the need.
(ii) Under paragraph (d)(3)(iii)(B) of this section,
a distribution for payment of up to the next 12 months
of post-secondary education and room and board ex-
penses for Employee B’s child is deemed to be on
account of an Employee B’s immediate and heavy fi-
nancial need. In addition, because Employer Q can
rely on Employee B’s written representation, the dis-
tribution is considered necessary to satisfy Employee
B’s immediate and heavy financial need. Therefore,
Employee B may receive a $10,000 distribution of his
elective contributions on account of hardship plus an
amount necessary to pay any federal, state, or local
income taxes or penalties reasonably anticipated to
result from the distribution.
Example 5. (i)Thefactsarethesameasin
Example 3, except Plan Y provides for hardship
distributions using the safe harbor rule of paragraph
(d)(3)(iv)(E) of this section. Accordingly, Plan Y
provides for a 6 month suspension of an eligible
employee’s elective contributions and employee
contributions to the plan after the receipt of a hard-
ship distribution by such eligible employee.
(ii) Under paragraph (d)(3)(iii)(B) of this section,
a distribution for payment of up to the next 12 months
of post-secondary education and room and board ex-
penses for Employee A’s dependent is deemed to be
January 31, 20054042005–5 I.R.B.

on account of an Employee A’s immediate and heavy
financial need. In addition, because Employee A is
not eligible for any other distribution or loan from
Plan Y and Plan Y suspends Employee A’s elective
contributions and employee contributions following
receipt of the hardship distribution, the distribution
will be deemed necessary to satisfy Employee A’s im-
mediate and heavy financial need (and Employee A
is not required to first liquidate his savings account).
Therefore, Employee A may receive a $15,000 dis-
tribution of his elective contributions on account of
hardship plus an amount necessary to pay any fed-
eral, state, or local income taxes or penalties reason-
ably anticipated to result from the distribution.
Example 6. Employer R maintains a pre-ERISA
money purchase pension plan that includes a cash
or deferred arrangement that is not a rural coopera-
tive plan. Elective contributions under the arrange-
ment may be distributed to an employee on account
of hardship. Under paragraph (d)(1) of this section,
hardship is a permissible distribution event only in a
profit-sharing, stock bonus or rural cooperative plan.
Since elective contributions under the arrangement
may be distributed before a permissible distribution
event occurs, the cash or deferred arrangement does
not satisfy this paragraph (d), and is not a qualified
cash or deferred arrangement. Moreover, the plan is
not a qualified plan becausea money purchase pen-
sion plan may not provide for payment of benefits
upon hardship. See §1.401–1(b)(1)(i).
(e)Additional requirements for quali-
fied cash or deferred arrangements—(1)
Qualified plan requirement. A cash or de-
ferred arrangement satisfies this paragraph
(e) only if the plan of which it is a part is
a profit-sharing, stock bonus, pre-ERISA
money purchase or rural cooperative plan
that otherwise satisfies the requirements
of section 401(a) (taking into account the
cash or deferred arrangement). A plan that
includes a cash or deferred arrangement
may provide for other contributions, in-
cluding employer contributions (other than
elective contributions), employee contri-
butions, or both. However, except as ex-
pressly permitted under section 401(m),
410(b)(2)(A)(ii) or 416(c)(2)(A), elective
contributions and matching contributions
taken into account under §1.401(k)–2(a)
may not be taken into account for purposes
of determining whether any other contri-
butions under any plan (including the plan
to which the contributions are made) sat-
isfy the requirements of section 401(a).
(2)Election requirements—(i)Cash
must be available. A cash or deferred
arrangement satisfies this paragraph (e)
only if the arrangement provides that the
amount that each eligible employee may
defer as an elective contribution is avail-
able to the employee in cash. Thus, for ex-
ample, if an eligible employee is provided
the option to receive a taxable benefit
(other than cash) or to have the employer
contribute on the employee’s behalf to a
profit-sharing plan an amount equal to the
value of the taxable benefit, the arrange-
ment is not a qualified cash or deferred ar-
rangement. Similarly, if an employee has
the option to receive a specified amount
in cash or to have the employer contribute
an amount in excess of the specified cash
amount to a profit-sharing plan on the
employee’s behalf, any contribution made
by the employer on the employee’s behalf
in excess of the specified cash amount is
not treated as made pursuant to a qualified
cash or deferred arrangement, but would
be treated as a matching contribution. This
cash availability requirement applies even
if the cash or deferred arrangement is part
of a cafeteria plan within the meaning of
section 125.
(ii)Frequency of elections. A cash or
deferred arrangement satisfies this para-
graph (e) only if the arrangement provides
an employee with an effective opportunity
to make (or change) a cash or deferred
election at least once during each plan year.
Whether an employee has an effective op-
portunity is determined based on all the
relevant facts and circumstances, includ-
ing the adequacy of notice of the availabil-
ity of the election, the period of time dur-
ing which an election may be made, and
any other conditions on elections.
(3)Separate accounting require-
ment—(i)General rule. A cash or de-
ferred arrangement satisfies this paragraph
(e)onlyiftheportionofanemployee’s
benefit subject to the requirements of
paragraphs (c) and (d) of this section is
determined by an acceptable separate ac-
counting between that portion and any
other benefits. Separate accounting is
not acceptable unless contributions and
withdrawals are attributed to the sepa-
rate accounts and gains, losses, and other
credits or charges are separately allocated
on a reasonable and consistent basis to
the accounts subject to the requirements
of paragraphs (c) and (d) of this section
and to other accounts.Subject to section
401(a)(4), forfeitures are not required to
be allocated to the accounts in which ben-
efits are subject to paragraphs (c) and (d)
of this section. The separate accounting
requirement of this paragraph (e)(3)(i) ap-
plies at the time the elective contribution
is contributed to the plan and continues to
apply until the contribution is distributed
under the plan.
(ii)Satisfaction of separate accounting
requirement. The requirements of para-
graph (e)(3)(i) of this section are treated as
satisfied if all amounts held under a plan
that includes a qualified cash or deferred
arrangement (and, if applicable, under an-
other plan to which QNECs and QMACs
are made) are subject to the requirements
of paragraphs (c) and (d) of this section.
(4)Limitations on cash or deferred
arrangements of state and local gov-
ernments—(i)General rule. A cash or
deferred arrangement does not satisfy the
requirements of this paragraph (e) if the
arrangement is adoptedafterMay6,1986,
by a State or local government or polit-
ical subdivision thereof, or any agency
or instrumentality thereof (a governmen-
tal unit). For purposes of this paragraph
(e)(4), an employer that has made a legally
binding commitment to adopt a cash or
deferred arrangement is treated as having
adopted the arrangement on that date.
(ii)Rural cooperative plans and Indian
tribal governments. This paragraph (e)(4)
does not apply to a rural cooperative plan
or to a plan of an employer which is an In-
dian tribal government (as defined in sec-
tion 7701(a)(40)), a subdivision of an In-
dian tribal government (determined in ac-
cordance with section 7871(d)), an agency
or instrumentality of an Indian tribal gov-
ernment or subdivision thereof, or a cor-
poration chartered under Federal, State or
tribal law which is owned in whole or in
part by any of the entities in this paragraph
(e)(4)(ii).
(iii)Adoption after May 6, 1986.A
cash or deferred arrangement is treated as
adopted after May 6, 1986, with respect to
all employees of any employer that adopts
the arrangement after such date.
(iv)Adoption before May 7, 1986.If
a governmental unit adopted a cash or
deferred arrangement before May 7, 1986,
then any cash or deferred arrangement
adopted by the unit at any time is treated
as adopted before that date. If an employer
adopted an arrangement prior to such date,
all employees of the employer may partic-
ipate in the arrangement.
(5)One-year eligibility requirement.A
cash or deferred arrangement satisfies this
paragraph (e) only if no employee is re-
quired to complete a period of service with
the employer maintaining the plan extend-
2005–5 I.R.B.405January 31, 2005

ing beyond the period permitted under sec-
tion 410(a)(1) (determined without regard
to section 410(a)(1)(B)(i)) to be eligible to
make a cash or deferred election under the
arrangement.
(6)Other benefits not contingent upon
elective contributions—(i)General rule.
A cash or deferred arrangement satisfies
this paragraph (e) only if no other benefit
is conditioned (directly or indirectly) upon
the employee’s electing to make or not to
make elective contributions under the ar-
rangement. The preceding sentence does
notapplyto—
(A) Any matching contribution (as de-
fined in §1.401(m)–1(a)(2)) made by rea-
sonofsuchanelection;
(B) Any benefit, right or feature (such
as a plan loan) that requires, or results in,
an amount to be withheld from an em-
ployee’s pay (e.g., to pay for the benefit or
to repay the loan), to the extent the cash
or deferred arrangement restricts elective
contributions to amounts available after
such withholding from the employee’s pay
(after deduction of all applicable income
and employment taxes);
(C) Any reduction in the employer’s
top-heavy contributions under section
416(c)(2) because of matching contri-
butions that resulted from the elective
contributions; or
(D) Any benefit that is provided at
the employee’s election under a plan de-
scribedinsection125(d)inlieuofan
elective contribution under a qualified
cash or deferred arrangement.
(ii)Definition of other benefits. For pur-
poses of this paragraph (e)(6), other bene-
fits include, but are not limited to, benefits
under a defined benefit plan; nonelective
contributions under a defined contribution
plan; the availability, cost, or amount of
health benefits; vacations or vacation pay;
life insurance; dental plans; legal services
plans; loans (including plan loans); finan-
cial planning services; subsidized retire-
ment benefits; stock options; property sub-
ject to section 83; and dependent care as-
sistance. Also, increases in salary, bonuses
or other cash remuneration (other than the
amount that would be contributed under
the cash or deferred election) are benefits
for purposes of this paragraph (e)(6). The
ability to make after-tax employee con-
tributions is a benefit, but that benefit is
not contingent upon an employee’s elect-
ing to make or not make elective con-
tributions under the arrangement merely
because the amount of elective contribu-
tions reduces dollar-for-dollar the amount
of after-tax employee contributions that
may be made. Additionally, benefits under
any other plan or arrangement (whether
or not qualified) are not contingent upon
an employee’s electing to make or not to
make elective contributions under a cash
or deferred arrangement merely because
the elective contributions are or are not
taken into account as compensation under
the other plan or arrangement for purposes
of determining benefits.
(iii)Effect of certain statutory limits.
Any benefit under an excess benefit plan
described in section 3(36) of the Employee
Retirement Income Security Act of 1974
(88 Stat. 829), Public Law 93–406, that
is dependent on the employee’s electing to
make or not to make elective contributions
is not treated as contingent. Deferred com-
pensation under a nonqualified plan of de-
ferred compensation that is dependent on
an employee’s having made the maximum
elective deferrals under section 402(g) or
the maximum elective contributions per-
mitted under the terms of the plan also is
not treated as contingent.
(iv)Nonqualified deferred compensa-
tion. Except as otherwise provided in para-
graph (e)(6)(iii) of this section, participa-
tion in a nonqualified deferred compensa-
tion plan is treated as contingent for pur-
poses of this paragraph (e)(6) to the extent
that an employee may receive additional
deferred compensation under the nonqual-
ified plan to the extent the employee makes
or does not make elective contributions.
(v)Plan loans and distributions.Aloan
or distribution of elective contributions is
not a benefit conditioned on an employee’s
electing to make or not make elective con-
tributions under the arrangement merely
because the amount of the loan or distri-
bution is based on the amount of the em-
ployee’s account balance.
(vi)Examples. The following examples
illustrate the application of this paragraph
(e)(6):
Example 1. Employer T maintains a cash or de-
ferred arrangement for all of its employees. Em-
ployer T also maintains a nonqualified deferred com-
pensation plan for two highly paid executives, Em-
ployees R and C. Under the terms of the nonqualified
deferred compensation plan, R and C are eligible to
participate only if they do not make elective contribu-
tions under the cash or deferred arrangement. Partici-
pation in the nonqualified plan is a contingent benefit
for purposes of this paragraph (e)(6), because R’s and
C’s participation is conditioned on their electing not
to make elective contributions under the cash or de-
ferred arrangement.
Example 2. Employer T maintains a cash or de-
ferred arrangement for all its employees. Employer T
also maintains a nonqualified deferred compensation
plan for two highly paid executives, Employees R and
C. Under the terms of the arrangements, Employees
R and C may defer a maximum of 10% of their com-
pensation, and may allocate their deferral between
the cash or deferred arrangement and the nonqualified
deferred compensation plan in any way they choose
(subject to the overall 10% maximum). Because the
maximum deferral available under the nonqualified
deferred compensation plan depends on the elective
deferrals made under the cash or deferred arrange-
ment, the right to participate in the nonqualified plan
is a contingent benefit for purposes of this paragraph
(e)(6).
(7)Plan provision requirement.Aplan
that includes a cash or deferred arrange-
ment satisfies this paragraph (e) only if
it provides that the nondiscrimination re-
quirements of section 401(k) will be met.
Thus, the plan must provide for satisfac-
tion of one of the specific alternatives de-
scribed in paragraph (b)(1)(ii) of this sec-
tion and, if with respect to that alterna-
tive there are optional choices, which of
the optional choices will apply. For exam-
ple, a plan that uses the ADP test of sec-
tion 401(k)(3), as described in paragraph
(b)(1)(ii)(A) of this section, must specify
whether it is using the current year testing
method or prior year testing method. Ad-
ditionally, a plan that uses the prior year
testing method must specify whether the
ADP for eligible NHCEs for the first plan
year is 3% or the ADP for the eligible
NHCEs for the first plan year. Similarly,
a plan that uses the safe harbor method of
section 401(k)(12), as described in para-
graph (b)(1)(ii)(B) of this section, must
specify whether the safe harbor contribu-
tion will be the nonelective safe harbor
contribution or the matching safe harbor
contribution and is not permitted to pro-
vide that ADP testing will be used if the
requirements for the safe harbor are not
satisfied. For purposes of this paragraph
(e)(7), a plan may incorporate by refer-
ence the provisions of section 401(k)(3)
and §1.401(k)–2 if that is the nondiscrim-
ination test being applied. The Commis-
sioner may, in guidance of general appli-
cability, published in the Internal Revenue
Bulletin (see §601.601(d)(2) of this chap-
ter), specify the options that will apply un-
der the plan if the nondiscrimination test
January 31, 20054062005–5 I.R.B.

is incorporated by reference in accordance
with the preceding sentence.
(f)Special rules for designated Roth
contributions.[Reserved].
(g)Effective dates—(1)General rule.
Except as otherwise provided in this para-
graph (g), this section and §§1.401(k)–2
through 1.401(k)–6 apply to plan years that
begin on or after January 1, 2006.
(2)Early implementation permitted.
A plan is permitted to apply the rules of
this section and §§1.401(k)–2 through
1.401(k)–6 to any plan year that ends
after December 29, 2004, provided the
plan applies all the rules of this section
and §§1.401(k)–2 through 1.401(k)–6 and
all the rules of §§1.401(m)–1 through
1.401(m)–5, to the extent applicable, for
that plan year and all subsequent plan
years.
(3)Collectively bargained plans.In
the case of a plan maintained pursuant to
one or more collective bargaining agree-
ments between employee representatives
and one or more employers in effect on
the date described in paragraph (g)(1) of
this section, the provisions of this section
and §§1.401(k)–2 through 1.401(k)–6 ap-
ply to the later of the first plan year begin-
ning after the termination of the last such
agreement or the first plan year described
in paragraph (g)(1) of this section.
(4)Applicability of prior regulations.
For any plan year before a plan applies
this section and §§1.401(k)–2 through
1.401(k)–6 (either the first plan year be-
ginningonorafterJanuary1,2006,or
such earlier year, as provided in paragraph
(g)(2) of this section), §1.401(k)–1 (as
it appeared in the April 1, 2004, edition
of 26 CFR part 1) applies to the plan to
the extent that section, as it so appears,
reflects the statutory provisions of section
401(k) as in effect for the relevant year.
§1.401(k)–2 ADP test.
(a)Actual deferral percentage (ADP)
test—(1)In general—(i)ADP test for-
mula. A cash or deferred arrangement
satisfies the ADP test for a plan year only
if—
(A) The ADP for the eligible HCEs for
the plan year is not more than the ADP for
the eligible NHCEs for the applicable year
multiplied by 1.25; or
(B) The excess of the ADP for the eligi-
ble HCEs for the plan year over the ADP
for the eligible NHCEs for the applicable
year is not more than 2 percentage points,
and the ADP for the eligible HCEs for the
plan year is not more than the ADP for
the eligible NHCEs for the applicable year
multiplied by 2.
(ii)HCEs as sole eligible employees.
If, for the applicableyear for determining
the ADP of the NHCEs for a plan year,
there are no eligible NHCEs (i.e, all of the
eligible employees under the cash or de-
ferred arrangement for the applicable year
are HCEs), the arrangement is deemed to
satisfy the ADP test for the plan year.
(iii)Special rule for early participation.
If a cash or deferred arrangement provides
that employees are eligible to participate
before they have completed the minimum
age and service requirements of section
410(a)(1)(A), and if the plan applies sec-
tion 410(b)(4)(B) in determining whether
the cash or deferred arrangement meets
the requirements of section 410(b)(1), then
in determining whether the arrangement
meets the requirements under paragraph
(a)(1) of this section, either—
(A) Pursuant to section 401(k)(3)(F),
the ADP test is performed under the plan
(determined without regard to disaggrega-
tion under §1.410(b)–7(c)(3)), using the
ADP for all eligible HCEs for the plan year
and the ADP of eligible NHCEs for the ap-
plicable year, disregarding all NHCEs who
have not met the minimum age and service
requirements of section 410(a)(1)(A); or
(B) Pursuant to §1.401(k)–1(b)(4), the
plan is disaggregated into separate plans
and the ADP test is performed separately
for all eligible employees who have com-
pleted the minimum age and service re-
quirements of section 410(a)(1)(A) and for
all eligible employees who have not com-
pleted the minimum age and service re-
quirements of section 410(a)(1)(A).
(2)Determination of ADP—(i)General
rule. The ADP for a group of eligible em-
ployees (either eligible HCEs or eligible
NHCEs) for a plan year or applicable year
is the average of the ADRs of the eligi-
ble employees in that group for that year.
The ADP for a group of eligible employ-
ees is calculated to the nearest hundredth
of a percentage point.
(ii)Determination of applicable year
under current year and prior year testing
method. The ADP test is applied using
the prior year testing method or the current
year testing method. Under the prior year
testing method, the applicable year for de-
termining the ADP for the eligible NHCEs
is the plan year immediately preceding the
plan year for which the ADP test is being
performed. Under the prior year testing
method, the ADP for the eligible NHCEs
is determined using the ADRs for the eli-
gible employees who were NHCEs in that
preceding plan year, regardless of whether
those NHCEs are eligible employees or
NHCEs in the plan year for which the ADP
test is being calculated. Under the cur-
rent year testing method, the applicable
year for determining the ADP for the eli-
gible NHCEs is the same plan year as the
plan year for which the ADP test is be-
ing performed. Undereither method, the
ADP for eligible HCEs is the average of
the ADRs of the eligible HCEs for the plan
year for which the ADP test is being per-
formed. See paragraph (c) of this section
for additional rules for the prior year test-
ing method.
(3)Determination of ADR—(i)General
rule. The ADR of an eligible employee for
a plan year or applicable year is the sum
of the employee’s elective contributions
taken into account with respect to such em-
ployee for the year, determined under the
rules of paragraphs (a)(4) and (5) of this
section, and the qualified nonelective con-
tributions and qualified matching contri-
butions taken into account with respect to
such employee under paragraph (a)(6) of
this section for the year, divided by the
employee’s compensation taken into ac-
count for the year. The ADR is calculated
to the nearest hundredth of a percentage
point. If no elective contributions, quali-
fied nonelective contributions, or qualified
matching contributions are taken into ac-
count under this section with respect to an
eligible employee for the year, the ADR of
the employee is zero.
(ii)ADR of HCEs eligible under more
than one arrangement—(A)General rule.
Pursuant to section 401(k)(3)(A), the ADR
of an HCE who is an eligible employee in
more than one cash or deferred arrange-
ment of the same employer is calculated
by treating all contributions with respect
to such HCE under any such arrange-
ment as being made under the cash or
deferred arrangement being tested. Thus,
the ADR for such an HCE is calculated by
accumulating all contributions under any
cash or deferred arrangement (other than
a cash or deferred arrangement described
2005–5 I.R.B.407January 31, 2005

in paragraph (a)(3)(ii)(B) of this section)
that would be taken into account under
this section for the plan year, if the cash
or deferred arrangement under which the
contribution was made applied this section
and had the same plan year. For exam-
ple, in the case of a plan with a 12-month
plan year, the ADR for the plan year of
that plan for an HCE who participates in
multiple cash or deferred arrangements of
the same employer is the sum of all contri-
butions during such 12-month period that
would be taken into account with respect
to the HCE under all such arrangements in
which the HCE is an eligible employee, di-
vided by the HCE’s compensation for that
12-month period (determined using the
compensation definition for the plan being
tested), without regard to the plan year of
the other plans and whether those plans
are satisfying this section or §1.401(k)–3.
(B)Plans not permitted to be aggre-
gated. Cash or deferred arrangements
under plans that are not permitted to
be aggregated under §1.401(k)–1(b)(4)
(determined without regard to the pro-
hibition on aggregating plans with in-
consistent testing methods set forth in
§1.401(k)–1(b)(4)(iii)(B) and the prohibi-
tion on aggregating plans with different
plan years set forth in §1.410(b)–7(d)(5))
are not aggregated under this paragraph
(a)(3)(ii).
(iii)Examples. The following examples
illustrate the application of this paragraph
(a)(3):
Example 1. (i) Employee A, an HCE with com-
pensation of $120,000, is eligible to make elective
contributions under Plan S and Plan T, two profit-
sharing plans maintained by Employer H with calen-
dar year plan years, each of which includes a cash or
deferred arrangement. During the current plan year,
Employee A makes elective contributions of $6,000
to Plan S and $4,000 to Plan T.
(ii) Under each plan, the ADR for Employee A is
determined by dividing Employee A’s total elective
contributions under both arrangements by Employee
A’s compensation taken into account under the plan
for the year. Therefore, Employee A’s ADR under
each plan is 8.33% ($10,000/$120,000).
Example 2. (i) The facts are the same as inExam-
ple 1, except that Plan T defines compensation (for
deferral and testing purposes) to exclude all bonuses
paid to an employee. Plan S defines compensation
(for deferral and testing purposes) to include bonuses
paid to an employee. During the current year, Em-
ployee A’s compensation included a $10,000 bonus.
Therefore, Employee A’s compensation under Plan T
is $110,000 and Employee A’s compensation under
Plan S is $120,000.
(ii) Employee A’s ADR under Plan T is 9.09%
($10,000/$110,000) and under Plan S, Employee A’s
ADR is 8.33% ($10,000/$120,000).
Example 3. (i) Employer J sponsors two profit-
sharing plans, Plan U and Plan V, each of which in-
cludes a cash or deferred arrangement. Plan U’s plan
year begins on July 1 and ends on June 30. Plan V
has a calendar year plan year. Compensation under
both plans is limited to the participant’s compensa-
tion during the period of participation. Employee B
is an HCE who participates in both plans. Employee
B’s monthly compensation and elective contributions
to each plan for the 2005 and 2006 calendar years are
as follows:
Calendar yearMonthly CompensationMonthly Elective Contribution to Plan UMonthly Elective Contribution to Plan V
2005
$10,000$500$400
2006
$11,500$700$550
(ii) Under Plan U, Employee B’s ADR for the
plan year ended June 30, 2006, is equal to Employee
B
’s total elective contributions under Plan U and Plan
V for the plan year ending June 30, 2006, divided by
Employee B’s compensation for that period. There-
f
ore, Employee B’s ADR under Plan U for the plan
year ending June 30, 2006, is (($900 x 6) + ($1,250 x
6)) / (($10,000 x 6) + ($11,500 x 6)), or 10%.
(
iii) Under Plan V, Employee B’s ADR for the
plan year ended December 31, 2005, is equal to to-
tal elective contributions under Plan U and V for the
plan year ending December 31, 2005, divided by Em-
ployee B’s compensation for that period. Therefore,
Employee B’s ADR under Plan V for the plan year
ending December 31, 2005, is ($10,800/$120,000),
or 9%.
Example 4. (i) The facts are the same asExample
3, except that Employee B first becomes eligible to
participate in Plan U on January 1, 2006.
(ii) Under Plan U, Employee B’s ADR for the
plan year ended June 30, 2006, is equal to Employee
B’s total elective contributions under Plan U and V
for the plan year ending June 30, 2006, divided by
Employee B’s compensation for that period. There-
fore, Employee B’s ADR under Plan U for the plan
year ending June 30, 2006, is (($400 x 6)+ ($1,250 x
6)) / (($10,000 x 6) + ($11,500 x 6)), or 7.67%.
(4)Elective contributions taken into
account under the ADP test—(i)General
rule. An elective contribution is taken into
account in determining the ADR for an
eligible employee for a plan year or ap-
plicable year only ifeach of the following
requirements is satisfied—
(A) The elective contribution is allo-
cated to the eligible employee’s account
under the plan as of a date within that year.
For purposes of this rule, an elective con-
tribution is considered allocated as of a
date within a year only if—
(1) The allocation is not contingent on
the employee’s participation in the plan or
performance of services on any date sub-
sequent to that date; and
(2) The elective contribution is actually
paid to the trust no later than the end of
the 12-month period immediately follow-
ing the year to which the contribution re-
lates.
(B) The elective contribution relates to
compensation that either—
(1) Would have been received by the
employee in the year but for the em-
ployee’s election to defer under the ar-
rangement; or
(2) Is attributable to services performed
by the employee in the year and, but for
the employee’s election to defer, would
have been received by the employee within
2
1
/2months after the close of the year, but
only if the plan provides for elective con-
tributions that relate to compensation that
would have been received after the close
of a year to be allocated to such prior year
rather than the year in which the compen-
sation would have been received.
(ii)Elective contributions for partners
and self-employed individuals.Forpur-
poses of this paragraph (a)(4), a partner’s
distributive share of partnership income is
treated as received on the last day of the
partnership taxable year and a sole propri-
etor’s compensation is treated as received
on the last day of the individual’s taxable
year. Thus, an elective contribution made
on behalf of a partner or sole proprietor is
treated as allocated to the partner’s account
for the plan year that includes the last day
of the partnership taxable year, provided
the requirements of paragraph (a)(4)(i) of
this section are met.
(iii)Elective contributions for HCEs.
Elective contributions of an HCE must
include any excess deferrals, as described
in §1.402(g)–1(a), even if those excess
deferrals are distributed, pursuant to
§1.402(g)–1(e).
(5)Elective contributions not taken into
account under the ADP test—(i)General
rule. Elective contributions that do not sat-
January 31, 20054082005–5 I.R.B.

isfy the requirements of paragraph (a)(4)(i)
of this section may not be taken into ac-
count in determining the ADR of an el-
igible employee for the plan year or ap-
plicable year with respect to which the
contributions were made, or for any other
plan year. Instead, the amount of the elec-
tive contributions must satisfy the require-
ments of section 401(a)(4) (without regard
to the ADP test) for the plan year for which
they are allocated under the plan as if they
were nonelective contributions and were
the only nonelective contributions for that
year. See §§1.401(a)(4)–1(b)(2)(ii)(B) and
1.410(b)–7(c)(1).
(ii)Elective contributions for NHCEs.
Elective contributions of an NHCE shall
not include any excess deferrals, as de-
scribed in §1.402(g)–1(a), to the extent the
excess deferrals are prohibited under sec-
tion 401(a)(30). However, to the extent
that the excess deferrals are not prohibited
under section 401(a)(30), they are included
in elective contributions even if distributed
pursuant to §1.402(g)–1(e).
(iii)Elective contributions treated as
catch-up contributions. Elective con-
tributions that are treated as catch-up
contributions under section 414(v) be-
cause they exceed a statutory limit or em-
ployer-provided limit (within the meaning
of §1.414(v)–1(b)(1)) are not taken into
account under paragraph (a)(4) of this
section for the plan year for which the
contributions were made, or for any other
plan year.
(iv)Elective contributions used to sat-
isfy the ACP test. Except to the extent
necessary to demonstrate satisfaction of
the requirement of §1.401(m)–2(a)(6)(ii),
elective contributions taken into account
for the ACP test under §1.401(m)–2(a)(6)
are not taken into account under paragraph
(a)(4) of this section.
(v)Additional elective contributions
pursuant to section 414(u). Additional
elective contributions made pursuant to
section 414(u) by reason of an eligible
employee’s qualified military service are
not taken into account under paragraph
(a)(4) of this section for the plan year for
which the contributions are made, or for
any other plan year.
(6)Qualified nonelective contributions
and qualified matching contributions that
may be taken into account under the ADP
test. Qualified nonelective contributions
and qualified matching contributions may
be taken into account in determining the
ADR for an eligible employee for a plan
year or applicable year but only to the ex-
tent the contributions satisfy the following
requirements—
(i)Timing of allocation.Thequali-
fied nonelective contribution or qualified
matching contribution is allocated to the
employee’s account as of a date within
that year within the meaning of paragraph
(a)(4)(i)(A) of this section. Consequently,
under the prior year testing method, in or-
der to be taken into account in calculat-
ing the ADP for the eligible NHCEs for
the applicable year, a qualified nonelective
contribution or qualified matching contri-
bution must be contributed no later than
the end of the 12-month period immedi-
ately following the applicable year even
though the applicable year is different than
the plan year being tested.
(ii)Requirement that amount satisfy
section 401(a)(4). The amount of nonelec-
tive contributions, including those quali-
fied nonelective contributions taken into
account under this paragraph (a)(6) and
those qualified nonelective contributions
taken into account for the ACP test of sec-
tion 401(m)(2) under §1.401(m)–2(a)(6),
satisfies the requirements of section
401(a)(4). See §1.401(a)(4)–1(b)(2). The
amount of nonelective contributions, ex-
cluding those qualified nonelective con-
tributions taken into account under this
paragraph (a)(6) and those qualified non-
elective contributions taken into account
for the ACP test of section 401(m)(2)
under §1.401(m)–2(a)(6), satisfies the
requirements of section 401(a)(4). See
§1.401(a)(4)–1(b)(2). In the case of
an employer that is applying the spe-
cial rule for employer-wide plans in
§1.414(r)–1(c)(2)(ii) with respect to the
cash or deferred arrangement, the determi-
nation of whether the qualified nonelective
contributions satisfy the requirements of
this paragraph (a)(6)(ii) must be made
on an employer-wide basis regardless of
whether the plans to which the qualified
nonelective contributions are made are
satisfying the requirements of section
410(b) on an employer-wide basis. Con-
versely, in the case of an employer that
is treated as operating qualified separate
lines of business, and does not apply the
special rule for employer-wide plans in
§1.414(r)–1(c)(2)(ii) with respect to the
cash or deferred arrangement, then the
determination of whether the qualified
nonelective contributions satisfy the re-
quirements of this paragraph (a)(6)(ii)
isnotpermittedtobemadeonanem-
ployer-wide basis regardless of whether
the plans to which the qualified nonelec-
tive contributions are made are satisfying
the requirements of section 410(b) on that
basis.
(iii)Aggregation must be permitted.
The plan that contains the cash or deferred
arrangement and the plan or plans to which
the qualified nonelective contributions
or qualified matching contributions are
made, are plans that would be permitted
to be aggregated under §1.401(k)–1(b)(4).
If the plan year of the plan that con-
tains the cash or deferred arrangement is
changed to satisfy the requirement under
§1.410(b)–7(d)(5) that aggregated plans
have the same plan year, qualified nonelec-
tive contributions and qualified matching
contributions may be taken into account in
the resulting short plan year only if such
qualified nonelective contributions and
qualified matching contributions could
have been taken into account under an
ADPtestforaplanwiththesameshort
plan year.
(iv)Disproportionate contributions not
taken into account—(A)General rule.
Qualified nonelective contributions can-
not be taken into account for a plan year
for an NHCE to the extent such contribu-
tions exceed the product of that NHCE’s
compensation and the greater of 5% or
two times the plan’s representative con-
tribution rate. Any qualified nonelective
contribution takeninto account under
an ACP test under §1.401(m)–2(a)(6)
(including the determination of the repre-
sentative contribution rate for purposes of
§1.401(m)–2(a)(6)(v)(B)), is not permit-
ted to be taken into account for purposes
of this paragraph (a)(6) (including the
determination of the representative contri-
bution rate under paragraph (a)(6)(iv)(B)
of this section).
(B)Definition of representative contri-
bution rate. For purposes of this paragraph
(a)(6)(iv), the plan’s representative contri-
bution rate is the lowest applicable contri-
bution rate of any eligible NHCE among
a group of eligible NHCEs that consists of
half of all eligible NHCEs for the plan year
(or, if greater, the lowest applicable con-
tribution rate of any eligible NHCE in the
group of all eligible NHCEs for the plan
2005–5 I.R.B.409January 31, 2005

year and who is employed by the employer
on the last day of the plan year).
(C)Definition of applicable contribu-
tion rate. For purposes of this paragraph
(a)(6)(iv), the applicable contribution rate
for an eligible NHCE is the sum of the
qualified matching contributions taken
into account under this paragraph (a)(6)
for the eligible NHCE for the plan year
and the qualified nonelective contribu-
tions made for the eligible NHCE for the
plan year, divided bytheeligibleNHCE’s
compensation for the same period.
(D)Special rule for prevailing wage
contributions. Notwithstanding paragraph
(a)(6)(iv)(A) of this section, qualified
nonelective contributions that are made
in connection with an employer’s obli-
gation to pay prevailing wages under the
Davis-Bacon Act (46 Stat. 1494), Pub-
lic Law 71–798, Service Contract Act of
1965 (79 Stat. 1965), Public Law 89–286,
or similar legislation can be taken into
account for a plan year for an NHCE to the
extent such contributions do not exceed
10 percent of that NHCE’s compensation.
(v)Qualified matching contributions.
Qualified matching contributions satisfy
this paragraph (a)(6) only to the extent that
such qualified matching contributions are
matching contributions that are not pre-
cluded from being taken into account un-
der the ACP test for the plan year under
the rules of §1.401(m)–2(a)(5)(ii).
(vi)Contributions only used once.
Qualified nonelective contributions and
qualified matching contributions cannot
be taken into account under this paragraph
(a)(6) to the extent such contributions
are taken into account for purposes of
satisfying any other ADP test, any ACP
test, or the requirements of §1.401(k)–3,
1.401(m)–3 or 1.401(k)–4. Thus, for ex-
ample, matching contributions that are
made pursuant to §1.401(k)–3(c) cannot
be taken into account under the ADP test.
Similarly, if a plan switches from the cur-
rent year testing method to the prior year
testing method pursuant to §1.401(k)–2(c),
qualified nonelective contributions that are
taken into account under the current year
testing method for a year may not be taken
into account under the prior year testing
method for the next year.
(7)Examples. The following examples
illustrate the application of this paragraph
(a):
Example 1. (i) Employer X has three employees,
A, B, and C. Employer X sponsors a profit-sharing
plan (Plan Z) that includes acash or deferred arrange-
ment. Each year, Employer X determines a bonus at-
tributable to the prior year. Under the cash or deferred
arrangement, each eligible employee may elect to re-
ceive none, all or any part of the bonus in cash. X
contributes the remainder to Plan Z. The portion of
the bonus paid in cash, if any, is paid 2 months af-
ter the end of the plan year and thus is included in
compensation for the following plan year. Employee
A is an HCE, while Employees B and C are NHCEs.
The plan uses the current year testing method and de-
fines compensation to include elective contributions
and bonuses paid during each plan year. In Febru-
ary of 2005, Employer X determined that no bonuses
will be paid for 2004. In February of 2006, Employer
X provided a bonus for each employee equal to 10%
of regular compensation for 2005. For the 2005 plan
year, A, B, and C have the following compensation
and make the following elections:
EmployeeCompensationElective Contribution
A
$100,000$4,340
B60,0002,860
C
45,0001,250
(ii) For each employee, the ratio of elective contri-
butions to the employee’s compensation for the plan
year is:
EmployeeRatio of Elective Contribution to CompensationADR
A
$4,340/$100,000
4.34%
B2,860/60,0004.77
C
1,250/45,000
2.78
(iii) The ADP for the HCEs (Employee A) is
4.34%. The ADP for the NHCEs is 3.78% ((4.77% +
2.78%)/2). Because 4.34% is less than 4.73% (3.78%
multiplied by 1.25), the plan satisfies the ADP test
under paragraph (a)(1)(i) of this section.
Example 2. (i) The facts are the same as inExam-
ple 1, except that elective contributions are made pur-
suant to a salary reduction agreement throughout the
plan year, and no bonuses are paid. As provided by
section 414(s)(2), Employer X includes elective con-
tributions in compensation. During the year, B and C
defer the same amount as inExample 1, but A defers
$5,770. Thus, the compensation and elective contri-
butions for A, B, and C are:
EmployeeCompensationElective ContributionsADR
A
$100,000$5,770
5.77%
B60,0002,8604.77
C
45,0001,250
2.78
(ii) The ADP for the HCEs (Employee A) is
5.77%. The ADP for the NHCEs is 3.78% ((4.77%
+ 2.78%)/2). Because 5.77% exceeds 4.73% (3.78%
x 1.25), the plan does not satisfy the ADP test under
paragraph (a)(1)(i) of thissection. However, because
the ADP for the HCEs does not exceed the ADP for
the NHCEs by more than 2 percentage points and the
ADP for the HCEs does not exceed the ADP for the
NHCEs multiplied by 2 (3.78% x 2 = 7.56%), the
plan satisfies the ADP test under paragraph (a)(1)(ii)
of this section.
January 31, 20054102005–5 I.R.B.

Example 3. (i) Employees D through L are eli-
gible employees in Plan T, a profit-sharing plan that
contains a cash or deferred arrangement. The plan is
a calendar year plan that uses the prior year testing
method. Plan T provides that elective contributions
are included in compensation (as provided under sec-
tion 414(s)(2)). Each eligible employee may elect to
defer up to 6% of compensation under the cash or de-
ferred arrangement. Employees D and E are HCEs.
The compensation, elective contributions, and ADRs
of Employees D and E for the 2006 plan year are
shown below:
EmployeeCompensation for
2006 Plan Year
Elective Contributions for 2006 Plan
Year
ADR for 2006 Plan Year
D
$100,000$10,000
10%
E
$95,000$4,750
5%
(ii) During the 2005 plan year, Employees F
through L were eligible NHCEs. The compensation,
elective contributions and ADRs of Employees F through L for the 2005 plan year are shown in the
following table:
Employee
Compensation for 2005 Plan YearElective Contributions for 2005 Plan
Year
ADR for 2005 Plan Year
F
$60,000$3,600
6%
G
$40,000$1,600
4%
H
$30,000$1,200
4%
I
$20,000$600
3%
J
$20,000$600
3%
K
$10,000$300
3%
L
$5,000$150
3%
(iii) The ADP for 2006 for the HCEs is 7.5%. Be-
cause Plan T is using the prior year testing method,
the applicable year for determining the NHCE ADP
is the prior plan year (i.e., 2005). The NHCE ADP is
determined using the ADRs for NHCEs eligible dur-
ing the prior plan year (without regard to whether they
are eligible under the plan during the plan year). The
ADP for the NHCEs is 3.71% (the sum of the individ-
ual ADRs, 26%, divided by 7 employees). Because
7.5% exceeds 4.64% (3.71% x 1.25), Plan T does not
satisfy the ADP test under paragraph (a)(1)(i) of this
section. In addition, because the ADP for the HCEs
exceeds the ADP for the NHCEs by more than 2 per-
centage points, Plan T does not satisfy the ADP test
under paragraph (a)(1)(ii) of this section. Therefore,
the cash or deferred arrangement fails to be a qual-
ified cash or deferred arrangement unless the ADP
failure is corrected under paragraph (b) of this sec-
tion.
Example 4. (i) Plan U is a calendar year profit-
sharing plan that contains a cash or deferred arrange-
ment and uses the current year testing method. Plan
U provides that elective contributions are included in
compensation (as provided under section 414(s)(2)).
The following amounts are contributed under Plan
U for the 2006 plan year: QNECs equal to 2% of
each employee’s compensation; Contributions equal
to 6% of each employee’s compensation that are not
immediately vested under the terms of the plan; 3%
of each employee’s compensation that the employee
may elect to receive as cash or to defer under the plan.
Both types of nonelective contributions are made for
the HCEs (employees M and N) and the NHCEs (em-
ployees O through S) for the plan year and are con-
tributed after the end of the plan year and before the
end of the following plan year. In addition, neither
type of nonelective contributions is used for any other
ADP or ACP test.
(ii) For the 2006 plan year, the compensation,
elective contributions, and actual deferral ratios of
employees M through S are shown in the following
table:
EmployeeCompensationElective ContributionsActual Deferral Ratio
M
$100,000$3,000
3%
N
$100,000$2,000
2%
O
$60,000$1,800
3%
P
$40,000
00
Q
$30,000
00
R
$5,000
00
S
$20,000
00
(iii) The elective contributions alone do not sat-
isfy the ADP test of section 401(k)(3) and paragraph
(a)(1) of this section because the ADP for the HCEs,
consisting of employees M and N, is 2.5% and the
ADP for the NHCEs is 0.6%.
(iv) The 2% QNECs satisfies the timing require-
ment of paragraph (a)(6)(i) of this section because it is
paid within 12-month after the plan year for which al-
located. All nonelective contributions also satisfy the
requirements relating to section 401(a)(4) set forth in
paragraph (a)(6)(ii) of this section (because all em-
ployees receive an 8% nonelective contribution and
the nonelective contributions excluding the QNECs
is 6% for all employees). In addition, the QNECs
are not disproportionate under paragraph (a)(6)(iv) of
this section because no QNEC for an NHCE exceeds
the product of the plan’s applicable contribution rate
(2%) and that NHCE’s compensation.
(v) Because the rules of paragraph (a)(6) of this
section are satisfied, the 2% QNECs may be taken
into account in applying the ADP test of section
401(k)(3) and paragraph (a)(1) of this section. The
6% nonelective contributions, however, may not be
taken into account because they are not QNECs.
(vi) If the 2% QNECs are taken into account, the
ADP for the HCEs is 4.5%, and the actual deferral
percentage for the NHCEs is 2.6%. Because 4.5% is
2005–5 I.R.B.411January 31, 2005

not more than two percentage points greater than 2.6
percent, and not more than two times 2.6, the cash or
deferred arrangement satisfies the ADP test of section
401(k)(3) under paragraph (a)(1)(ii) of this section.
Example 5. (i) The facts are the same asExample
4, except the plan uses the prior year testing method.
In addition, the NHCE ADP for the 2005 plan year
(the prior plan year) is 0.8% and no QNECs are con-
tributed for the 2005 plan year during 2005 or 2006.
(ii) In 2007, it is determined that the elective con-
tributions alone do not satisfy the ADP test of sec-
tion 401(k)(3) and paragraph (a)(1) of this section for
2006 because the 2006 ADP for the eligible HCEs,
consisting of employees M and N, is 2.5% and the
2005 ADP for the eligible NHCEs is 0.8%. An addi-
tional QNEC of 2% of compensation is made for each
eligible NHCE in 2007 and allocated for 2005.
(iii) The 2% QNECs that are made in 2007 and al-
located for the 2005 plan year do not satisfy the tim-
ing requirement of paragraph (a)(6)(i) of this section
for the applicable year for the 2005 plan year because
they were not contributed before the last day of the
2006 plan year. Accordingly, the 2% QNECs do not
satisfy the rules of paragraph (a)(6) of this section and
may not be taken into account in applying the ADP
test of section 401(k)(3) and paragraph (a)(1) of this
section for the 2006 plan year. The cash or deferred
arrangement fails to be a qualified cash or deferred
arrangement unless the ADP failure is corrected un-
der paragraph (b) of this section.
Example 6. (i)ThefactsarethesameasExam-
ple 4, except that the ADP for the HCEs is 4.6%
and there is no 6% nonelective contribution under
the plan. The employer would like to take into ac-
count the 2% QNEC in determining the ADP for the
NHCEs but not in determining the ADP for the HCEs.
(ii) The elective contributions alone fail the re-
quirements of section 401(k) and paragraph (a)(1) of
this section because the HCE ADP for the plan year
(4.6%) exceeds 0.75% (0.6% x 1.25) and 1.2% (0.6%
x2).
(iii) The 2% QNECs may not be taken into ac-
count in determining the ADP of the NHCEs because
they fail to satisfy the requirements relating to sec-
tion 401(a)(4) set forth in paragraph (a)(6)(ii) of this
section. This is because the amount of nonelective
contributions, excluding those QNECs that would
be taken into account under the ADP test, would be
2% of compensation for the HCEs and 0% for the
NHCEs. Therefore, the cash or deferred arrangement
fails to be a qualified cash or deferred arrangement
unless the ADP failure is corrected under paragraph
(b) of this section.
Example 7. (i) The facts are the same asExample
6, except that Employee R receives a QNEC in an
amount of $500 and no QNECs are made on behalf
of the other employees.
(ii) If the QNEC could be taken into account un-
der paragraph (a)(6) of this section, the ADP for the
NHCEs would be 2.6% and the plan would satisfy the
ADP test. The QNEC is disproportionate under para-
graph (a)(6)(iv) of this section, and cannot be taken
into account under paragraph (a)(6) of this section, to
the extent it exceeds the greater of 5% and two times
the plan’s representative contribution rate (0%), mul-
tiplied by Employee R’s compensation. The plan’s
representative contribution rate is 0% because it is the
lowest applicable contribution rate among a group of
NHCEs that is at least half of all NHCEs, or all the
NHCEswhoareemployedonthelastdayoftheplan
year. Therefore, the QNEC may be taken into account
under the ADP test only to the extent it does not ex-
ceed 5% times Employee R’s compensation (or $250)
and the cash or deferred arrangement fails to satisfy
the ADP test and must correct under paragraph (b) of
this section.
Example 8. (i) The facts are the same as inEx-
ample 4except that the plan changes from the current
year testing method to the prior year testing method
for the following plan year (2007 plan year). The
ADP for the HCEs for the 2007 plan year is 3.5%.
(ii) The 2% QNECs may not be taken into account
in determining the ADP for the NHCEs for the appli-
cable year (2006 plan year) in satisfying the ADP test
for the 2007 plan year because they were taken into
account in satisfying the ADP test for the 2006 plan
year. Accordingly, the NHCE ADP for the applicable
year is 0.6%. The elective contributions for the plan
year fail the requirements of section 401(k) and para-
graph (a)(1) of this section because the HCE ADP for
the plan year (3.5%) exceeds the ADP limit of 1.2%
(the greater of 0.75% (0.6% x 1.25) and 1.2% (0.6% x
2)), determined using the applicable year ADP for the
NHCEs. Therefore, the cash or deferred arrangement
fails to be a qualified cash or deferred arrangement
unless the ADP failure is corrected under paragraph
(b)ofthissection.
Example 9. (i)(A) Employer N maintains Plan
X, a profit sharing plan that contains a cash or de-
ferred arrangement and that uses the current year test-
ing method. Plan X provides for employee contribu-
tions, elective contributions, and matching contribu-
tions. Matching contributions on behalf of NHCEs
are qualified matching contributions (QMACs) and
are contributed during the 2005 plan year. Matching
contributions on behalf of HCEs are not QMACs, be-
cause they fail to satisfy the nonforfeitability require-
ment of §1.401(k)–1(c). The elective contributions
and matching contributions with respect to HCEs for
the 2005 plan year are shown in the following table:
Elective
Contributions
Total Matching
Contributions
Matching
contributions that are
not QMACs
QMACs
Highly compensated employees
15%5%5%
0%
(B) The elective contributions and matching con-
tributions with respect to the NHCEs for the 2005
plan year are shown in the following table:
Elective
Contributions
Total Matching
Contributions
Matching
contributions that are
not QMACs
QMACs
Nonhighly compensated employees11%4%0%4%
(ii) The plan fails to satisfy the ADP test of section
401(k)(3)(A) and paragraph (a)(1) of this section be-
cause the ADP for HCEs (15%) is more than 125% of
the ADP for NHCEs (11%), and more than 2 percent-
age points greater than 11%. However, the plan pro-
vides that QMACs may be used to meet the require-
ments of section 401(k)(3)(A)(ii) provided that they
are not used for any other ADP or ACP test. QMACs
equal to 1% of compensation are taken into account
for each NHCE in applying the ADP test. After this
adjustment, the applicable ADP and ACP (taking into
account the provisions of §1.401(m)–2(a)(5)(ii)) for
the plan year are as follows:
Actual Deferral PercentageActual Contribution Percentage
HCEs
15%5%
Nonhighly compensated employees123
January 31, 20054122005–5 I.R.B.

(iii) The elective contributions and QMACs
taken into account for purposes of the ADP test of
section 401(k)(3) satisfy the requirements of section
401(k)(3)(A)(ii) under paragraph (a)(1)(ii) of this
section because the ADP for HCEs (15%) is not more
than the ADP for NHCEs multiplied by 1.25 (12% x
1.25 = 15%).
(b)Correction of excess contribu-
tions—(1)Permissible correction meth-
ods—(i)In general. A cash or deferred
arrangement does not fail to satisfy the
requirements of section 401(k)(3) and
paragraph (a)(1) of this section if the em-
ployer, in accordance with the terms of
the plan that includes the cash or deferred
arrangement, uses any of the following
correction methods—
(A)Qualified nonelective contribu-
tions or qualified matching contributions.
The employer makes qualified nonelec-
tive contributions or qualified matching
contributions that are taken into account
under this section and, in combination
with other amounts taken into account
under paragraph (a) of this section, allow
the cash or deferred arrangement to satisfy
the requirements of paragraph (a)(1) of
this section.
(B)Excess contributions distributed.
Excess contributions are distributed in
accordance with paragraph (b)(2) of this
section.
(C)Excess contributions recharacter-
ized. Excess contributions are recharacter-
ized in accordance with paragraph (b)(3)
of this section.
(ii)Combination of correction meth-
ods. A plan may provide for the use of
any of the correction methods described
in paragraph (b)(1)(i) of this section, may
limit elective contributions in a manner
designed to prevent excess contributions
from being made, or may use a combina-
tion of these methods, to avoid or correct
excess contributions. A plan may per-
mit an HCE to elect whether any excess
contributions are to be recharacterized or
distributed. If the plan uses a combination
of correction methods, any contribution
made under paragraph (b)(1)(i)(A) of this
section must be taken into account before
application of the correction methods in
paragraph (b)(1)(i)(B) or (C) of this sec-
tion.
(iii)Exclusive means of correction.
A failure to satisfy the requirements of
paragraph (a)(1) of this section may not
be corrected using any method other than
the ones described in paragraphs (b)(1)(i)
and (ii) of this section. Thus, excess
contributions for a plan year may not
remain unallocated or be allocated to a
suspense account for allocation to one or
more employees in any future year. In
addition, excess contributions may not
be corrected using the retroactive cor-
rection rules of §1.401(a)(4)–11(g). See
§1.401(a)(4)–11(g)(3)(vii) and (5).
(2)Corrections through distribu-
tion—(i)General rule. This paragraph
(b)(2) contains the rules for correction of
excess contributions through a distribu-
tion from the plan. Correction through
a distribution generally involves a 4-step
process. First, the plan must determine,
in accordance with paragraph (b)(2)(ii)
of this section, the total amount of ex-
cess contributions that must be distributed
under the plan. Second, the plan must
apportion the total amount of excess con-
tributions among HCEs in accordance
with paragraph (b)(2)(iii) of this section.
Third, the plan must determine the income
allocable to excess contributions in ac-
cordance with paragraph (b)(2)(iv) of this
section. Finally, the plan must distribute
the apportioned excess contributions and
allocable income in accordance with para-
graph (b)(2)(v) of this section. Paragraph
(b)(2)(vi) of this section provides rules
relating to the tax treatment of these dis-
tributions. Paragraph (b)(2)(vii) provides
other rules relating to these distributions.
(ii)Calculation of total amount to
be distributed. The following proce-
dures must be used to determine the total
amount of the excess contributions to be
distributed—
(A)Calculate the dollar amount of
excess contributions for each HCE.The
amount of excess contributions attribut-
able to a given HCE for a plan year is
the amount (if any) by which the HCE’s
contributions taken into account under this
section must be reduced for the HCE’s
ADR to equal the highest permitted ADR
under the plan. To calculate the highest
permitted ADR under a plan, the ADR
of the HCE with the highest ADR is re-
duced by the amount required to cause that
HCE’s ADR to equal the ADR of the HCE
with the next highest ADR. If a lesser
reduction would enable the arrangement
to satisfy the requirements of paragraph
(b)(2)(ii)(C) of this section, only this lesser
reduction is used in determining the high-
est permitted ADR.
(B)Determination of the total amount
of excess contributions. The process de-
scribed in paragraph (b)(2)(ii)(A) of this
section must be repeated until the arrange-
ment would satisfy the requirements of
paragraph (b)(2)(ii)(C) of this section. The
sum of all reductions for all HCEs deter-
mined under paragraph (b)(2)(ii)(A) of this
section is the total amount of excess con-
tributions for the plan year.
(C)Satisfaction of ADP. A cash or
deferred arrangement satisfies this para-
graph (b)(2)(ii)(C) if the arrangement
would satisfy the requirements of para-
graph (a)(1)(ii) of this section if the
ADR for each HCE were determined
after the reductions described in paragraph
(b)(2)(ii)(A) of this section.
(iii)Apportionment of total amount of
excess contributions among the HCEs.
The following procedures must be used in
apportioning the total amount of excess
contributions determined under paragraph
(b)(2)(ii) of this section among the HCEs:
(A)Calculate the dollar amount of ex-
cess contributions for each HCE. The con-
tributions of the HCE with the highest dol-
lar amount of contributions taken into ac-
count under this section are reduced by the
amount required to cause that HCE’s con-
tributions to equal the dollar amount of the
contributions taken into account under this
section for the HCE with the next highest
dollar amount of contributions taken ac-
count under this section. If a lesser ap-
portionment to the HCE would enable the
plan to apportion the total amount of ex-
cess contributions, only the lesser appor-
tionment would apply.
(B)Limit on amount apportioned to any
individual. For purposes of this paragraph
(b)(2)(iii), the amount of contributions
taken into account under this section with
respect to an HCE who is an eligible
employee in more than one plan of an
employer is determined by taking into
account all contributions otherwise taken
into account with respect to such HCE
under any plan of the employer during the
plan year of the plan being tested as being
made under the plan being tested. How-
ever, the amount of excess contributions
apportioned for a plan year with respect to
any HCE must not exceed the amount of
contributions actually contributed to the
plan for the HCE for the plan year. Thus, in
the case of an HCE who is an eligible em-
ployee in more than one plan of the same
2005–5 I.R.B.413January 31, 2005

employer to which elective contributions
are made and whose ADR is calculated
in accordance with paragraph (a)(3)(ii)
of this section, the amount required to be
distributed under this paragraph (b)(2)(iii)
shall not exceed the contributions actually
contributed to the plan and taken into ac-
count under this section for the plan year.
(C)Apportionment to additional HCEs.
The procedure in paragraph (b)(2)(iii)(A)
of this section must be repeated until the
total amount of excess contributions de-
termined under paragraph (b)(2)(ii) of this
section has been apportioned.
(iv)Income allocable to excess contri-
butions—(A)General rule.Theincome
allocable to excess contributions is equal
to the sum of the allocable gain or loss for
the plan year and, to the extent the excess
contributions are or will be credited with
gain or loss for the gap period (i.e.,thepe-
riod after the close of the plan year and
prior to the distribution) if the total account
were to be distributed, the allocable gain or
loss during that period.
(B)Method of allocating income.A
plan may use any reasonable method for
computing the incomeallocable to excess
contributions, provided that the method
does not violate section 401(a)(4), is used
consistently for all participants and for all
corrective distributions under the plan for
the plan year, and is used by the plan for al-
locating income to participant’s accounts.
See §1.401(a)(4)–1(c)(8). A plan will not
fail to use a reasonable method for com-
puting the income allocable to excess con-
tributions merely because the income allo-
cable to excess contributions is determined
on a date that is no more than 7 days before
the distribution.
(C)Alternative method of allocating
plan year income. A plan may allocate
income to excess contributions for the
plan year by multiplying the income for
the plan year allocable to the elective con-
tributions and other amounts taken into
account under this section (including con-
tributions made for the plan year), by a
fraction, the numerator of which is the ex-
cess contributions for the employee for the
plan year, and the denominator of which
is the sum of the—
(1) Account balance attributable to
elective contributionsand other contribu-
tions taken into account under this section
as of the beginning of the plan year, and
(2) Any additional amount of such con-
tributions made for the plan year.
(D)Safe harbor method of allocat-
ing gap period income.Aplanmayuse
the safe harbor method in this paragraph
(b)(2)(iv)(D) to determine income on
excess contributions for the gap period.
Under this safe harbor method, income
on excess contributions for the gap period
is equal to 10% of the income allocable
to excess contributions for the plan year
that would be determined under paragraph
(b)(2)(iv)(C) of this section, multiplied by
the number of calendar months that have
elapsed since the end of the plan year.
For purposes of calculating the number
of calendar months that have elapsed un-
der the safe harbor method, a corrective
distribution that is made on or before the
fifteenth day of a month is treated as made
on the last day of the preceding month and
a distribution made after the fifteenth day
of a month is treated as made on the last
day of the month.
(E)Alternative method for allocating
plan year and gap period income.A
plan may determine the allocable gain or
loss for the aggregate of the plan year
andthegapperiodbyapplyingtheal-
ternative method provided by paragraph
(b)(2)(iv)(C) of this section to this ag-
gregate period. This is accomplished by
substituting the income for the plan year
and the gap period for the income for the
plan year and by substituting the contribu-
tions taken into account under this section
for the plan year and the gap period for
the contributions taken account under this
section for the plan year in determining the
fraction that is multiplied by that income.
(v)Distribution. Within12monthsaf-
ter the close of the plan year in which the
excess contribution arose, the plan must
distribute to each HCE the excess con-
tributions apportioned to such HCE un-
der paragraph (b)(2)(iii) of this section and
the allocable income. Except as otherwise
provided in this paragraph (b)(2)(v) and
paragraph (b)(4)(i) of this section, a dis-
tribution of excess contributions must be
in addition to any other distributions made
during the year and must be designated as a
corrective distributionbytheemployer.In
the event of a complete termination of the
plan during the plan year in which an ex-
cess contribution arose, the corrective dis-
tribution must be made as soon as adminis-
tratively feasible after the date of termina-
tion of the plan, but in no event later than
12 months after the date of termination. If
the entire account balance of an HCE is
distributed prior to when the plan makes a
distribution of excess contributions in ac-
cordance with this paragraph (b)(2), the
distribution is deemed to have been a cor-
rective distribution of excess contributions
(and income) to the extent that a corrective
distribution would otherwise have been re-
quired.
(vi)Tax treatment of corrective dis-
tributions—(A)General rule. Except as
provided in this paragraph (b)(2)(vi), a
corrective distribution of excess contri-
butions (and income) that is made within
2
1
/2months after the end of the plan year
for which the excess contributions were
made is includible in the employee’s gross
income on the dates the elective contribu-
tions would have been received by the em-
ployee had the employee originally elected
to receive the amounts in cash, treating the
excess contributionsthat are being dis-
tributed as the first elective contributions
for the plan year. A corrective distribu-
tion of excess contributions (and income)
that is made more than 2
1
/2months after
the end of the plan year for which the
contributions were made is includible in
the employee’s gross income in the em-
ployee’s taxable year in which distributed.
Regardless of when the corrective distri-
bution is made, it is notsubject to the early
distribution tax of section 72(t). See also
paragraph (b)(4) of this section for addi-
tional rules relating to the employer excise
tax on amounts distributed more than 2
1
/2
months after the end of the plan year. See
also §1.402(c)–2, A–4 for restrictions on
rolling over distributions that are excess
contributions.
(B)Rule for de minimis distributions.
If the total amount of excess contribu-
tions, determined under this paragraph
(b)(2), and excess aggregate contributions
determined under §1.401(m)–2(b)(2) dis-
tributed to a recipient under a plan for any
plan year is less than $100 (excluding in-
come), a corrective distribution of excess
contributions (and income) is includible
in the gross income of the recipient in the
taxable year of the recipient in which the
corrective distribution is made.
(vii)Other rules—(A)No employee or
spousal consent required. A corrective
distribution of excess contributions (and
income) may be made under the terms of
January 31, 20054142005–5 I.R.B.

the plan without regard to any notice or
consent otherwise required under sections
411(a)(11) and 417.
(B)Treatment of corrective distribu-
tions as elective contributions. Excess
contributions are treated as employer con-
tributions for purposes of sections 404 and
415 even if distributed from the plan.
(C)No reduction of required minimum
distribution. A distribution of excess con-
tributions (and income) is not treated as
a distribution for purposes of determin-
ing whether the plan satisfies the mini-
mum distribution requirements of section
401(a)(9). See §1.401(a)(9)–5, A–9(b).
(D)Partial distributions. Any distribu-
tion of less than the entire amount of ex-
cess contributions (and allocable income)
with respect to any HCE is treated as a
pro ratadistribution of excess contribu-
tions and allocable income.
(viii)Examples. The following exam-
ples illustrate the application of this para-
graph (b)(2). For purposes of these exam-
ples, none of the plans provide for catch-up
contributions under section 414(v). The
examples are as follows:
Example 1. (i) Plan P, a calendar year profit-shar-
ing plan that includes a cash or deferred arrangement,
provides for distribution of excess contributions to
HCEs to the extent necessary to satisfy the ADP test.
For the 2006 plan year, Employee A, an HCE, has
elective contributions of $12,000 and $200,000 in
compensation, for an ADR of 6%, and Employee B, a
second HCE, has elective contributions of $8,960 and
compensation of $128,000, for an ADR of 7%. The
ADP for the NHCEs is 3% for the 2006 plan year.
Under the ADP test, the ADP of the two HCEs un-
der the plan may not exceed 5% (i.e., 2 percentage
points more than the ADP of the NHCEs under the
plan). The ADP for the 2 HCEs under the plan is
6.5%. Therefore, there must be a correction of ex-
cess contributions for the 2006 plan year.
(ii) The total amount of excess contributions for
the HCEs is determined under paragraph (b)(2)(ii) of
this section as follows: the elective contributions of
Employee B (the HCE with the highest ADR) are re-
duced by $1,280 in order to reduce his ADR to 6%
($7,680/$128,000), which is the ADR of Employee
A.
(iii) Because the ADP of the HCEs determined af-
ter the $1,280 reduction to Employee B still exceeds
5%, further reductions in elective contributions are
necessary in order to reduce the ADP of the HCEs
to 5%. The elective contributions of Employee A
and Employee B are each reduced by 1% of com-
pensation ($2,000 and $1,280 respectively). Because
the ADP of the HCEs determined after the reductions
equals 5%, the plan would satisfy the requirements of
(a)(1)(ii) of this section.
(iv) The total amount ofexcess contributions
($4,560 = $1,280+$2,000+$1,280) is apportioned
among the HCEs under paragraph (b)(2)(iii) of this
section first to the HCE with the highest amount of
elective contributions. Therefore, Employee A is
apportioned $3,040 (the amount required to cause
Employee A’s elective contributions to equal the next
highest dollar amount of elective contributions).
(v) Because the total amount of excess contribu-
tions has not been apportioned, further apportionment
is necessary. The balance ($1,520) of the total amount
of excess contributions is apportioned equally among
Employee A and Employee B ($760 to each).
(vi) Therefore, the cash or deferred arrangement
will satisfy the requirements of paragraph (a)(1) of
this section if, by the end of the 12 month period fol-
lowing the end of the 2006 plan year, Employee A
receives a corrective distribution of excess contribu-
tions equal to $3,800 ($3,040 + $760) and allocable
income and Employee B receives a corrective distri-
bution of $760 and allocable income.
Example 2. (i) The facts are the same as inExam-
ple 1, except Employee A’s ADR is based on $3,000
of elective contributions to this plan and $9,000 of
elective contributions to another plan of the employer.
(ii) The total amount ofexcess contributions
($4,560 = $1,280+$2,000+$1,280) is apportioned
among the HCEs under paragraph (b)(2)(iii) of this
section first to the HCE with the highest amount
of elective contributions. The amount of elective
contributions for Employee A is $12,000. Therefore,
Employee A is apportioned $3,040 (the amount re-
quired to cause Employee A’s elective contributions
to equal the next highest dollar amount of elec-
tive contributions). However, pursuant to paragraph
(b)(2)(iii)(B) of this section, no more than the amount
actually contributed to the plan may be apportioned
to an HCE. Accordingly, no more than $3,000 may
be apportioned to Employee A. Therefore, the re-
maining $1,560 must be apportioned to Employee B.
(ii) The cash or deferred arrangement will satisfy
the requirements of paragraph (a)(1) of this section if,
by the end of the 12 month period following the end of
the 2006 plan year, Employee A receives a corrective
distribution of excess contributions equal to $3,000
(total amount of elective contributions actually con-
tributed to the plan for Employee A) and allocable
income and Employee B receives a corrective distri-
bution of $1,560 and allocable income.
Example 3. (i) The facts are the same as inExam-
ple 1. The plan allocates income on a daily basis. The
corrective distributionsare made in February 2007.
The excess contribution that must be distributed to
Employee A as a corrective distribution is $3,800.
This amount must be increased (or decreased) to re-
flect gains (or losses) allocable to that amount dur-
ing the 2006 plan year. The plan uses a reasonable
method that satisfies paragraph (b)(2)(iv)(B) of this
section to determine the gain during the 2006 plan
year allocable to the $3,800 as $145. Therefore, as of
the end of the 2006 plan year, the amount of correc-
tive distribution that is required would be $3,945.
(ii) Because the plan allocates income on a daily
basis, excess contributions are credited with gain or
loss during the gap period. Therefore, the corrective
distribution must include income allocable to $3,945
through the date of distribution. For the period from
January 1 through the date of distribution (or if the
plan provides 7 days before the date of distribution),
the income allocable to $3,945 is $105. Therefore,
the plan will satisfy the requirements of paragraph
(a)(1) of this section if Employee A receives a cor-
rective distribution of $4,050.
Example 4. (i) The facts are the same as inExam-
ple 1. The plan determines plan year income using the
alternative method for calculating income provided
in paragraph (b)(2)(iv)(C) of this section and using
the portion of the participant’s account attributable
to elective contributions, including elective contribu-
tions made for the plan year. The plan uses the safe
harbor method provided in paragraph (b)(2)(iv)(D) of
this section for allocating gap period income. The
corrective distribution is made during the last week
of February 2007. At the beginning of the 2006 plan
year, $100,000 of Employee A’s plan account repre-
sents elective contributions plus attributable earnings.
During the 2006 plan year, $10,000 in elective con-
tributions were contributed to the plan for Employee
A. The income allocable to Employee A’s account at-
tributable to elective contributions for the 2006 plan
year is $8,000.
(ii) Therefore, the plan year income allocable to
the $3,800 corrective distribution for Employee A
is $266.65 ($8,000 multiplied by $3,800 divided by
$110,000). Therefore, as of the end of the 2006 plan
year, the amount of corrective distribution that is re-
quired is $4,066.65. This amount must be increased
by the gap period income of $53.32 (10% multiplied
by $266.65 (2006 plan year income attributable to the
excess contribution) multiplied by 2 (number of cal-
endar months since end of 2006 plan year). There-
fore, the plan will satisfy the requirements of para-
graph (a)(1) of this section if Employee A receives a
corrective distribution of $4,119.97.
Example 5. (i) The facts are the same as inEx-
ample 4, except that the plan provides for quarterly
valuations based on the account balance at the end of
the quarter.
(ii) Because the plan’s method for allocating in-
come does not allocate any income to amounts dis-
tributed during the quarter, Employee A will not be
credited with an allocation of income with respect to
the amount distributed. Accordingly, Plan P need not
plan adjust the distribution of excess contribution for
income during the gap period and thus satisfies para-
graph (a)(1) of this section if Employee A receives a
corrective distribution of $4,066.65.
(3)Recharacterization of excess contri-
butions—(i)General rule. Excess contri-
butions are recharacterized in accordance
with this paragraph (b)(3) only if the ex-
cess contributions that would have to be
distributed under (b)(2) of this section if
the plan was correcting through distribu-
tion of excess contributions are recharac-
terized as described in paragraph (b)(3)(ii)
of this section, and all of the conditions set
forth in paragraph (b)(3)(iii) of this section
are satisfied.
(ii)Treatment of recharacterized excess
contributions. Recharacterized excess
contributions are includible in the em-
ployee’s gross income as if such amounts
were distributed under paragraph (b)(2) of
this section. The recharacterized excess
contributions are treated as employee con-
tributions for purposes of section 72, sec-
tions 401(a)(4), 401(m), §1.401(k)–1(d)
2005–5 I.R.B.415January 31, 2005

and §1.401(k)–2. This requirement is not
treated as satisfied unless the payor or plan
administrator reports the recharacterized
excess contributionsas employee contri-
butions to the Internal Revenue Service
and the employee by timely providing
such Federal tax forms and accompany-
inginstructionsandtimelytakingsuch
otheractionasisprescribedbytheCom-
missioner in revenue rulings, notices and
other guidance published in the Internal
Revenue Bulletin (see §601.601(d)(2) of
this chapter) as well as the applicable
Federal tax forms and accompanying in-
structions.
(iii)Additional rules—(A)Time of
recharacterization. Excess contributions
may not be recharacterized under this
paragraph (b)(3) after 2
1
/2months after
the close of the plan year to which the
recharacterization relates. Recharacteri-
zation is deemed to have occurred on the
date on which the last of those HCEs with
excess contributions to be recharacterized
is notified in accordance with paragraph
(b)(3)(ii) of this section.
(B)Employee contributions must be
permitted under plan. The amount of
recharacterized excess contributions, in
combination with the employee contribu-
tions actually made by the HCE, may not
exceed the maximum amount of employee
contributions (determined without regard
to the ACP test of section 401(m)(2)) per-
mitted under the provisions of the plan as
in effect on the first day of the plan year.
(C)Treatment of recharacterized ex-
cess contributions. Recharacterized ex-
cess contributions continue to be treated
as employer contributions for all purposes
under the Internal Revenue Code (other
than those specified inparagraph (b)(3)(ii)
of this section), including section 401(a)
and sections 404, 409, 411, 412, 415, 416,
and 417. Thus, for example, recharacter-
ized excess contributions remain subject
to the requirements of §1.401(k)–1(c);
must be deducted under section 404; and
are treated as employer contributions de-
scribed in section 415(c)(2)(A).
(4)Rules applicable to all correc-
tions—(i)Coordination with distribution
of excess deferrals—(A)Treatment of ex-
cess deferrals that reduce excess contribu-
tions. The amount of excess contributions
(and allocable income) to be distributed
under paragraph (b)(2) of this section or
the amount of excess contributions rechar-
acterized under paragraph (b)(3) of this
section with respect to an employee for a
plan year, is reduced by any amounts pre-
viously distributed to the employee from
the plan to correct excess deferrals for the
employee’s taxable year ending with or
within the plan year in accordance with
section 402(g)(2).
(B)Treatment of excess contribu-
tions that reduce excess deferrals.Under
§1.402(g)–1(e), the amount required to be
distributed to correct an excess deferral to
an employee for a taxable year is reduced
by any excess contributions (and allocable
income) previously distributed or excess
contributions recharacterized with respect
to the employee for the plan year begin-
ning with or within the taxable year. The
amount of excess contributions includible
in the gross income of the employee, and
the amount of excess contributions re-
ported by the payer or plan administrator
as includible in the gross income of the
employee, does not include the amount of
any reduction under §1.402(g)–1(e)(6).
(ii)Forfeitureofmatchondistributed
excess contributions. A matching contri-
bution is taken into account under section
401(a)(4) even if the match is with re-
spect to an elective contribution that is
distributed or recharacterized under this
paragraph (b). This requires that, after
correction of excess contributions, each
level of matching contributions be cur-
rently and effectively available to a group
of employees that satisfies section 410(b).
See §1.401(a)(4)–4(e)(3)(iii)(G). Thus, a
plan that provides the same rate of match-
ing contributions to all employees will not
meet the requirements of section 401(a)(4)
if elective contributions are distributed
under this paragraph (b) to HCEs to the
extent needed to meet the requirements of
section 401(k)(3), while matching contri-
butions attributable to those elective con-
tributions remain allocated to the HCEs’
accounts. Under section 411(a)(3)(G)
and §1.411(a)–4(b)(7), a plan may for-
feit matching contributions attributable
to excess contributions, excess aggregate
contributions or excess deferrals to avoid
a violation of section 401(a)(4). See also
§1.401(a)(4)–11(g)(3)(vii)(B) regarding
the use of additional allocations to the
accounts of NHCEs for the purpose of
correcting a discriminatory rate of match-
ing contributions.
(iii)Permitted forfeiture of QMAC.Pur-
suant to section 401(k)(8)(E), a qualified
matching contribution is not treated as for-
feitable under §1.401(k)–1(c) merely be-
cause under the plan it is forfeited in ac-
cordance with paragraph (b)(4)(ii) of this
section.
(iv)No requirement for recalculation.
If excess contributions are distributed or
recharacterized in accordance with para-
graphs (b)(2) and (3) of this section, the
cash or deferred arrangement is treated as
meeting the nondiscrimination test of sec-
tion 401(k)(3) regardless of whether the
ADP for the HCEs, if recalculated after the
distributions or recharacterizations, would
satisfy section 401(k)(3).
(v)Treatment of excess contribu-
tions that are catch-up contributions.
A cash or deferred arrangement does not
fail to meet the requirements of section
401(k)(3) and paragraph (a)(1) of this sec-
tion merely because excess contributions
that are catch-up contributions because
they exceed the ADP limit, as described in
§1.414(v)–1(b)(1)(iii), are not corrected in
accordance with this paragraph (b).
(5)Failure to timely correct—(i)Fail-
ure to correct within 2
1
/2months after end
of plan year. If a plan does not correct ex-
cess contributions within 2
1
/2months af-
ter the close of the plan year for which
the excess contributions are made, the em-
ployer will be liable for a 10% excise tax
on the amount of the excess contributions.
See section 4979 and §54.4979–1 of this
chapter. Qualifiednonelective contribu-
tions and qualified matching contributions
properly taken into account under para-
graph (a)(6) of this section for a plan year
may enable a plan to avoid having excess
contributions, even if the contributions are
made after the close of the 2
1
/2month pe-
riod.
(ii)Failure to correct within 12 months
after end of plan year. If excess contribu-
tions are not corrected within 12 months
after the close of the plan year for which
they were made, the cash or deferred ar-
rangement will fail to satisfy the require-
ments of section 401(k)(3) for the plan
year for which the excess contributions are
made and all subsequent plan years during
which the excess contributions remain in
the trust.
(c)Additional rules for prior year test-
ing method—(1)Rules for change in test-
ing method—(i)General rule.Aplanis
January 31, 20054162005–5 I.R.B.

permitted to change from the prior year
testing method to the current year test-
ing method for any plan year. A plan
is permitted to change from the current
year testing method to the prior year test-
ing method only in situations described in
paragraph (c)(1)(ii) of this section. For
purposes of this paragraph (c)(1), a plan
that uses the safe harbor method described
in §1.401(k)–3 or a SIMPLE 401(k) plan
is treated as using the current year testing
method for that plan year.
(ii)Situations permitting a change to
the prior year testing method. The situa-
tions described in this paragraph (c)(1)(ii)
are:
(A) The plan is not the result of the ag-
gregation of two or more plans, and the
current year testing method was used un-
der the plan for each of the 5 plan years
preceding the plan year of the change (or
if lesser, the number of plan years the plan
has been in existence, including years in
which the plan was a portion of another
plan).
(B) The plan is the result of the aggre-
gation of two or more plans, and for each
of the plans that are being aggregated (the
aggregating plans), the current year test-
ing method was used for each of the 5
plan years preceding the plan year of the
change(oriflesser,thenumberofplan
years since that aggregating plan has been
in existence, including years in which the
aggregating plan was a portion of another
plan).
(C) A transaction described in section
410(b)(6)(C)(i) and§1.410(b)–2(f) occurs
and—
(1) As a result of the transaction, the
employer maintains both a plan using the
prioryeartestingmethodandaplanusing
the current year testing method; and
(2) The change from the current year
testing method to the prior year testing
method occurs within the transition period
described in section 410(b)(6)(C)(ii).
(2)Calculation of ADP under the prior
year testing method for the first plan
year—(i)Plans that are not successor
plans. If, for the first plan year of any plan
(other than a successor plan), the plan uses
the prior year testing method, the plan is
permitted to use either that first plan year
as the applicable year for determining the
ADP for eligible NHCEs, or use 3% as the
ADP for eligible NHCEs, for applying the
ADP test for that first plan year. A plan
(other than a successor plan) that uses the
prior year testing method but has elected
for its first plan year to use that year as the
applicable year is not treated as changing
its testing method in the second plan year
and is not subject to the limitations on dou-
ble counting on QNECs under paragraph
(a)(6)(vi) of this section for the second
plan year.
(ii)First plan year defined. For pur-
poses of this paragraph (c)(2), the first
plan year of any plan is the first year in
which the plan provides for elective con-
tributions. Thus, the rules of this para-
graph(c)(2)donotapplytoaplan(within
the meaning of §1.410(b)–7(b)) for a plan
year if for such plan year the plan is ag-
gregated under §1.401(k)–1(b)(4) with any
other plan that provided for elective contri-
butions in the prior year.
(iii)Successor plans.Aplanisasuc-
cessor plan if 50% or more of the eligi-
ble employees for the first plan year were
eligible employees under a qualified cash
or deferred arrangement maintained by the
employer in the prior year. If a plan that
is a successor plan uses the prior year test-
ingmethodforitsfirstplanyear,theADP
for the group of NHCEs for the applicable
year must be determined under paragraph
(c)(4) of this section.
(3)Plans using different testing meth-
ods for the ADP and ACP test. Except
as otherwise provided in this paragraph
(c)(3), a plan may use the current year test-
ing method or prior year testing method for
the ADP test for a plan year without regard
to whether the current year testing method
orprioryeartestingmethodisusedforthe
ACP test for that year. For example, a plan
may use the prior year testing method for
the ADP test and the current year testing
method for its ACP test for the plan year.
However, plans that use different testing
methods under this paragraph (c)(3) can-
not use—
(i) The recharacterization method of
paragraph (b)(3) of this section to correct
excess contributions for a plan year;
(ii) The rules of §1.401(m)–2(a)(6)(ii)
to take elective contributions into account
under the ACP test (rather than the ADP
test); or
(iii) The rules of paragraph (a)(6)(v) of
this section to take qualified matching con-
tributions into account under the ADP test
(rather than the ACP test).
(4)Rules for plan coverage
changes—(i)In general. A plan that
uses the prior year testing method and ex-
periences a plan coverage change during
a plan year satisfies the requirements of
this section for that year only if the plan
provides that the ADP for the NHCEs for
the plan year is the weighted average of
the ADPs for the prior year subgroups.
(ii)Optional rule for minor plan cov-
erage changes. If a plan coverage change
occurs and 90% or more of the total num-
ber of the NHCEs from all prior year sub-
groups are from a single prior year sub-
group, then, in lieu of using the weighted
averages described in paragraph (c)(4)(i)
of this section, the plan may provide that
the ADP for the group of eligible NHCEs
for the prior year under the plan is the
ADPoftheNHCEsfortheprioryearof
the plan under which that single prior year
subgroup was eligible.
(iii)Definitions. The following defini-
tions apply for purposes of this paragraph
(c)(4):
(A)Plan coverage change.Theterm
plan coverage changemeans a change in
the group or groups of eligible employees
under a plan on account of—
(1) The establishment or amendment of
aplan;
(2) A plan merger or spinoff under sec-
tion 414(l);
(3) A change in the way plans (within
the meaning of §1.410(b)–7(b)) are
combined or separated for purposes of
§1.401(k)–1(b)(4) (e.g., permissively ag-
gregating plans not previously aggre-
gated under §1.410(b)–7(d), or ceasing
to permissively aggregate plans under
§1.410(b)–7(d));
(4) A reclassification of a substantial
group of employees that has the same ef-
fect as amending the plan (e.g., a transfer
of a substantial group of employees from
one division to another division); or
(5) A combination of any of paragraphs
(c)(4)(iii)(A)(1) through (4)ofthissection.
(B)Prior year subgroup.Theterm
prior year subgroupmeans all NHCEs
for the prior plan year who, in the prior
year, were eligible employees under a
specific plan maintained by the employer
that included a qualified cash or deferred
arrangement and who would have been
eligible employees in the prior year under
the plan being tested if the plan coverage
change had first been effective as of the
2005–5 I.R.B.417January 31, 2005

first day of the prior plan year instead of
first being effective during the plan year.
The determination of whether an NHCE
isamemberofaprioryearsubgroupis
made without regard to whether the NHCE
terminated employment during the prior
year.
(C)Weighted average of the ADPs
for the prior year subgroups.Theterm
weighted average of the ADPs for the
prior year subgroupsmeans the sum, for
all prior year subgroups, of the adjusted
ADPs for the plan year. The termadjusted
ADP with respect to a prior year subgroup
means the ADP for the prior plan year of
the specific plan under which the members
of the prior year subgroup were eligible
employees on the first day of the prior plan
year, multiplied by a fraction, the numer-
ator of which is the number of NHCEs in
the prior year subgroup and denominator
of which is the total number of NHCEs in
all prior year subgroups.
(iv)Examples. The following examples
illustrate the application of this paragraph
(c)(4):
Example 1. (i) Employer B maintains two
calendar year plans, Plan O and Plan P, each of
which includes a cash or deferred arrangement.
The plans were not permissively aggregated under
§1.410(b)–7(d) for the 2005 plan year. Both plans
use the prior year testing method. Plan O had 300
eligible employees who were NHCEs for the 2005
plan year, and their ADP for that year was 6%.
Sixty of the eligible employees who were NHCEs
for the 2005 plan year under Plan O, terminated
their employment during that year. Plan P had 100
eligible employees who were NHCEs for 2005, and
the ADP for those NHCEs for that plan was 4%.
Plan O and Plan P are permissively aggregated under
§1.410(b)–7(d) for the 2006 plan year.
(ii) The permissive aggregation of Plan O and
Plan P for the 2006 plan year under §1.410(b)–7(d)
is a plan coverage change that results in treating
the plans as one plan (Plan OP) for purposes of
§1.401(k)–1(b)(4). Therefore, the prior year ADP
for the NHCEs under Plan OP for the 2006 plan year
is the weighted average of the ADPs for the prior
year subgroups: the Plan O prior year subgroup and
the Plan P prior year subgroup.
(iii) The Plan O prior year subgroup consists of
the 300 employees who, in the 2005 plan year, were
eligible NHCEs under Plan O and who would have
been eligible under Plan OP for the 2005 plan year if
Plan O and Plan P had been permissively aggregated
for that plan year. The Plan P prior year subgroup
consists of the 100 employees who, in the 2005 plan
year, were eligible NHCEs under Plan P and would
have been eligible under Plan OP for the 2005 plan
year if Plan O and Plan P had been permissively ag-
gregated for that plan year.
(iv) The weighted average of the ADPs for the
prior year subgroups is the sum of the adjusted ADP
for the Plan O prior year subgroup and the adjusted
ADP for the Plan P prior year subgroup. The adjusted
ADP for the Plan O prior year subgroup is 4.5%, cal-
culated as follows: 6% (the ADP for the NHCEs un-
der Plan O for the 2005 plan year) x 300/400 (the
number of NHCEs in the Plan O prior year subgroup
divided by the total number of NHCEs in all prior
year subgroups). The adjusted ADP for the Plan P
prior year subgroup is 1%, calculated as follows: 4%
(the ADP for the NHCEs under Plan P for the 2005
plan year) x 100/400 (the number of NHCEs in the
Plan P prior year subgroup divided by the total num-
ber of NHCEs in all prior year subgroups). Thus, the
prior year ADP for NHCEs under Plan OP for the
2006 plan year is 5.5% (the sum of adjusted ADPs
for the prior year subgroups, 4.5% plus 1%).
(v) As provided in paragraph (c)(4)(iii)(B) of this
section, the determination of whether an NHCE is a
member of a prior year subgroup is made without re-
gard to whether that NHCE terminated employment
during the prior year. Thus, the prior ADP for the
NHCEs under Plan OP for the 2006 plan year is un-
affected by the termination of the 60 NHCEs covered
by Plan O during the 2005 plan year.
Example 2. (i) The facts are the same asExample
1, except that the 60 employees who terminated em-
ployment during the 2005 plan are instead spun-off to
another plan.
(ii) The permissive aggregation of Plan O and
Plan P for the 2006 plan year under §1.410(b)–7(d)
is a plan coverage change that results in treating
the plans as one plan (Plan OP) for purposes of
§1.401(k)–1(b)(4) and the spin-off of the 60 employ-
ees is a plan coverage change. Therefore, the prior
year ADP for the NHCEs under Plan OP for the 2006
plan year is the weighted average of the ADPs for the
prior year subgroups: the Plan O prior year subgroup
and the Plan P prior year subgroup.
(iii) For purposes of determining the prior year
subgroups, the employees who would have been eli-
gible employees in the prior year under the plan be-
ing tested are determined as if both plan coverage
changes had first been effective as of the first day
of the prior plan year. The Plan O prior year sub-
group consists of the 240 employees who, in the 2005
plan year, were eligible NHCEs under Plan O and
would have been eligible under Plan OP for the 2005
plan year if the spin-off had occurred at the begin-
ningofthe2005planyearandPlanOandPlanPhad
been permissively aggregated under §1.410(b)–7(d)
for that plan year. The Plan P prior year subgroup
consists of the 100 employees who, in the 2005 plan
year, were eligible NHCEs under Plan P and would
have been eligible under Plan OP for the 2005 plan
year if Plan O and Plan P had been permissively ag-
gregated under §1.410(b)–7(d) for that plan year.
(iv) The weighted average of the ADPs for the
prior year subgroups is the sum of the adjusted ADP
with respect to the prior year subgroup consisting of
eligible NHCEs from Plan O and the adjusted ADP
with respect to the prior year subgroup consisting of
eligible NHCEs from Plan P. The adjusted ADP for
the prior year subgroup consisting of eligible NHCEs
under Plan O is 4.23%, calculated as follows: 6% (the
ADP for the NHCEs under Plan O for the 2005 plan
year) x 240/340 (the number of NHCEs in that prior
year subgroup divided by the total number of NHCEs
in all prior year subgroups). The adjusted ADP for the
prior year subgroup consisting of the eligible NHCEs
from Plan P is 1.18%, calculated as follows: 4% (the
ADP for the NHCEs under Plan P for the 2005 plan
year) x 100/340 (the number of NHCEs in that prior
year subgroup divided by the total number of NHCEs
in all prior year subgroups). Thus, the prior year ADP
for NHCEs under Plan OP for the 2006 plan year is
5.41% (the sum of adjusted ADPs for the prior year
subgroups, 4.23% plus 1.18%).
Example 3. (i) The facts are the same as inExam-
ple 1, except that instead of Plan O and Plan P being
permissively aggregated for the 2006 plan year, 200
of the employees eligible under Plan O were spun-off
from Plan O and merged into Plan P.
(ii) The spin-off from Plan O and merger to Plan P
for the 2006 plan year are plan coverage changes for
Plan P. Therefore, the prior year ADP for the NHCEs
under Plan P for the 2006 plan year is the weighted
average of the ADPs for the prior year subgroups un-
der Plan P. There are 2 subgroups under Plan P for
the 2006 plan year. The Plan O prior year subgroup
consists of the 200 employees who, in the 2005 plan
year, were eligible NHCEs under Plan O and who
would have been eligible under Plan P for the 2005
plan year if the spin-off and merger had occurred on
the first day of the 2005 plan year. The Plan P prior
year subgroup consists of the 100 employees who, in
the 2005 plan year, were eligible NHCEs under Plan
P for the 2005 plan year.
(iii) The weighted average of the ADPs for the
prior year subgroups is the sum of the adjusted ADP
for the Plan O prior year subgroup and the adjusted
ADP for the Plan P prior year subgroup. The adjusted
ADP for the Plan O prior year subgroup is 4.0%, cal-
culated as follows: 6% (the ADP for the NHCEs un-
der Plan O for the 2005 plan year) x 200/300 (the
number of NHCEs in the Plan O prior year subgroup
divided by the total number of NHCEs in all prior
year subgroups). The adjusted ADP for the Plan P
prior year subgroup is 1.33%, calculated as follows:
4% (the ADP for the NHCEs under Plan P for the
2005 plan year) x 100/300 (the number of NHCEs
in the Plan P prior year subgroup divided by the total
number of NHCEs in all prior year subgroups). Thus,
the prior year ADP for NHCEs under Plan P for the
2006 plan year is 5.33% (the sum of adjusted ADPs
for the 2 prior year subgroups, 4.0% plus 1.33%).
(iv) The spin-off from Plan O for the 2006 plan
year is a plan coverage change for Plan O. There-
fore, the prior year ADP for the NHCEs under Plan
O for the 2006 plan year is the weighted average of
the ADPs for the prior year subgroups under Plan O.
In this case, there is only one prior year subgroup un-
der Plan O, the employees who were NHCEs of Em-
ployer B for the 2005 plan year and who were eli-
gible for the 2005 plan year under Plan O. Because
there is only one prior year subgroup under Plan O,
the weighted average of the ADPs for the prior year
subgroup under Plan O is equal to the NHCE ADP for
theprioryear(2005planyear)underPlanO,or6%.
Example 4. (i) Employer C maintains a calendar
year plan, Plan Q, which includes a cash or deferred
arrangement that uses the prior year testing method.
Plan Q covers employees of Division A and Divi-
sion B. In 2005, Plan Q had 500 eligible employees
who were NHCEs, and the ADP for those NHCEs for
2005 was 2%. Effective January 1, 2006, Employer
C amends the eligibility provisions under Plan Q to
exclude employees of Division B effective January
1, 2006. In addition, effective on that same date, Em-
ployer C establishes a new calendar year plan, Plan
January 31, 20054182005–5 I.R.B.

R, which includes a cash or deferred arrangement that
uses the prior year testing method. The only eligible
employees under Plan R are the 100 employees of Di-
vision B who were eligible employees under Plan Q.
(ii) Plan R is a successor plan, within the meaning
of paragraph (c)(2)(iii) of this section (because all of
the employees were eligible employees under Plan Q
in the prior year). Therefore, Plan R cannot use the
first plan year rule set forth in paragraph (c)(2)(i) of
this section.
(iii) The amendment to the eligibility provisions
of Plan Q and the establishment of Plan R are plan
coverage changes within the meaning of paragraph
(c)(4)(iii)(A) of this section for Plan Q and Plan R.
Accordingly, each plan must determine the NHCE
ADP for the 2006 plan year under the rules set forth
in paragraph (c)(4) of this section.
(iv) The prior year ADP for NHCEs under Plan Q
is the weighted average of the ADPs for the prior year
subgroups. Plan Q has only one prior year subgroup
(because the only NHCEs who would have been eli-
gible employees under Plan Q for the 2005 plan year
if the amendment to the Plan Q eligibility provisions
had occurred as of the first day of that plan year were
eligible employees under Plan Q). Therefore, for pur-
poses of the 2006 plan year under Plan Q, the ADP
for NHCEs for the prior yearis the weighted average
of the ADPs for the prior year subgroups, or 2%, the
same as if the plan amendment had not occurred.
(v) Similarly, Plan R has only one prior year sub-
group (because the only NHCEs who would have
been eligible employees under Plan R for the 2005
plan year if the plan were established as of the first
day of that plan year were eligible employees under
Plan Q). Therefore, for purposes of the 2006 testing
year under Plan R, the ADP for NHCEs for the prior
year is the weighted average of the ADPs for the prior
year subgroups, or 2%, the same as that of Plan Q.
Example 5. (i) The facts are the same as inExam-
ple 4, except that the provisions of Plan R extend eli-
gibility to 50 hourly employees who previously were
not eligible employees under any qualified cash or de-
ferred arrangement maintained by Employer C.
(ii) Plan R is a successor plan (because 100 of
Plan R’s 150 eligible employees were eligible em-
ployees under another qualified cash or deferred ar-
rangement maintained by Employer C in the prior
year). Therefore, Plan R cannot use the first plan year
rule set forth in paragraph (c)(2)(i) of this section.
(iii) The establishment of Plan R is a plan cover-
age change that affects Plan R. Because the 50 hourly
employees were not eligible employees under any
qualified cash or deferred arrangement of Employer
C for the prior plan year, they do not comprise a prior
year subgroup. Accordingly, Plan R still has only one
prior year subgroup. Therefore, for purposes of the
2006 testing year under Plan R, the ADP for NHCEs
for the prior year is the weighted average of the ADPs
for the prior year subgroups, or 2%, the same as that
of Plan Q.
§1.401(k)–3 Safe harbor requirements.
(a)ADP test safe harbor. A cash or de-
ferred arrangement satisfies the ADP safe
harbor provision of section 401(k)(12) for
a plan year if the arrangement satisfies
the safe harbor contribution requirement of
paragraph (b) or (c) of this section for the
plan year, the notice requirement of para-
graph (d) of this section, the plan year re-
quirements of paragraph (e) of this sec-
tion, and the additional rules of paragraphs
(f), (g) and (h) of this section, as applica-
ble. Pursuant to section 401(k)(12)(E)(ii),
the safe harbor contribution requirement of
paragraph (b) or (c) of this section must be
satisfied without regard to section 401(l).
The contributions made under paragraphs
(b) and (c) of this section are referred to
as safe harbor nonelective contributions
and safe harbor matching contributions, re-
spectively.
(b)Safe harbor nonelective contribu-
tion requirement—(1)General rule.The
safe harbor nonelective contribution re-
quirement of this paragraph is satisfied if,
under the terms of the plan, the employer
is required to make a qualified nonelective
contribution on behalf of each eligible
NHCE equal to at least 3% of the em-
ployee’s safe harbor compensation.
(2)Safe harbor compensation de-
fined. For purposes of this section, safe
harbor compensation means compensa-
tion as defined in §1.401(k)–6 (which
incorporates the definition of compen-
sation in §1.414(s)–1); provided, how-
ever, that the rule in the last sentence of
§1.414(s)–1(d)(2)(iii) (which generally
permits a definition of compensation to
exclude all compensation in excess of a
specified dollar amount) does not apply in
determining the safe harbor compensation
of NHCEs. Thus, for example, the plan
may limit the period used to determine
safe harbor compensation to the eligible
employee’s period of participation.
(c)Safe harbor matching contribution
requirement—(1)In general.Thesafe
harbor matching contribution requirement
of this paragraph (c) is satisfied if, un-
der the plan, qualified matching contribu-
tions are made on behalf of each eligi-
ble NHCE in an amount determined un-
der the basic matching formula of sec-
tion 401(k)(12)(B)(i)(I), as described in
paragraph (c)(2) of this section, or under
an enhanced matching formula of section
401(k)(12)(B)(i)(II), as described in para-
graph (c)(3) of this section.
(2)Basic matching formula.Under
the basic matching formula, each eligible
NHCE receives qualified matching con-
tributions in an amount equal to the sum
of—
(i) 100% of the amount of the em-
ployee’s elective contributions that do not
exceed 3% of the employee’s safe harbor
compensation; and
(ii) 50% of the amount of the em-
ployee’s elective contributions that exceed
3% of the employee’s safe harbor com-
pensation but that do not exceed 5% of the
employee’s safe harbor compensation.
(3)Enhanced matching formula.Un-
der an enhanced matching formula, each
eligible NHCE receives a matching con-
tribution under a formula that, at any rate
of elective contributions by the employee,
provides an aggregate amount of qualified
matching contributions at least equal to the
aggregate amount ofqualified matching
contributions that would have been pro-
vided under the basic matching formula of
paragraph (c)(2) of this section. In addi-
tion, under an enhanced matching formula,
the ratio of matching contributions on be-
half of an employee under the plan for a
plan year to the employee’s elective con-
tributions may not increase as the amount
of an employee’s elective contributions in-
creases.
(4)Limitation on HCE matching contri-
butions. The safe harbor matching contri-
bution requirement of this paragraph (c) is
not satisfied if the ratio of matching con-
tributions made on account of an HCE’s
elective contributions under the cash or
deferred arrangement for a plan year to
those elective contributions is greater than
the ratio of matching contributions to elec-
tive contributions that would apply with
respect to any eligible NHCE with elec-
tive contributions at the same percentage
of safe harbor compensation.
(5)Use of safe harbor match not pre-
cluded by certain plan provisions—(i)
Safe harbor matching contributions on
employee contributions. The safe harbor
matching contribution requirement of this
paragraph (c) will not fail to be satis-
fied merely because safe harbor matching
contributions are made on both elective
contributions and employee contributions
if safe harbor matching contributions are
made with respect to the sum of elective
contributions and employee contributions
on the same terms as safe harbor matching
contributions are made with respect to
elective contributions. Alternatively, the
safe harbor matching contribution require-
ment of this paragraph (c) will not fail
to be satisfied merely because safe har-
2005–5 I.R.B.419January 31, 2005

bor matching contributions are made on
both elective contributions and employee
contributions if safe harbor matching con-
tributions on elective contributions are
not affected by the amount of employee
contributions.
(ii)Periodic matching contributions.
The safe harbor matching contribution
requirement of this paragraph (c) will not
fail to be satisfied merely because the plan
provides that safe harbor matching con-
tributions will be made separately with
respect to each payroll period (or with
respect to all payroll periods ending with
or within each month or quarter of a plan
year) taken into account under the plan for
the plan year, provided that safe harbor
matching contributions with respect to any
elective contributions made during a plan
year quarter are contributed to the plan by
the last day of the immediately following
plan year quarter.
(6)Permissible restrictions on elective
contributions by NHCEs—(i)General
rule. The safe harbor matching contri-
bution requirement of this paragraph (c)
is not satisfied if elective contributions
by NHCEs are restricted, unless the re-
strictions are permitted by this paragraph
(c)(6).
(ii)Restrictions on election periods.A
plan may limit the frequency and dura-
tion of periods in which eligible employ-
ees may make or change cash or deferred
elections under a plan. However, an em-
ployee must have a reasonable opportunity
(including a reasonable period after receipt
of the notice described in paragraph (d) of
this section) to make or change a cash or
deferred election for the plan year. For pur-
poses of this paragraph (c)(6)(ii), a 30-day
period is deemed to be a reasonable period
to make or change a cash or deferred elec-
tion.
(iii)Restrictions on amount of elective
contributions. A plan is permitted to limit
the amount of elective contributions that
may be made by an eligible employee
under a plan, provided that each NHCE
who is an eligible employee is permitted
(unless the employee is restricted under
paragraph (c)(6)(v) of this section) to make
elective contributions in an amount that
is at least sufficient to receive the max-
imum amount of matching contributions
available under the plan for the plan year,
and the employee is permitted to elect any
lesser amount of elective contributions.
However, a plan may require eligible em-
ployees to make cash or deferred elections
in whole percentages of compensation or
whole dollar amounts.
(iv)Restrictions on types of compen-
sationthatmaybedeferred.Aplanmay
limit the types of compensation that may
be deferred by an eligible employee under
a plan, provided that each eligible NHCE
is permitted to make elective contribu-
tions under a definition of compensation
that would be a reasonable definition
of compensation within the meaning of
§1.414(s)–1(d)(2). Thus, the definition of
compensation from which elective con-
tributions may be made is not required to
satisfy the nondiscrimination requirement
of §1.414(s)–1(d)(3).
(v)Restrictions due to limitations un-
der the Internal Revenue Code.Aplan
may limit the amount of elective contribu-
tions made by an eligible employee under
aplan—
(A) Because of the limitations of sec-
tion 402(g) or 415; or
(B) Because, on account of a hard-
ship distribution, an employee’s ability to
make elective contributions has been sus-
pended for 6 months in accordance with
§1.401(k)–1(d)(3)(iv)(E).
(7)Examples. The following examples
illustrate the safe harbor contribution re-
quirement of this paragraph (c):
Example 1. (i) Beginning January 1, 2006, Em-
ployer A maintains Plan L covering employees in
Divisions D and E, each of which includes HCEs
and NHCEs. Plan L contains a cash or deferred
arrangement and provides qualified matching contri-
butions equal to 100% of each eligible employee’s
elective contributions up to 3% of compensation and
50% of the next 2% of compensation. For purposes
of the matching contribution formula, safe harbor
compensation is defined as all compensation within
the meaning of section 415(c)(3) (a definition that
satisfies section 414(s)). Also, each employee is
permitted to make elective contributions from all
safe harbor compensation within the meaning of
section 415(c)(3) and maychange a cash or deferred
election at any time. Plan L limits the amount of
an employee’s elective contributions for purposes
of section 402(g) and section 415, and, in the case
of a hardship distribution, suspends an employee’s
ability to make elective contributions for 6 months
in accordance with §1.401(k)–1(d)(3)(iv)(E). All
contributions under Plan L are nonforfeitable and
are subject to the withdrawal restrictions of section
401(k)(2)(B). Plan L provides for no other contri-
butions and Employer A maintains no other plans.
Plan L is maintained on a calendar-year basis, and
all contributions for a plan year are made within 12
months after the end of the plan year.
(ii) Based on these facts, matching contributions
under Plan L are safe harbor matching contributions
because they are qualified matching contributions
equal to the basic matching formula. Accordingly,
Plan L satisfies the safe harbor contribution require-
ment of this paragraph (c).
Example 2. (i) The facts are the same as inExam-
ple 1, except that instead of providing a basic match-
ing contribution, Plan L provides a qualified match-
ing contribution equal to 100% of each eligible em-
ployee’s elective contributions up to 4% of safe har-
bor compensation.
(ii) Plan L’s formula is an enhanced matching for-
mula because each eligible NHCE receives safe har-
bor matching contributions at a rate that, at any rate of
elective contributions, provides an aggregate amount
of qualified matching contributions at least equal to
the aggregate amount of qualified matching contribu-
tions that would have been received under the basic
safe harbor matching formula, and the rate of match-
ing contributions does not increase as the rate of an
employee’s elective contributions increases. Accord-
ingly, Plan L satisfies the safe harbor contribution re-
quirement of this paragraph (c).
Example 3. (i) The facts are the same as inExam-
ple 2, except that instead of permitting each employee
to make elective contributions from all compensation
within the meaning of section 415(c)(3), each em-
ployee’s elective contributions under Plan L are lim-
ited to 15% of the employee’s basic compensation.
Basic compensationis defined under Plan L as com-
pensation within the meaning of section 415(c)(3),
but excluding overtime pay.
(ii) The definition of basic compensation under
Plan L is a reasonable definition of compensation
within the meaning of §1.414(s)–1(d)(2).
(iii) Plan L will not fail to satisfy the safe harbor
contribution requirement of this paragraph (c) merely
because Plan L limits the amount of elective contri-
butions and the types of compensation that may be
deferred by eligible employees, provided that each el-
igible NHCE may make elective contributions equal
to at least 4% of the employee’s safe harbor compen-
sation.
Example 4. (i) The facts are the same as inExam-
ple 1,exceptthatPlanLprovides that only employees
employed on the last day of the plan year will receive
a safe harbor matching contribution.
(ii) Even if the plan that provides for employee
contributions and matching contributions satisfies the
minimum coverage requirements of section 410(b)(1)
taking into account this last-day requirement, Plan L
would not satisfy the safe harbor contribution require-
ment of this paragraph (c) because safe harbor match-
ing contributions are not made on behalf of all eligible
NHCEs who make elective contributions.
(iii) The result would be the same if, instead of
providing safe harbor matching contributions, Plan L
provides for a 3% safe harbor nonelective contribu-
tion that is restricted to eligible employees under the
cash or deferred arrangement who are employed on
the last day of the plan year.
Example 5. (i) The facts are the same as inEx-
ample 1, except that instead of providing qualified
matching contributions under the basic matching for-
mula to employees in both Divisions D and E, em-
ployees in Division E are provided qualified match-
ing contributions under the basic matching formula,
while safe harbor matching contributions continue to
be provided to employees in Division D under the en-
hanced matching formula described inExample 2.
January 31, 20054202005–5 I.R.B.

(ii) Even if Plan L satisfies §1.401(a)(4)–4 with
respect to each rate of matching contributions avail-
able to employees under the plan, the plan would fail
to satisfy the safe harbor contribution requirement of
this paragraph (c) because the rate of matching con-
tributions with respect to HCEs in Division D at a rate
of elective contributions between 3% and 5% would
be greater than that with respect to NHCEs in Divi-
sion E at the same rate of elective contributions. For
example, an HCE in Division D who would have a
4% rate of elective contributions would have a rate
of matching contributions of 100% while an NHCE
in Division E who would have the same rate of elec-
tive contributions would have a lower rate of match-
ing contributions.
(d)Notice requirement—(1)General
rule. The notice requirement of this para-
graph (d) is satisfied for a plan year if
each eligible employee is given notice
of the employee’s rights and obligations
under the plan and the notice satisfies the
content requirement of paragraph (d)(2)
of this section and the timing requirement
of paragraph (d)(3) of this section. The
notice must be in writing or in such other
form as may be approved by the Commis-
sioner.
(2)Content requirement—(i)General
rule. The content requirement of this para-
graph (d)(2) is satisfied if the notice is—
(A) Sufficiently accurate and compre-
hensive to inform the employee of the em-
ployee’s rights and obligations under the
plan; and
(B) Written in a manner calculated to
be understood by the average employee
eligible to participate in the plan.
(ii)Minimum content requirement.
Subject to the requirements of paragraph
(d)(2)(iii) of this section, a notice is not
considered sufficiently accurate and com-
prehensive unless the notice accurately
describes—
(A) The safe harbor matching contribu-
tion or safe harbor nonelective contribu-
tion formula used under the plan (includ-
ing a description of the levels of safe har-
bor matching contributions, if any, avail-
able under the plan);
(B) Any other contributions under the
plan or matching contributions to another
plan on account of elective contributions
or employee contributions under the plan
(including the potential for discretionary
matching contributions) and the conditions
under which such contributions are made;
(C) The plan to which safe harbor con-
tributions will be made (if different than
the plan containing the cash or deferred ar-
rangement);
(D) The type and amount of compensa-
tion that may be deferred under the plan;
(E) How to make cash or deferred
elections, including any administrative
requirements that apply to such elections;
(F) The periods available under the plan
for making cash or deferred elections;
(G) Withdrawal and vesting provisions
applicable to contributions under the plan;
and
(H) Information that makes it easy
to obtain additional information about
the plan (including an additional copy
of the summary plan description) such
as telephone numbers, addresses and, if
applicable, electronic addresses, of indi-
viduals or offices from whom employees
can obtain such plan information.
(iii)References to SPD.Aplanwillnot
fail to satisfy the content requirements of
this paragraph (d)(2) merely because, in
the case of information described in para-
graph (d)(2)(ii)(B) of this section (relat-
ing to any other contributions under the
plan), paragraph (d)(2)(ii)(C) of this sec-
tion (relating to the plan to which safe har-
bor contributions will be made) or para-
graph (d)(2)(ii)(D) of this section (relating
to the type and amount of compensation
that may be deferred under the plan), the
notice cross-references the relevant por-
tions of a summary plan description that
provides the same information that would
be provided in accordance with such para-
graphs and that has been provided (or is
concurrently provided) to employees.
(3)Timing requirement—(i)General
rule. The timing requirement of this para-
graph (d)(3) is satisfied if the notice is
provided within a reasonable period be-
fore the beginning of the plan year (or,
in the year an employee becomes eligi-
ble, within a reasonable period before
the employee becomes eligible). The de-
termination of whether a notice satisfies
the timing requirement of this paragraph
(d)(3) is based on all of the relevant facts
and circumstances.
(ii)Deemed satisfaction of timing re-
quirement. The timing requirement of this
paragraph (d)(3) is deemed to be satisfied
if at least 30 days (and no more than 90
days) before the beginning of each plan
year, the notice is given to each eligible
employee for the plan year. In the case of
an employee who does not receive the no-
tice within the period described in the pre-
vious sentence because the employee be-
comes eligible after the 90th day before
the beginning of the plan year, the tim-
ing requirement is deemed to be satisfied
if the notice is provided no more than 90
days before the employee becomes eligi-
ble (and no later than the date the em-
ployee becomes eligible). Thus, for ex-
ample, the preceding sentence would ap-
ply in the case of any employee eligible
for the first plan year under a newly estab-
lished plan that provides for elective con-
tributions, or would apply in the case of the
first plan year in which an employee be-
comes eligible under an existing plan that
provides for elective contributions.
(e)Plan year requirement—(1)Gen-
eral rule. Except as provided in this para-
graph (e) or in paragraph (f) of this section,
a plan will fail to satisfy the requirements
of section 401(k)(12) and this section un-
less plan provisions that satisfy the rules of
this section are adopted before the first day
of the plan year and remain in effect for an
entire 12-month plan year. In addition, ex-
cept as provided in paragraph (g) of this
section, a plan which includes provisions
that satisfy the rules of this section will not
satisfy the requirements of §1.401(k)–1(b)
if it is amended to change such provisions
for that plan year. Moreover, if, as de-
scribed under paragraph (h)(4) of this sec-
tion, safe harbor matching or nonelective
contributions will be made to another plan
for a plan year, provisions under that other
plan specifying that the safe harbor contri-
butions will be made and providing that the
contributions will be QNECs or QMACs
must also be adopted before the first day
of that plan year.
(2)Initial plan year.Anewly
established plan (other than a suc-
cessor plan within the meaning of
§1.401(k)–2(c)(2)(iii)) will not be treated
as violating the requirements of this para-
graph (e) merely because the plan year is
less than 12 months, provided that the plan
year is at least 3 months long (or, in the
case of a newly established employer that
establishes the plan as soon as administra-
tively feasible after the employer comes
into existence, a shorter period). Simi-
larly, a cash or deferred arrangement will
not fail to satisfy the requirement of this
paragraph (e) if it is added to an existing
profit sharing, stock bonus, or pre-ERISA
money purchase pension plan for the first
time during that year provided that—
(i) The plan is not a successor plan; and
2005–5 I.R.B.421January 31, 2005

(ii) The cash or deferred arrangement is
made effective no later than 3 months prior
to the end of the plan year.
(3)Change of plan year. A plan that
has a short plan year as a result of changing
its plan year will not fail to satisfy the re-
quirements of paragraph (e)(1) of this sec-
tion merely because the plan year has less
than 12 months, provided that—
(i) The plan satisfied the requirements
of this section for the immediately preced-
ing plan year; and
(ii) The plan satisfies the requirements
of this section (determined without regard
to paragraph (g) of this section) for the
immediately following plan year (or for
the immediately following 12 months if
the immediately following plan year is less
than 12 months).
(4)Final plan year. A plan that termi-
nates during a plan year will not fail to sat-
isfy the requirements of paragraph (e)(1)
of this section merely because the final
plan year is less than 12 months, provided
that the plan satisfies the requirement of
this section through the date of termination
and either—
(i) The plan would satisfy the require-
ments of paragraph (g) of this section,
treating the termination of the plan as a
reduction or suspension of safe harbor
matching contributions, other than the
requirement that employees have a rea-
sonable opportunity to change their cash
or deferred elections and, if applicable,
employee contribution elections; or
(ii) The plan termination is in connec-
tion with a transaction described in section
410(b)(6)(C) or the employer incurs a sub-
stantial business hardship comparable to a
substantial business hardship described in
section 412(d).
(f)Plan amendments adopting safe
harbor nonelective contributions—(1)
General rule. Notwithstanding paragraph
(e)(1) of this section, a plan that provides
for the use of the current year testing
method may be amended after the first
day of the plan year and no later than 30
days before the last day of the plan year
to adopt the safe harbor method of this
section, effective as of the first day of the
plan year, using nonelective contributions
under paragraph (b) of this section, but
only if the plan provides the contingent
and follow-up notices described in this
section. A plan amendment made pur-
suant to this paragraph (f)(1) for a plan
year may provide for the use of the safe
harbor method described in this section
solely for that plan year and a plan sponsor
is not limited in the number of years for
which it is permitted to adopt an amend-
ment providing for the safe harbor method
of this section using nonelective contribu-
tions under paragraph (b) of this section
and this paragraph (f).
(2)Contingent notice provided.Aplan
satisfies the requirement to provide the
contingent notice under this paragraph
(f)(2) if it provides a notice that would sat-
isfy the requirements of paragraph (d) of
this section, except that, in lieu of setting
forth the safe harbor contributions used
under the plan as set forth in paragraph
(d)(2)(ii)(A) of this section, the notice
specifies that the plan may be amended
during the plan year to include the safe
harbor nonelective contribution and that,
if the plan is amended, a follow-up notice
will be provided.
(3)Follow-up notice requirement.A
plan satisfies the requirement to provide
a follow-up notice under this paragraph
(f)(3) if, no later than 30 days before the
last day of the plan year, each eligible em-
ployee is given a notice that states that the
safe harbor nonelective contributions will
be made for the plan year. The notice must
be in writing or in such other form as may
be prescribed by the Commissioner and
is permitted to be combined with a con-
tingent notice provided under paragraph
(f)(2) of this section for the next plan year.
(g)Permissible reduction or suspen-
sion of safe harbor matching contribu-
tions—(1)General rule. A plan that
provides for safe harbor matching contri-
butions will not fail to satisfy the require-
ments of section 401(k)(3) for a plan year
merely because the plan is amended dur-
ing a plan year to reduce or suspend safe
harbor matching contributions on future
elective contributions (and, if applicable,
employee contributions) provided that—
(i) All eligible employees are provided
the supplemental notice in accordance
with paragraph (g)(2) of this section;
(ii) The reduction or suspension of safe
harbor matching contributions is effective
no earlier than the later of 30 days after
eligible employees are provided the no-
tice described in paragraph (g)(2) of this
section and the date the amendment is
adopted;
(iii) Eligible employees are given a rea-
sonable opportunity (including a reason-
able period after receipt of the supplemen-
tal notice) prior to the reduction or suspen-
sion of safe harbor matching contributions
to change their cash or deferred elections
and, if applicable, their employee contri-
bution elections;
(iv) The plan is amended to provide that
the ADP test will be satisfied for the entire
plan year in which the reduction or suspen-
sion occurs using the current year testing
method described in §1.401(k)–2(a)(2)(ii);
and
(v) The plan satisfies the requirements
of this section (other than this paragraph
(g)) with respect to amounts deferred
through the effective date of the amend-
ment.
(2)Notice of suspension requirement.
The notice of suspension requirement of
this paragraph (g)(2) is satisfied if each el-
igible employee is given a notice (in writ-
ing or such other form as prescribed by the
Commissioner) that explains—
(i) The consequences of the amendment
which reduces or suspends matching con-
tributions on future elective contributions
and, if applicable, employee contributions;
(ii) The procedures for changing their
cash or deferred election and, if applicable,
their employee contribution elections; and
(iii) The effective date of the amend-
ment.
(h)Additional rules—(1)Contributions
taken into account. A contribution is taken
into account for purposes of this section
for a plan year if and only if the contribu-
tion would be taken into account for such
plan year under the rules of §1.401(k)–2(a)
or 1.401(m)–2(a). Thus, for example, a
safe harbor matching contribution must be
made within 12 months of the end of the
plan year. Similarly, an elective contribu-
tion that would be taken into account for a
plan year under §1.401(k)–2(a)(4)(i)(B)(2)
must be taken into account for such plan
year for purposes of this section, even if the
compensation would have been received
after the close of the plan year.
(2)Use of safe harbor nonelective
contributions to satisfy other nondis-
crimination tests. A safe harbor non-
elective contribution used to satisfy the
nonelective contribution requirement un-
der paragraph (b) of this section may
also be taken into account for purposes
of determining whether a plan satisfies
January 31, 20054222005–5 I.R.B.

section 401(a)(4). Thus, these contribu-
tions are not subject to the limitations on
qualified nonelective contributions under
§1.401(k)–2(a)(6)(ii), but are subject to
the rules generally applicable to nonelec-
tive contributions under section 401(a)(4).
See §1.401(a)(4)–1(b)(2)(ii). However,
pursuant to section 401(k)(12)(E)(ii), to
the extent they are needed to satisfy the
safe harbor contribution requirement of
paragraph (b) of this section, safe har-
bor nonelective contributions may not
be taken into account under any plan for
purposes of section 401(l) (including the
imputation of permitted disparity under
§1.401(a)(4)–7).
(3)Early participation rules. Sec-
tion 401(k)(3)(F) and §1.401(k)–2(a)
(1)(iii)(A), which provide an alternative
nondiscrimination rule for certain plans
that provide for early participation, do not
apply for purposes of section 401(k)(12)
and this section. Thus, a plan is not treated
as satisfying this section with respect
to the eligible employees who have not
completed the minimum age and service
requirements of section 410(a)(1)(A) un-
less the plan satisfies the requirements of
this section with respect to such eligible
employees. However, a plan is permitted
to apply the rules of section 410(b)(4)(B)
to treat the plan as two separate plans for
purposes of section 410(b) and apply the
safe harbor requirements of this section
to one plan and apply the requirements
of §1.401(k)–2 to the other plan. See
§1.401(k)–1(b)(4)(vi),Example 2.
(4)Satisfying safe harbor contribution
requirement under another defined contri-
bution plan. Safe harbor matching or non-
elective contributions may be made to the
plan that contains the cash or deferred ar-
rangement or to another defined contribu-
tion plan that satisfies section 401(a) or
403(a). If safe harbor contributions are
made to another defined contribution plan,
the safe harbor plan must specify the plan
to which the safe harbor contributions are
made and the contribution requirement of
paragraph (b) or (c) of this section must
be satisfied in the other defined contri-
bution plan in the same manner as if the
contributions were made to the plan that
contains the cash or deferred arrangement.
Consequently, the plan to which the con-
tributions are made must have the same
plan year as the plan containing the cash
and deferred arrangement and each em-
ployee eligible under the plan containing
the cash or deferred arrangement must be
eligible under the same conditions under
the other defined contribution plan. The
plan to which the safe harbor contributions
are made need not be a plan that can be
aggregated with the plan that contains the
cash or deferred arrangement.
(5)Contributions used only once.Safe
harbor matching or nonelective contribu-
tions cannot be used to satisfy the require-
ments of this section with respect to more
than one plan.
§1.401(k)–4 SIMPLE 401(k) plan
requirements.
(a)General rule. A cash or deferred
arrangement satisfies the SIMPLE 401(k)
plan provision of section 401(k)(11) for a
plan year if the arrangement satisfies the
requirements of paragraphs (b) through (i)
of this section for that year. A plan that
contains a cash or deferred arrangement
that satisfies this section is referred to as
a SIMPLE 401(k) plan. Pursuant to sec-
tion 401(k)(11), a SIMPLE 401(k) plan is
treated as satisfying the ADP test of sec-
tion 401(k)(3)(A)(ii) for that year.
(b)Eligible employer—(1)General
rule. A SIMPLE 401(k) plan must be
established by an eligible employer. Eligi-
ble employer for purposes of this section
means, with respect to any plan year, an
employer that had no more than 100 em-
ployees who each received at least $5,000
of SIMPLE compensation, as defined in
paragraph (e)(5) of this section, from the
employer for the prior calendar year.
(2)Special rule. An eligible employer
that establishes a SIMPLE 401(k) plan for
a plan year and that fails to be an eligi-
ble employer for any subsequent plan year,
is treated as an eligible employer for the
2 plan years following the last plan year
the employer was an eligible employer. If
the failure is due to any acquisition, dis-
position, or similar transaction involving
an eligible employer, the preceding sen-
tence applies only if the provisions of sec-
tion 410(b)(6)(C)(i) are satisfied.
(c)Exclusive plan—(1)General rule.
The SIMPLE 401(k) plan must be the ex-
clusive plan for each SIMPLE 401(k) plan
participant for the plan year. This require-
ment is satisfied if there are no contribu-
tions made, or benefits accrued, for ser-
vices during the plan year on behalf of
any SIMPLE 401(k) plan participant un-
der any other qualified plan maintained by
the employer. Other qualified plan for pur-
poses of this section means any plan, con-
tract, pension, or trust described in section
219(g)(5)(A) or (B).
(2)Special rule. A SIMPLE 401(k)
plan will not be treated as failing the re-
quirements of this paragraph (c) merely
because any SIMPLE 401(k) plan partic-
ipant receives an allocation of forfeitures
under another plan of the employer.
(d)Election and notice—(1)General
rule. An eligible employer establishing or
maintaining a SIMPLE 401(k) plan must
satisfy the election and notice require-
ments in paragraphs (d)(2) and (3) of this
section.
(2)Employee elections—(i)Initial plan
year of participation. For the plan year in
which an employee first becomes eligible
under the SIMPLE 401(k) plan, the em-
ployee must be permitted to make a cash
or deferred election under the plan during
a 60-day period that includes either the day
the employee becomes eligible or the day
before.
(ii)Subsequent plan years. For each
subsequent plan year, each eligible em-
ployee must be permitted to make or mod-
ify his cash or deferred election during the
60-day period immediately preceding such
plan year.
(iii)Election to terminate.Aneligible
employee must be permitted to terminate
his cash or deferred election at any time.
If an employee does terminate his cash or
deferred election, the plan is permitted to
provide that such employee cannot have
elective contributions made under the plan
for the remainder of the plan year.
(3)Employee notices. The employer
must notify each eligible employee within
a reasonable time prior to each 60-day
election period, or on the day the elec-
tion period starts, that he or she can make
a cash or deferred election, or modify a
prior election, if applicable, during that pe-
riod. The notice must state whether the
eligible employer will make the matching
contributions described in paragraph (e)(3)
of this section or the nonelective contribu-
tions described in paragraph (e)(4) of this
section.
(e)Contributions—(1)General rule.
A SIMPLE 401(k) plan satisfies the con-
tribution requirements of this paragraph
(e) for a plan year only if no contribu-
2005–5 I.R.B.423January 31, 2005

tions may be made to the SIMPLE 401(k)
plan during such year, other than contri-
butions described in this paragraph (e)
and rollover contributions described in
§1.402(c)–2, Q&A–1(a).
(2)Elective contributions. Subject to
the limitations on annual additions un-
der section 415, each eligible employee
must be permitted to make an election
to have up to $10,000 of elective contri-
butions made on the employee’s behalf
under the SIMPLE 401(k) plan for a plan
year. The $10,000 limit is increased be-
ginning in 2006 in the same manner as
the $160,000 amount is adjusted under
section 415(d), except that pursuant to
section 408(p)(2)(E)(ii) the base period
shall be the calendar quarter beginning
July 1, 2004, and any increase which is
not a multiple of $500 is rounded to the
next lower multiple of $500.
(3)Matching contributions. Each plan
year, the eligible employer must contribute
a matching contribution to the account of
each eligible employee on whose behalf
elective contributions were made for the
plan year. The amount of the matching
contribution must equal the lesser of the
eligible employee’s elective contributions
for the plan year or 3% of the eligible
employee’s SIMPLE compensation for the
entire plan year.
(4)Nonelective contributions.Forany
plan year, in lieu of contributing matching
contributions described in paragraph (e)(3)
of this section, an eligible employer may,
in accordance with plan terms, contribute
a nonelective contribution to the account
of each eligible employee in an amount
equal to 2% of the eligible employee’s
SIMPLE compensation for the entire plan
year. The eligible employer may limit the
nonelective contributions to those eligible
employees who received at least $5,000 of
SIMPLE compensation from the employer
for the entire plan year.
(5)SIMPLE compensation. Except
as otherwise provided, the termSIMPLE
compensationfor purposes of this section
means the sum of wages, tips, and other
compensation from the eligible employer
subject to federal income tax withhold-
ing(asdescribedinsection6051(a)(3))
and the employee’s elective contribu-
tions made under any other plan, and
if applicable, elective deferrals under
a section 408(p) SIMPLE IRA plan, a
section 408(k)(6) SARSEP, or a plan or
contract that satisfies the requirements
of section 403(b), and compensation de-
ferred under a section 457 plan, required
to be reported by the employer on Form
W–2(asdescribedinsection6051(a)(8)).
For self-employed individuals, SIMPLE
compensation means net earnings from
self-employment determined under sec-
tion 1402(a) prior to subtracting any con-
tributions made under the SIMPLE 401(k)
plan on behalf of the individual.
(f)Vesting. All benefits attributable to
contributions described in paragraph (e) of
this section must be nonforfeitable at all
times.
(g)Plan year. The plan year of a
SIMPLE 401(k) plan must be the whole
calendar year. Thus, in general, a SIMPLE
401(k) plan can be established only on
January 1 and can be terminated only on
December 31. However, in the case of an
employer that did not previously maintain
a SIMPLE 401(k) plan, the establishment
date can be as late as October 1 (or later
in the case of an employer that comes into
existence after October 1 and establishes
theSIMPLE401(k)planassoonasad-
ministratively feasible after the employer
comes into existence).
(h)Other rules. A SIMPLE 401(k) plan
is not treated as a top-heavy plan under
section 416. See section 416(g)(4)(G).
§1.401(k)–5 Special rules for mergers,
acquisitions and similar events.
[Reserved].
§1.401(k)–6 Definitions.
Unless otherwise provided, the defini-
tions of this section govern for purposes of
section 401(k) and the regulations thereun-
der.
Actual contribution percentage (ACP)
test.Actual contribution percentage test
orACP testmeans the test described in
§1.401(m)–2(a)(1).
Actual deferral percentage (ADP).Ac-
tual deferral percentageorADPmeans the
ADP of the group of eligible employees as
defined in §1.401(k)–2(a)(2).
Actual deferral percentage (ADP)
test.Actual deferral percentage testor
ADP testmeans the test described in
§1.401(k)–2(a)(1).
Actual deferral ratio (ADR).Actual
deferral ratioorADRmeans the ADR
of an eligible employee as defined in
§1.401(k)–2(a)(3).
Cash or deferred arrangement.Cash
or deferred arrangementis defined in
§1.401(k)–1(a)(2).
Cash or deferred election.Cash
or deferred electionis defined in
§1.401(k)–1(a)(3).
Compensation.Compensationmeans
compensation as defined in section 414(s)
and §1.414(s)–1. The period used to de-
termine an employee’s compensation for
a plan year must be either the plan year
or the calendar year ending within the
plan year. Whichever period is selected
must be applied uniformly to determine
the compensation of every eligible em-
ployee under the plan for that plan year.
A plan may, however, limit the period
taken into account under either method
to that portion of the plan year or cal-
endar year in which the employee was
an eligible employee, provided that this
limit is applied uniformly to all eligible
employees under the plan for the plan
year. In the case of an HCE whose ADR
is determined under §1.401(k)–2(a)(3)(ii),
period of participation includes peri-
ods under another plan for which elec-
tive contributions are aggregated under
§1.401(k)–2(a)(3)(ii). See also section
401(a)(17) and §1.401(a)(17)–1(c)(1).
Current year testing method.Current
year testing methodmeans the testing
method described in §1.401(k)–2(a)(2)(ii)
or 1.401(m)–2(a)(2)(ii) under which the
applicable year is the current plan year.
Elective contributions.Elective con-
tributionsmeans employer contributions
made to a plan pursuant to a cash or de-
ferred election under a cash or deferred
arrangement (whether or not the arrange-
ment is a qualified cash or deferred ar-
rangement under §1.401(k)–1(a)(4)).
Eligible employee—(1)General rule.
Eligible employeemeans an employee
who is directly or indirectly eligible to
make a cash or deferred election under the
plan for all or a portion of the plan year.
For example, if an employee must per-
form purely ministerial or mechanical acts
(e.g., formal application for participation
or consent to payroll withholding) in order
to be eligible to make a cash or deferred
election for a plan year, the employee is
an eligible employee for the plan year
without regard to whether the employee
performs the acts.
January 31, 20054242005–5 I.R.B.

(2)Conditions on eligibility.Anem-
ployee who is unable to make a cash or
deferred election because the employee
has not contributed to another plan is also
an eligible employee. By contrast, if an
employee must perform additional service
(e.g., satisfy a minimum period of ser-
vice requirement) in order to be eligible
to make a cash or deferred election for
a plan year, the employee is not an eli-
gible employee for the plan year unless
the service is actually performed. See
§1.401(k)–1(e)(5), however, for certain
limits on the use of minimum service re-
quirements. An employee who would be
eligible to make elective contributions but
for a suspension due to a distribution, a
loan, or an election not to participate in the
plan, is treated as an eligible employee for
purposes of section 401(k)(3) for a plan
year even though the employee may not
make a cash or deferred election by reason
of the suspension. Finally, an employee
does not fail to be treated as an eligible
employee merely because the employee
may receive no additional annual additions
because of section 415(c)(1).
(3)Certain one-time elections.Anem-
ployee is not an eligible employee merely
because the employee, no later than the
employee’s first becoming eligible to
make a cash or deferred election under
any plan or arrangement of the employer
(described in section 219(g)(5)(A)), is
given the one-time opportunity to elect,
and the employee does in fact elect, not
to be eligible to make a cash or deferred
election under the plan or any other plan
or arrangement maintained by the em-
ployer (including plans not yet estab-
lished) for the duration of the employee’s
employment with the employer. This
rule applies in addition to the rules in
§1.401(k)–1(a)(3)(v) relating to the def-
inition of a cash or deferred election. In
no event is an election made after De-
cember 23, 1994, treated as a one-time
irrevocable election under this paragraph
if the election is made by an employee
who previously became eligible under an-
other plan or arrangement (whether or not
terminated) of the employer.
Eligible HCE.Eligible HCEmeans an
eligible employee who is an HCE.
Eligible NHCE.Eligible NHCEmeans
an eligible employee who is not an HCE.
Employee.Employeemeans an em-
ployee within the meaning of §1.410(b)–9.
Employee stock ownership plan
(ESOP).Employee stock ownership plan
orESOPmeans the portion of a plan
that is an ESOP within the meaning of
§1.410(b)–7(c)(2).
Employer.Employermeans an em-
ployer within the meaning of §1.410(b)–9.
Excess contributions.Excess contri-
butionsmeans, with respect to a plan
year, the amount of total excess contri-
butions apportioned to an HCE under
§1.401(k)–2(b)(2)(iii).
Excess deferrals.Excess deferrals
means excess deferrals as defined in
§1.402(g)–1(e)(3).
Highly compensated employee (HCE).
Highly compensated employeeorHCEhas
the meaning provided in section 414(q).
Matching contributions.Matching con-
tributionsmeans matching contributions
as defined in §1.401(m)–1(a)(2).
Nonelective contributions.Nonelective
contributionsmeans employer contribu-
tions (other than matching contributions)
with respect to which the employee may
not elect to have the contributions paid
to the employee in cash or other benefits
instead of being contributed to the plan.
Non-employee stock ownership plan
(non-ESOP).Non-employee stock owner-
ship planornon-ESOPmeans the portion
of a plan that is not an ESOP within the
meaning of §1.410(b)–7(c)(2).
Non-highly compensated employee
(NHCE).Non-highly compensated em-
ployeeorNHCEmeans an employee who
is not an HCE.
Plan.Planis defined in §1.401(k)–1
(b)(4).
Pre-ERISA money purchase pension
plan.(1)Pre-ERISA money purchase pen-
sion planis a pension plan—
(i) That is a defined contribution plan
(as defined in section 414(i));
(ii) That was in existence on June 27,
1974, and as in effect on that date, included
a salary reductionagreement; and
(iii) Under which neither the employee
contributions nor the employer contribu-
tions, including elective contributions,
may exceed the levels (as a percentage of
compensation) provided for by the contri-
bution formula in effect on June 27, 1974.
(2) A plan was in existence on June 27,
1974, if it was a written plan adopted on or
before that date, even if no funds had yet
been paid to the trust associated with the
plan.
Prior year testing method.Prior
year testingmethod means the test-
ing method under which the appli-
cable year is the prior plan year, as
described in §1.401(k)–2(a)(2)(ii) or
1.401(m)–2(a)(2)(ii).
Qualified matching contributions
(QMACs).Qualified matching con-
tributionsorQMACsmeans matching
contributions that, except as provided
otherwise in §1.401(k)–1(c) and (d), sat-
isfy the requirements of §1.401(k)–1(c)
and (d) as though the contributions were
elective contributions, without regard to
whether the contributions are actually
taken into account under the ADP test un-
der §1.401(k)–2(a)(6) or the ACP test un-
der §1.401(m)–2(a)(6). Thus, the match-
ing contributions must satisfy the vesting
requirements of §1.401(k)–1(c) and be
subject to the distribution requirements of
§1.401(k)–1(d) whenthey are contributed
to the plan. See also §1.401(k)–2(b)(4)(iii)
for a rule providing that a matching contri-
bution does not fail to qualify as a QMAC
solely because it is forfeitable under sec-
tion 411(a)(3)(G) as a result of being a
matching contribution with respect to an
excess deferral, excess contribution, or
excess aggregate contribution.
Qualified nonelective contributions
(QNECs).Qualified nonelective con-
tributionsorQNECsmeans employer
contributions, other than elective con-
tributions or matching contributions,
that, except as provided otherwise in
§1.401(k)–1(c) and (d), satisfy the re-
quirements of §1.401(k)–1(c) and (d)
as though the contributions were elec-
tive contributions, without regard to
whether the contributions are actually
taken into account under the ADP test
under §1.401(k)–2(a)(6) or the ACP test
under §1.401(m)–2(a)(6). Thus, the non-
elective contributions must satisfy the
vesting requirements of §1.401(k)–1(c)
and be subject to the distribution require-
ments of §1.401(k)–1(d) when they are
contributed to the plan.
Rural cooperative plans.Rural cooper-
ative planmeans a plan described in sec-
tion 401(k)(7).
Par. 5. Sections 1.401(m)–0 through
1.401(m)–2 are revised and sections
1.401(m)–3 through 1.401(m)–5 are added
to read as follows:
2005–5 I.R.B.425January 31, 2005

§1.401(m)–0 Table of contents.
This section contains first a list of sec-
tion headings and then a list of the para-
graphs in each section in §§1.401(m)–1
through 1.401(m)–5.
LIST OF SECTIONS
§1.401(m)–1 Employee contributions
and matching contributions.
§1.401(m)–2 ACP test.
§1.401(m)–3 Safe harbor requirements.
§1.401(m)–4 Special rules for mergers,
acquisitions and similar events. [Re-
served].
§1.401(m)–5 Definitions.
LIST OF PARAGRAPHS
§1.401(m)–1 Employee contributions and
matching contributions.
(a) General nondiscrimination rules.
(1) Nondiscriminatory amount of con-
tributions.
(i) Exclusive means of amounts testing.
(ii) Testing benefits, rights and features.
(2) Matching contributions.
(i) In general.
(ii) Employer contributions made on ac-
count of an employee contribution or elec-
tive deferral.
(iii) Employer contributions not on ac-
count of an employee contribution or elec-
tive deferral.
(A) General rule.
(B) Special rule for forfeitures and re-
leased ESOP shares.
(C) Exception forbona fideadministra-
tive considerations.
(3) Employee contributions.
(i) In general.
(ii) Certain contributions not treated as
employee contributions.
(iii) Qualified cost-of-living arrange-
ments.
(b) Nondiscrimination requirements for
amount of contributions.
(1) Matching contributions and em-
ployee contributions.
(2) Automatic satisfaction by certain
plans.
(3) Anti-abuse provisions.
(4) Aggregation and restructuring.
(i) In general.
(ii) Aggregation of employee contribu-
tions and matching contributions within a
plan.
(iii) Aggregation of plans.
(A) In general.
(B) Arrangements with inconsistent
ACP testing methods.
(iv) Disaggregation of plans and sepa-
rate testing.
(A) In general.
(B) Restructuring prohibited.
(v) Certain disaggregation rules not ap-
plicable.
(c) Additional requirements.
(1) Separate testing for employee con-
tributions and matching contributions.
(2) Plan provision requirement.
(d) Effective date.
(1) General rule.
(2) Early implementation permitted.
(3) Applicability of prior regulations.
§1.401(m)–2 ACP test.
(a) Actual contribution percentage
(ACP) test.
(1) In general.
(i) ACP test formula.
(ii) HCEs as sole eligible employees.
(iii) Special rule forearly participation.
(2) Determination of ACP.
(i) General rule.
(ii) Determination of applicable year
under current year and prior year testing
method.
(3) Determination of ACR.
(i) General rule.
(ii) ACR of HCEs eligible under more
than one plan.
(A) General rule.
(B) Plans not permitted to be aggre-
gated.
(iii) Example.
(4) Employee contributions and match-
ing contributions taken into account under
the ACP test.
(i) Employee contributions.
(ii) Recharacterized elective contribu-
tions.
(iii) Matching contributions.
(5) Employee contributions and match-
ing contributions not taken into account
under the ACP test.
(i) General rule.
(ii) Disproportionate matching contri-
butions.
(A) Matching contributions in excess of
100%.
(B) Representative matching rate.
(C) Definition of matching rate.
(iii) Qualified matching contributions
used to satisfy the ADP test.
(iv) Matching contributions taken into
account under safe harbor provisions.
(v) Treatment of forfeited matching
contributions.
(vi) Additional employee contributions
or matching contributions pursuant to sec-
tion 414(u).
(6) Qualified nonelective contributions
and elective contributions that may be
taken into account under the ACP test.
(i) Timing of allocation.
(ii) Elective contributions taken into ac-
count under the ACP test.
(iii) Requirement that amount satisfy
section 401(a)(4).
(iv) Aggregation must be permitted.
(v) Disproportionate contributions not
taken into account.
(A) General rule.
(B) Definition of representative contri-
bution rate.
(C) Definition of applicable contribu-
tion rate.
(D) Special rule for prevailing wage
contributions.
(vi)Contributiononlyusedonce.
(7) Examples.
(b) Correction of excess aggregate con-
tributions.
(1) Permissible correction methods.
(i) In general.
(A) Additional contributions.
(B) Excess aggregate contributions dis-
tributed or forfeited.
(ii) Combination of correction methods.
(iii) Exclusive means of correction.
(2) Correction through distribution.
(i) General rule.
(ii) Calculation of total amount to be
distributed.
(A) Calculate the dollar amount of
excess aggregate contributions for each
HCE.
(B) Determination of the total amount
of excess aggregate contributions.
(C) Satisfaction of ACP.
(iii) Apportionment of total amount of
excess aggregate contributions among the
HCEs.
(A) Calculate the dollar amount of
excess aggregate contributions for each
HCE.
(B) Limit on amount apportioned to any
HCE.
(C) Apportionment to additional HCEs.
January 31, 20054262005–5 I.R.B.

(iv) Income allocable to excess aggre-
gate contributions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating in-
come for the plan year.
(D) Safe harbor method of allocating
gap period income.
(E) Alternative method of allocating
plan year and gap period income.
(F) Allocable income for recharacter-
ized elective contributions.
(v) Distribution and forfeiture.
(vi) Tax treatment of corrective distri-
butions.
(A) General rule.
(B) Rule forde minimisdistributions.
(3) Other rules.
(i) No employee or spousal consent re-
quired.
(ii) Treatment of corrective distribu-
tions and forfeited contributions as em-
ployer contributions.
(iii) No reduction of required minimum
distribution.
(iv) Partial correction.
(v) Matching contributions on excess
contributions, excess deferrals and excess
aggregate contributions.
(A) Corrective distributions not permit-
ted.
(B) Coordination with section
401(a)(4).
(vi) No requirement for recalculation.
(4) Failure to timely correct.
(i) Failure to correct within 2
1
/2months
after end of plan year.
(ii) Failure to correct within 12 months
after end of plan year.
(5) Examples.
(c) Additional rules for prior year test-
ing method.
(1) Rules for change in testing method.
(2)CalculationofACPundertheprior
year testing method for the first plan year.
(i) Plans that are not successor plans.
(ii) First plan year defined.
(iii) Plans that are successor plans.
(3) Plans using different testing meth-
ods for the ACP and ADP test.
(4) Rules for plan coverage change.
(i) In general.
(ii) Optional rule for minor plan cover-
age changes.
(iii) Definitions.
(A) Plan coverage change.
(B) Prior year subgroup.
(C) Weighted average of the ACPs for
the prior year subgroups.
(iv) Examples.
§1.401(m)–3 Safe harbor requirements.
(a) ACP test safe harbor.
(b) Safe harbor nonelective contribu-
tion requirement.
(c) Safe harbor matching contribution
requirement.
(d) Limitation on contributions.
(1) General rule.
(2) Matching rate must not increase.
(3) Limit on matching contributions.
(4) Limitation on rate of match.
(5) HCEs participating in multiple
plans.
(6) Permissible restrictions on elective
deferrals by NHCEs.
(i) General rule.
(ii) Restrictions on election periods.
(iii) Restrictions on amount of contribu-
tions.
(iv) Restrictions on types of compensa-
tion that may be deferred.
(v) Restrictions due to limitations under
the Internal Revenue Code.
(e) Notice requirement.
(f) Plan year requirement.
(1) General rule.
(2) Initial plan year.
(3)Changeofplanyear.
(4) Final plan year.
(g) Plan amendments adopting nonelec-
tive safe harbor contributions.
(h) Permissible reduction or suspension
of safe harbor matching contributions.
(1) General rule.
(2) Notice of suspension requirement.
(i) Reserved.
(j) Other rules.
(1) Contributions taken into account.
(2) Use of safe harbor nonelective con-
tributions to satisfy other nondiscrimina-
tion tests.
(3) Early participation rules.
(4) Satisfying safe harbor contribution
requirement under another defined contri-
bution plan.
(5) Contributions used only once.
(6) Plan must satisfy ACP with respect
to employee contributions.
§1.401(m)–4 Special rules for mergers,
acquisitions and similar events.
[Reserved].
§1.401(m)–5 Definitions.
§1.401(m)–1 Employee contributions and
matching contributions.
(a)Generalnondiscrimination
rules—(1)Nondiscriminatory amount
of contributions—(i)Exclusive means of
amounts testing. A defined contribution
plan does not satisfy section 401(a) for a
plan year unless the amount of employee
contributions and matching contributions
to the plan for the plan year satisfies sec-
tion 401(a)(4). The amount of employee
contributions and matching contributions
under a plan satisfies the requirements of
section 401(a)(4) with respect to amounts
if and only if the amount of employee
contributions and matching contributions
satisfies the nondiscrimination test of sec-
tion 401(m) under paragraph (b) of this
section and the plan satisfies the additional
requirements of paragraph (c) of this sec-
tion. See §1.401(a)(4)–1(b)(2)(ii)(B).
(ii)Testing benefits, rights and fea-
tures. A plan that provides for employee
contributions or matching contributions
must satisfy the requirements of section
401(a)(4) relating to benefits, rights and
features in addition to the requirement
regarding amounts described in paragraph
(a)(1)(i) of this section. For example,
the right to make each level of employee
contributions and the right to each level
of matching contributions under the plan
are benefits, rights or features subject to
the requirements of section 401(a)(4).
See §1.401(a)(4)–4(e)(3)(i) and (iii)(F)
through (G).
(2)Matching contributions—(i)In
general. For purposes of section 401(m),
this section and §§1.401(m)–2 through
1.401(m)–5, matchingcontributions are—
(A) Any employer contribution (includ-
ing a contribution made at the employer’s
discretion) to a defined contribution plan
on account of an employee contribution to
a plan maintained by the employer;
(B) Any employer contribution (includ-
ing a contribution made at the employer’s
discretion) to a defined contribution plan
on account of an elective deferral; and
2005–5 I.R.B.427January 31, 2005

(C) Any forfeiture allocated on the basis
of employee contributions, matching con-
tributions, or elective deferrals.
(ii)Employer contributions made on
account of an employee contribution or
elective deferral. Whether an employer
contribution is made on account of an
employee contribution or an elective de-
ferral is determined on the basis of all the
relevant facts and circumstances, includ-
ing the relationship between the employer
contribution and employee actions outside
the plan. An employer contribution made
to a defined contribution plan on account
of contributions made by an employee
under an employer-sponsored savings ar-
rangement that are not held in a plan that
is intended to be a qualified plan or other
arrangement described in §1.402(g)–1(b)
is not a matching contribution.
(iii)Employer contributions not on ac-
count of an employee contribution or elec-
tive deferral—(A) General rule.Employer
contributions are not matching contribu-
tions made on account of elective defer-
rals if they are contributed before the cash
or deferred election is made or before the
employees’ performance of services with
respect to which the elective deferrals are
made (or when the cash that is subject to
the cash or deferred elections would be
currently available, ifearlier). In addition,
an employer contribution is not a matching
contribution made on account of an em-
ployee contribution if it is contributed be-
fore the employee contribution.
(B)Exceptions for forfeitures and
released ESOP shares. The rule of para-
graph (a)(3)(iii)(A) of this section does
not apply to a forfeiture that is allocated
as a matching contribution. In addi-
tion, an allocation of shares from an
ESOP loan suspense account described
in §54.4975–11(c) and (d) of this chapter
will not fail to be treated as a matching
contribution solely because the employer
contribution that resulted in the release
and allocation of those shares from the
suspense account is made before the em-
ployees’ performance of services with
respect to which the elective deferrals are
made (or when the cash that is subject to
the cash or deferred elections would be
currently available, if earlier) provided
that—
(1) The contribution is for a required
payment that is due under the loan terms;
and
(2) The contribution is not made early
with a principal purpose of accelerating
deductions.
(C)Exception for bona fide admin-
istrative considerations. The timing of
contributions will not be treated as fail-
ing to satisfy the requirements of this
paragraph (a)(3)(iii) merely because con-
tributions are occasionally made before
the employees’ performance of services
with respect to which the elective deferrals
are made (or when the cash that is subject
to the cash or deferred elections would
be currently available, if earlier) in order
to accommodatebona fideadministrative
considerations and are not paid early with
a principal purpose of accelerating deduc-
tions.
(3)Employee contributions—(i)In
general. For purposes of section 401(m),
this section and §§1.401(m)–2 through
1.401(m)–5, employee contributions are
contributions to a plan that are designated
or treated at the time of contribution as
after-tax employee contributions (e.g.,by
treating the contributions as taxable in-
come subject to applicable withholding
requirements) and are allocated to an indi-
vidual account for each eligible employee
to which attributable earnings and losses
are allocated. See §1.401(k)–1(a)(2)(ii).
The termemployee contributionsin-
cludes—
(A) Employee contributions to the de-
fined contribution portion of a plan de-
scribedinsection414(k);
(B) Employee contributions applied to
the purchase of whole life insurance pro-
tection or survivor benefit protection under
a defined contribution plan;
(C) Amounts attributable to excess
contributions within the meaning of sec-
tion 401(k)(8)(B) that are recharacter-
ized as employee contributions under
§1.401(k)–2(b)(3); and
(D) Employee contributions to a plan or
contract that satisfies the requirements of
section 403(b).
(ii)Certain contributions not treated
as employee contributions.Theterm
employee contributions does not include
designated Roth contributions, repayment
of loans, rollover contributions, repay-
ment of distributions described in section
411(a)(7)(C), or employee contributions
that are transferred to the plan from an-
other plan.
(iii)Qualified cost-of-living arrange-
ments. Employee contributions to a quali-
fied cost-of-living arrangement described
in section 415(k)(2)(B) are treated as
employee contributions to a defined con-
tribution plan, without regard to the re-
quirement that the employee contributions
be allocated to an individual account to
which attributable earnings and losses are
allocated.
(b)Nondiscrimination requirements for
amount of contributions—(1)Matching
contributions and employee contributions.
The matching contributions and employee
contributions under a plan satisfy this
paragraph (b) for a plan year only if the
plan satisfies—
(i)The ACP test of section 401(m)(2)
described in §1.401(m)–2;
(ii) The ACP safe harbor provi-
sions of section 401(m)(11) described
in §1.401(m)–3; or
(iii) The SIMPLE 401(k) provisions of
sections 401(k)(11) and 401(m)(10) de-
scribed in §1.401(k)–4.
(2)Automatic satisfaction by certain
plans. Notwithstanding paragraph (b)(1)
of this section, the requirements of this
section are treated as satisfied with re-
spect to employee contributions and
matching contributions under a collec-
tively bargained plan (or the portion of
a plan) that automatically satisfies sec-
tion 410(b). See §§1.401(a)(4)–1(c)(5)
and 1.410(b)–2(b)(7). Additionally, the
requirements of sections 401(a)(4) and
410(b) do not apply to a governmen-
tal plan (within the meaning of section
414(d)) maintained by a State or local gov-
ernment or political subdivision thereof
(or agency or instrumentality thereof)
and, accordingly such plans are not re-
quired to comply with this section. See
sections 401(a)(5)(G), 403(b)(12)(C) and
410(c)(1)(A).
(3)Anti-abuse provisions. Sections
1.401(m)–1 through 1.401(m)–5 are
designed to provide simple, practical
rules that accommodate legitimate plan
changes. At the same time, the rules are
intended to be applied by employers in a
manner that does not make use of changes
in plan testing procedures or other plan
provisions to inflate inappropriately the
ACP for NHCEs (which is used as a
benchmark for testing the ACP for HCEs)
or to otherwise manipulate the nondis-
crimination testing requirements of this
January 31, 20054282005–5 I.R.B.

paragraph (b). Further, this paragraph (b)
is part of the overall requirement that ben-
efits or contributions not discriminate in
favor of HCEs. Therefore, a plan will not
be treated as satisfying the requirements
of this paragraph (b) if there are repeated
changes to plan testing procedures or plan
provisions that have the effect of distort-
ingtheACPsoastoincreasesignificantly
the permitted ACP for HCEs, or otherwise
manipulate the nondiscrimination rules of
this paragraph, if a principal purpose of
the changes was to achieve such a result.
(4)Aggregation and restructuring—(i)
In general. This paragraph (b)(4) con-
tains the exclusive rules for aggregating
and disaggregating plans that provide for
employee contributions and matching con-
tributions for purposes of this section and
§§1.401(m)–2 through 1.401(m)–5.
(ii)Aggregation of employee contribu-
tions and matching contributions within
aplan. Except as otherwise specifically
provided in this paragraph (b)(4) and
§1.401(m)–3(j)(6), a plan must be subject
to a single test under paragraph (b)(1) of
this section with respect to all employee
contributions and matching contribu-
tions and all eligible employees under the
plan. Thus, for example, if two groups
of employees are eligible for matching
contributions under a plan, all employee
contributions and matching contributions
under the plan must be subject to a single
test, even if they have significantly dif-
ferent features, such as different rates of
match.
(iii)Aggregation of plans—(A)In
general.Thetermplanmeans a plan
within the meaning of §1.410(b)–7(a) and
(b), after application of the mandatory
disaggregation rules of §1.410(b)–7(c),
and the permissive aggregation rules of
§1.410(b)–7(d), as modified by paragraph
(b)(4)(v) of this section. Thus, for ex-
ample, two plans (within the meaning of
§1.410(b)–7(b)) that are treated as a single
plan pursuant to the permissive aggrega-
tion rules of §1.410(b)–7(d) are treated
as a single plan for purposes of sections
401(k) and 401(m).
(B)Arrangements with inconsistent
ACP testing methods. Pursuant to para-
graph (b)(4)(ii) of this section, a single
testing method must apply with respect to
all employee contributions and matching
contributions and all eligible employees
under a plan. Thus, in applying the permis-
sive aggregation rules of §1.410(b)–7(d),
an employer may not aggregate plans
(within the meaning of §1.410(b)–7(b))
that apply inconsistent testing methods.
For example, a plan (within the meaning
of §1.410(b)–7) that applies the current
year testing method may not be aggre-
gated with another plan that applies the
prior year testing method. Similarly, an
employer may not aggregate a plan (within
the meaning of §1.410(b)–7) that is using
the ACP safe harbor provisions of section
401(m)(11) and another plan that is using
the ACP test of section 401(m)(2).
(iv)Disaggregation of plans and sepa-
rate testing—(A)In general.Ifemployee
contributions or matching contributions
are included in a plan (within the mean-
ing of §1.410(b)–7(b)) that is mandatorily
disaggregated under the rules of section
410(b) (as modified by this paragraph
(b)(4)), the matching contributions and
employee contributions under that plan
must be disaggregated in a consistent
manner. For example, in the case of
an employer that is treated as operating
qualified separate lines of business under
section 414(r), if the eligible employees
under a plan which provides for employee
contributions or matching contributions
are in more than one qualified separate line
of business, only those employees within
each qualified separate line of business
may be taken into account in determining
whether each disaggregated portion of the
plan complies with the requirements of
section 401(m), unless the employer is ap-
plying the special rule for employer-wide
plans in §1.414(r)–1(c)(2)(ii) with re-
spect to the plan. Similarly, if a plan that
provides for employee contributions or
matching contributions under which em-
ployees are permitted to participate before
they have completed the minimum age and
service requirements of section 410(a)(1)
applies section 410(b)(4)(B) for determin-
ing whether the plan complies with section
410(b)(1), then the plan must be treated
as two separate plans, one comprising
all eligible employees who have met the
minimum age and service requirements of
section 410(a)(1) and one comprising all
eligible employees who have not met the
minimum age and service requirements of
section 410(a)(1), unless the plan is using
the rule in §1.401(m)–2(a)(1)(iii)(A).
(B)Restructuring prohibited.Restruc-
turing under §1.401(a)(4)–9(c) may not
be used to demonstrate compliance with
the requirements of section 401(m). See
§1.401(a)(4)–9(c)(3)(ii).
(v)Certain disaggregation rules not
applicable. The mandatory disaggre-
gation rules relating to section 401(k)
plans and section 401(m) plans set forth
in §1.410(b)–7(c)(1) and to ESOP and
non-ESOP portions of a plan set forth in
§1.410(b)–7(c)(2) shall not apply for pur-
poses of this section and §§1.401(m)–2
through 1.401(m)–5. Accordingly, not-
withstanding §1.410(b)–7(d)(2), an ESOP
and a non-ESOP which are different plans
(within the meaning of section 414(l), as
described in §1.410(b)–7(b)) are permitted
to be aggregated for these purposes.
(c)Additional requirements—(1)Sepa-
rate testing for employee contributions
and matching contributions.Under
§1.410(b)–7(c)(1), the group of employees
who are eligible to make employee con-
tributions or eligible to receive matching
contributions must satisfy the require-
mentsofsection410(b)asifthoseem-
ployees were covered under a separate
plan. The determination of whether the
separate plan satisfies the requirements
of section 410(b) must be made without
regard to the modifications to the dis-
aggregation rules set forth in paragraph
(b)(4)(v) of this section. In addition, ex-
cept as expressly permitted under section
401(k), 410(b)(2)(A)(ii), or 416(c)(2)(A),
employee contributions, matching contri-
butions and elective contributions taken
into account under §1.401(m)–2(a)(6) may
not be taken into account for purposes of
determining whether any other contribu-
tions under any plan (including the plan
to which the employee contributions or
matching contributions are made) satisfy
the requirements of section 401(a). See
also §1.401(a)(4)–11(g)(3)(vii) for special
rules relating to corrections of violations
of the minimum coverage requirements or
discriminatory rates of matching contribu-
tions.
(2)Plan provision requirement.A
plan that provides for employee contribu-
tions or matching contributions satisfies
this section only if it provides that the
nondiscrimination requirements of section
401(m) will be met. Thus, the plan must
provide for satisfaction of one of the spe-
cific alternatives described in paragraph
(b)(1) of this section and, if with respect to
that alternative there are optional choices,
2005–5 I.R.B.429January 31, 2005

which of the optional choices will apply.
For example, a plan that uses the ACP
test of section 401(m)(2), as described in
paragraph (b)(1)(i) of this section, must
specify whether it is using the current
year testing method or prior year testing
method. Additionally, a plan that uses
the prior year testing method must spec-
ify whether the ACP for eligible NHCEs
for the first plan year is 3% or the ACP
for the eligible NHCEs for the first plan
year. Similarly, a plan that uses the safe
harbor method of section 401(m)(11), as
described in paragraph (b)(1)(ii) of this
section, must specify whether the safe har-
bor contribution will be the nonelective
safe harbor contribution or the matching
safe harbor contribution and is not per-
mitted to provide that ACP testing will
be used if the requirements for the safe
harbor are not satisfied. For purposes of
this paragraph (c)(2), a plan may incorpo-
rate by reference the provisions of section
401(m)(2) and §1.401(m)–2 if that is the
nondiscrimination test being applied. The
Commissioner may, in guidance of gen-
eral applicability, published in the Internal
Revenue Bulletin (see §601.601(d)(2) of
this chapter), specify the options that will
apply under the plan if the nondiscrimi-
nation test is incorporated by reference in
accordance with the preceding sentence.
(d)Effective date—(1)General rule.
Except as otherwise provided in this para-
graph (d), this section and §§1.401(m)–2
through1.401(m)–5applytoplanyears
that begin on or after January 1, 2006.
(2)Early implementation permitted.
A plan is permitted to apply the rules of
this section and §§1.401(m)–2 through
1.401(m)–5 to any plan year that ends
after December 29, 2004, provided the
plan applies all the rules of this section
and §§1.401(m)–2 through 1.401(m)–5
and all the rules of §§1.401(k)–1 through
1.401(k)–6, to the extent applicable, for
that plan year and all subsequent plan
years.
(3)Applicability of prior regulations.
For any plan year, before a plan applies
this section and §§1.401(m)–2 through
1.401(m)–5 (either the first plan year be-
ginning on or after January 1, 2006 or
such earlier year, as provided in paragraph
(d)(2) of this section), §1.401(m)–1 and
§1.401(m)–2 (as theyappeared in the April
1, 2004 edition of 26 CFR part 1) apply
to the plan to the extent those sections, as
they so appear, reflect the statutory provi-
sions of section 401(m) as in effect for the
relevant year.
§1.401(m)–2 ACP test.
(a)Actual contribution percentage
(ACP) test—(1)In general—(i)ACP test
formula. A plan satisfies the ACP test for
a plan year only if—
(A) The ACP for the eligible HCEs for
the plan year is not more than the ACP for
the eligible NHCEs for the applicable year
multiplied by 1.25; or
(B) The excess of the ACP for the eli-
gible HCEs for the plan year over the ACP
for the eligible NHCEs for the applicable
year is not more than 2 percentage points,
and the ACP for the eligible HCEs for the
plan year is not more than the ACP for
the eligible NHCEs for the applicable year
multiplied by 2.
(ii)HCEs as sole eligible employees.If,
for the applicable year there are no eligible
NHCEs (i.e.,alloftheeligibleemployees
under the plan for the applicable year are
HCEs), the plan is deemed to satisfy the
ACP test.
(iii)Special rule for early participation.
If a plan providing for employee contribu-
tions or matching contributions provides
that employees are eligible to participate
before they have completed the minimum
age and service requirements of section
410(a)(1)(A), and if the plan applies sec-
tion 410(b)(4)(B) in determining whether
the plan meets the requirements of section
410(b)(1), then in determining whether the
plan meets the requirements under para-
graph (a)(1) of this section either—
(A) Pursuant to section 401(m)(5)(C),
the ACP test is performed under the plan
(determined without regard to disaggrega-
tion under §1.410(b)–7(c)(3)), using the
ACP for all eligible HCEs for the plan year
and the ACP of eligible NHCEs for the ap-
plicable year, disregarding all NHCEs who
have not met the minimum age and service
requirements of section 410(a)(1)(A); or
(B) Pursuant to §1.401(m)–1(b)(4), the
plan is disaggregated into separate plans
and the ACP test is performed separately
for all eligible employees who have com-
pleted the minimum age and service re-
quirements of section 410(a)(1)(A) and for
all eligible employees who have not com-
pleted the minimum age and service re-
quirements of section 410(a)(1)(A).
(2)Determination of ACP—(i)General
rule. The ACP for a group of eligible
employees (either eligible HCEs or eligi-
ble NHCEs) for a plan year or applicable
year is the average of the ACRs of eligi-
ble employees in the group for that year.
The ACP for a group of eligible employ-
ees is calculated to the nearest hundredth
of a percentage point.
(ii)Determination of applicable year
under current year and prior year testing
method. The ACP test is applied using
the prior year testing method or the cur-
rent year testing method. Under the prior
year testing method, the applicable year
for determining the ACP for the eligible
NHCEs is the plan year immediately pre-
ceding the plan year for which the ACP test
is being calculated. Under the prior year
testing method, the ACP for the eligible
NHCEs is determined using the ACRs for
the eligible employees who were NHCEs
in that preceding plan year, regardless of
whether those NHCEs are eligible employ-
ees or NHCEs in the plan year for which
the ACP test is being performed. Under
the current year testing method, the appli-
cable year for determining the ACP for el-
igible NHCEs is the same plan year as the
plan year for which the ACP test is being
calculated. Under either method, the ACP
for the eligible HCEs is determined using
the ACRs of eligible employees who are
HCEs for the plan year for which the ACP
test is being performed. See paragraph (c)
of this section for additional rules for the
prior year testing method.
(3)Determination of ACR—(i)General
rule. The ACR of an eligible employee
for the plan year or applicable year is the
sum of the employee contributions and
matching contributions taken into account
with respect to such employee (determined
under the rules of paragraphs (a)(4) and
(5) of this section), and the qualified non-
elective and elective contributions taken
into account under paragraph (a)(6) of this
section for the year, divided by the em-
ployee’s compensation taken into account
for the year. The ACR is calculated to the
nearest hundredth of a percentage point. If
no employee contributions, matching con-
tributions, elective contributions, or qual-
ified nonelective contributions are taken
into account under thissection with respect
to an eligible employee for the year, the
ACR of the employee is zero.
January 31, 20054302005–5 I.R.B.

(ii)ACR of HCEs eligible under more
than one plan—(A)General rule.Pur-
suant to section 401(m)(2)(B), the ACR
of an HCE who is an eligible employee
in more than one plan of an employer to
which matching contributions or employee
contributions are made is calculated by
treating all contributions with respect to
such HCE under any such plan as being
made under the plan being tested. Thus,
the ACR for such an HCE is calculated
by accumulating all matching contribu-
tions and employee contributions under
any plan (other than a plan described in
paragraph (a)(3)(ii)(B) of this section) that
would be taken into account under this
section for the plan year, if the plan under
which the contribution was made applied
this section and had the same plan year.
For example, in the case of a plan with
a 12-month plan year, the ACR for the
plan year of that plan for an HCE who
participates in multiple plans of the same
employer that provide for matching con-
tributions or employee contributions is
the sum of all such contributions during
such 12-month period that would be taken
into account with respect to the HCE
under all plans in which the HCE is an
eligible employee, divided by the HCE’s
compensation for that 12-month period
(determined using the compensation def-
inition for the plan being tested), without
regard to the plan year of the other plans
and whether those plans are satisfying this
section or §1.401(m)–3.
(B)Plans not permitted to be aggre-
gated. Contributions under plans that
are not permitted to be aggregated under
§1.401(m)–1(b)(4) (determined without
regard to the prohibition on aggregating
plans with inconsistent testing methods
set forth in §1.401(m)–1(b)(4)(iii)(B)
and the prohibition on aggregating plans
with different plan years set forth in
§1.410(b)–7(d)(5))are not aggregated
under this paragraph (a)(3)(ii).
(iii)Example. The following exam-
ple illustrates the application of para-
graph (a)(3)(ii) of this section. See also
§1.401(k)–2(a)(3)(iii) for additional ex-
amples of the application of the parallel
rule under section 401(k)(3)(A). The ex-
ampleisasfollows:
Example. Employee A, an HCE with compen-
sation of $120,000, is eligible to make employee
contributions under Plan S and Plan T, two calen-
dar-year profit-sharing plans of Employer H. Plan
S and Plan T use the same definition of compensa-
tion. Plan S provides a match equal to 50% of each
employee’s contributions and Plan T has no match.
During the current plan year, Employee A elects to
contribute $4,000 in employee contributions to Plan
T and $4,000 in employee contributions to Plan S.
There are no other contributions made on behalf of
Employee A. Each plan must calculate Employee A’s
ACR by dividing the total employee contributions
by Employee A and matching contributions under
both plans by $120,000. Therefore, Employee A’s
ACR under each plan is 8.33% ($4,000+ $4,000+
$2,000/$120,000).
(4)Employee contributions and match-
ing contributions taken into account under
the ACP test—(i)Employee contributions.
An employee contribution is taken into ac-
count in determining the ACR for an eligi-
ble employee for the plan year or applica-
ble year in which the contribution is made.
For purposes of the preceding sentence, an
amount withheld from an employee’s pay
(or a payment by the employee to an agent
of the plan) is treated as contributed at the
time of such withholding (or payment) if
the funds paid are transmitted to the trust
within a reasonable period after the with-
holding (or payment).
(ii)Recharacterized elective contribu-
tions. Excess contributions recharacter-
ized in accordance with§1.401(k)–2(b)(3)
are taken into account as employee con-
tributions for the plan year that includes
the time at which the excess contribution
is includible in the gross income of the em-
ployee under §1.401(k)–2(b)(3)(ii).
(iii)Matching contributions.Amatch-
ing contribution is taken into account in
determining the ACR for an eligible em-
ployee for a plan yearor applicable year
only if each of the following requirements
is satisfied—
(A) The matching contribution is allo-
cated to the employee’s account under the
terms of the plan as of a date within that
year;
(B) The matching contribution is made
on account of (or the matching contri-
bution is allocated on the basis of) the
employee’s elective deferrals or employee
contributions for that year; and
(C) The matching contribution is actu-
ally paid to the trust no later than the end of
the 12-month period immediately follow-
ing the year that contains that date.
(5)Employee contributions and match-
ing contributions not taken into account
under the ACP test—(i)General rule.
Matching contributions that do not satisfy
the requirements of paragraph (a)(4)(iii)
of this section may not be taken into ac-
count in the ACP test for the plan year
with respect to which the contributions
were made, or for any other plan year.
Instead, the amount of the matching con-
tributions must satisfy the requirements
of section 401(a)(4) (without regard to
the ACP test) for the plan year for which
they are allocated under the plan as if they
were nonelective contributions and were
the only nonelective contributions for that
year. See §§1.401(a)(4)–1(b)(2)(ii)(B)
and 1.410(b)–7(c)(1).
(ii)Disproportionate matching contri-
butions—(A)Matching contributions in
excess of 100%. A matching contribution
with respect to an elective deferral for an
NHCE is not taken into account under
the ACP test to the extent it exceeds the
greatest of:
(1) 5% of compensation;
(2) the employee’s elective deferrals for
a year; and
(3) the product of 2 times the plan’s
representative matching rate and the em-
ployee’s elective deferrals for a year.
(B)Representative matching rate.For
purposes of this paragraph (a)(5)(ii), the
plan’s representative matching rate is
the lowest matching rate for any eligible
NHCE among a group of NHCEs that con-
sists of half of all eligible NHCEs in the
plan for the plan year who make elective
deferrals for the plan year (or, if greater,
the lowest matching rate for all eligible
NHCEs in the plan who are employed by
the employer on the last day of the plan
year and who make elective deferrals for
the plan year).
(C)Definition of matching rate.For
purposes of this paragraph (a)(5)(ii), the
matching rate for an employee generally is
the matching contributions made for such
employee divided by the employee’s elec-
tive deferrals for the year. If the matching
rate is not the same for all levels of elective
deferrals for an employee, the employee’s
matching rate is determined assuming that
an employee’s elective deferrals are equal
to 6 percent of compensation.
(D)Application to matching contribu-
tions that match employee contributions.
Ifaplanprovidesamatchwithrespect
to the sum of the employee’s employee
contributions and elective deferrals, that
sum is substituted for the amount of the
employee’s elective deferrals in para-
graphs (a)(5)(ii)(A) and (C) of this section
2005–5 I.R.B.431January 31, 2005

and employees whomakeeitherem-
ployee contributions or elective deferrals
are taken into accountunder paragraph
(a)(5)(ii)(B) of this section. Similarly, if
a plan provides a match with respect to
the employee’s employee contributions,
but not elective deferrals, the employee’s
employee contributions are substituted
for the amount of the employee’s elective
deferrals in paragraphs (a)(5)(ii) (A) and
(C) of this section and employees who
make employee contributions are taken
into account under paragraph (a)(5)(ii)(B)
of this section.
(iii)Qualified matching contributions
used to satisfy the ADP test.Qualified
matching contributions that are taken
into account for the ADP test of section
401(k)(3) under §1.401(k)–2(a)(6) are not
taken into account in determining an eligi-
ble employee’s ACR.
(iv)Matching contributions taken into
account under safe harbor provisions.A
plan that satisfies the ACP safe harbor
requirements of section 401(m)(11) for
a plan year but nonetheless must satisfy
the requirements of this section because
it provides for employee contributions
forsuchplanyearispermittedtoapply
this section disregarding all matching
contributions with respect to all eligible
employees. In addition, a plan that satis-
fies the ADP safe harbor requirements of
§1.401(k)–3 for a plan year using quali-
fied matching contributions but does not
satisfy the ACP safe harbor requirements
of section 401(m)(11) for such plan year is
permitted to apply this section by exclud-
ing matching contributions with respect to
all eligible employees that do not exceed
4% of each employee’s compensation. If
a plan disregards matching contributions
pursuant to this paragraph (a)(5)(iv), the
disregard must apply with respect to all
eligible employees.
(v)Treatment of forfeited matching con-
tributions. A matching contribution that is
forfeited because the contribution to which
it relates is treated as an excess contribu-
tion, excess deferral, or excess aggregate
contribution is not taken into account for
purposes of this section.
(vi)Additional employee contributions
or matching contributions pursuant to sec-
tion 414(u). Additional employee contri-
butions and matching contributions made
by reason of an eligible employee’s qual-
ified military service under section 414(u)
are not taken into account under paragraph
(a)(4) of this section for the plan year for
which the contributions are made, or for
any other plan year.
(6)Qualified nonelective contributions
and elective contributions that may be
taken into account under the ACP test.
Qualified nonelective contributions and
elective contributions may be taken into
account in determining the ACR for an
eligible employee for a plan year or ap-
plicable year, but only to the extent the
contributions satisfy the following re-
quirements—
(i)Timing of allocation.Thequali-
fied nonelective contribution is allocated
to the employee’s account as of a date
within that year (within the meaning of
§1.401(k)–2(a)(4)(i)(A)) and the elective
contribution satisfies §1.401(k)–2(a)(4)(i).
Consequently, under the prior year test-
ing method, in order to be taken into ac-
count in calculating the ACP for the group
of eligible NHCEs for the applicable year,
a qualified nonelective contribution must
be contributed no later than the end of the
12-month period following the applicable
year even though the applicable year is dif-
ferent than the plan year being tested.
(ii)Elective contributions taken into
account under the ACP test. Elective con-
tributions may be taken into account for
the ACP test only if the cash or deferred
arrangement under which the elective con-
tributions are made is required to satisfy
the ADP test in §1.401(k)–2(a)(1) and,
then only to the extent that the cash or
deferred arrangement would satisfy that
test, including such elective contributions
in the ADP for the plan year or applicable
year. Thus, for example, elective deferrals
made pursuant to a salary reduction agree-
ment under an annuity described in section
403(b) are not permitted to be taken into
account in an ACP test. Similarly, elective
contributions under a cash or deferred ar-
rangement that is using the section 401(k)
safe harbor described in §1.401(k)–3 can-
not be taken into account in an ACP test.
(iii)Requirementthatamountsatisfy
section 401(a)(4). The amount of non-
elective contributions, including those
qualified nonelective contributions taken
into account under thisparagraph (a)(6)
and those qualified nonelective contribu-
tions taken into account for the ADP test
under paragraph §1.401(k)–2(a)(6), and
the amount of nonelective contributions,
excluding those qualified nonelective
contributions taken into account under
this paragraph (a)(6) for the ACP test
and those qualified nonelective contri-
butions taken into account for the ADP
test under paragraph §1.401(k)–2(a)(6),
satisfies the requirements of section
401(a)(4). See §1.401(a)(4)–1(b)(2). In
the case of an employer that is apply-
ing the special rule for employer-wide
plans in §1.414(r)–1(c)(2)(ii) with re-
spect to the plan, the determination of
whether the qualified nonelective contri-
butions satisfy the requirements of this
paragraph (a)(6)(iii) must be made on an
employer-wide basis regardless of whether
the plans to which the qualified nonelec-
tive contributions are made are satisfying
the requirements of section 410(b) on an
employer-wide basis. Conversely, in the
case of an employer that is treated as oper-
ating qualified separate lines of business,
and does not apply the special rule for em-
ployer-wide plans in §1.414(r)–1(c)(2)(ii)
with respect to the plan, then the determi-
nation of whether the qualified nonelective
contributions satisfy the requirements of
this paragraph (a)(6)(iii) is not permitted
to be made on an employer-wide basis
regardless of whether the plans to which
the qualified nonelective contributions are
made are satisfying the requirements of
section 410(b) on that basis.
(iv)Aggregation must be permitted.
The plan that provides for employee or
matching contributions and the plan or
plans to which the qualified nonelective
contributions or elective contributions are
made are plans that would be permitted to
be aggregated under §1.401(m)–1(b)(4).
If the plan year of the plan that provides
for employee or matching contributions
is changed to satisfy the requirement un-
der §1.410(b)–7(d)(5) that aggregated
plans have the same plan year, qualified
nonelective contributions and elective
contributions may be taken into account
in the resulting short plan year only if
such qualified nonelective and elective
contributions could have been taken into
account under an ADP test for a plan with
that same short plan year.
(v)Disproportionate contributions not
taken into account—(A)General rule.
Qualified nonelective contributions can-
not be taken into account for an applicable
year for an NHCE to the extent such
contributions exceed the product of that
January 31, 20054322005–5 I.R.B.

NHCE’s compensation and the greater of
5% and 2 times the plan’s representative
contribution rate. Any qualified non-
elective contribution taken into account
in an ADP test under §1.401(k)–2(a)(6)
(including the determination of the repre-
sentative contribution rate for purposes of
§1.401(k)–2(a)(6)(iv)(B)) is not permitted
to be taken into account for purposes of
this paragraph (a)(6) (including the deter-
mination of the representative contribution
rate for purposes of paragraph (a)(6)(v)(B)
of this section).
(B)Definition of representative contri-
bution rate. For purposes of this paragraph
(a)(6)(v), the plan’s representative contri-
bution rate is the lowest applicable contri-
bution rate of any eligible NHCE among
a group of eligible NHCEs that consists
of half of all eligible NHCEs for the plan
year (or, if greater, the lowest applicable
contribution rate of any eligible NHCE in
the group of all eligible NHCEs for the ap-
plicable year and who is employed by the
employer on the last day of the applicable
year).
(C)Definition of applicable contribu-
tion rate. For purposes of this paragraph
(a)(6)(v), the applicable contribution rate
for an eligible NHCE is the sum of the
matching contributions taken into account
under this section for the employee for
the plan year and the qualified nonelective
contributions made for that employee for
the plan year, divided by that employee’s
compensation for the same period.
(D)Special rule for prevailing wage
contributions. Notwithstanding paragraph
(a)(6)(v)(A) of this section, qualified non-
elective contributions that are made in
connection with an employer’s obliga-
tion to pay prevailing wages under the
Davis-Bacon Act (46 Stat. 1494), Pub-
lic Law 71–798, Service Contract Act of
1965 (79 Stat. 1965), Public Law 89–286,
or similar legislation can be taken into
account for a plan year for an NHCE to the
extent such contributions do not exceed
10 percent of that NHCE’s compensation.
(vi)Contribution only used once.Qual-
ified nonelective contributions cannot be
taken into account under this paragraph
(a)(6) to the extent such contributions
are taken into account for purposes of
satisfying any other ACP test, any ADP
test, or the requirements of §1.401(k)–3,
1.401(m)–3 or 1.401(k)–4. Thus, for ex-
ample, qualified nonelective contributions
that are made pursuant to §1.401(k)–3(b)
cannot be taken into account under the
ACP test. Similarly, if a plan switches
from the current year testing method to
the prior year testing method pursuant to
§1.401(m)–2(c)(1), qualified nonelective
contributions that are taken into account
under the current year testing method for
a plan year may not be taken into account
under the prior year testing method for the
next plan year.
(7)Examples. The following examples
illustrate the application of this paragraph
(a). See §1.401(k)–2(a)(6) for additional
examples of the parallel rules under sec-
tion 401(k)(3)(A). The examples are as fol-
lows:
Example 1. (i) Employer L maintains Plan U, a
profit-sharing plan under which $.50 matching contri-
butions are made for each dollar of employee contri-
butions. Plan U uses the current year testing method.
The chart below shows the average employee contri-
butions (as a percentage of compensation) and match-
ing contributions (as a percentage of compensation)
for Plan U’s HCEs and NHCEs for the 2006 plan
year:
Employee ContributionsMatching ContributionsActual Contribution Percentage
Highly compensated employees4%2%6%
Nonhighly compensated employees3%
1.5%4.5%
(ii) The matching rate for all NHCEs is 50% and
thus the matching contributions are not dispropor-
tionate under paragraph (a)(5)(ii) of this section. Ac-
cordingly, they are taken into account in determining
the ACR of eligible employees.
(iii) Because the ACP for the HCEs (6.0%) ex-
ceeds 5.63% (4.5% x 1.25), Plan U does not satisfy
the ACP test under paragraph (a)(1)(i)(A) of this sec-
tion. However, because the ACP for the HCEs does
not exceed the ACP for the NHCEs by more than 2
percentage points and the ACP for the HCEs does not
exceed the ACP for the NHCEs multiplied by 2 (4.5%
x 2 = 9%), the plan satisfies the ACP test under para-
graph (a)(1)(i)(B) of this section.
Example 2. (i) Employees A through F are eligi-
ble employees in Plan V, a profit-sharing plan of Em-
ployer M that includes a cash or deferred arrangement
and permits employee contributions. Under Plan V,
a $.50 matching contribution is made for each dollar
of elective contributions and employee contributions.
Plan V uses the current year testing method and does
not provide for elective contributions to be taken into
account in determining an eligible employee’s ACR.
For the 2006 plan year, Employees A and B are HCEs
and the remaining employees are NHCEs. The com-
pensation, elective contributions, employee contribu-
tions, and matching contributions for the 2006 plan
year are shown in the following table:
EmployeeCompensationElective ContributionsEmployee ContributionsMatching Contributions
A
$190,000$15,000$ 3,500$9,250
B100,000
$ 5,000$10,000$7,500
C
85,000
$12,000$0$6,000
D70,000
$ 9,500$0$4,750
E40,000
$10,000$0$5,000
F10,000
$0$0$0
(ii) The matching rate for all NHCEs is 50% and
thus the matching contributions are not dispropor-
tionate under paragraph (a)(5)(ii) of this section. Ac-
cordingly, they are taken into account in determining
the ACR of eligible employees, as shown in the fol-
lowing table:
2005–5 I.R.B.433January 31, 2005

EmployeeCompensationEmployee ContributionsMatching ContributionsACR %
A
$190,000$ 3,500$9,250
6.71
B100,000
$10,000$7,500
17.50
C
85,000
$0$6,000
7.06
D70,000
$0$4,750
6.79
E40,000
$0$5,000
12.50
F10,000
$0$0
0
(iii) The ACP for the HCEs is 12.11% ((6.71%
+ 17.50%)/2). The ACP for the NHCEs is 6.59%
((7.06% + 6.79% + 12.50% + 0.%)/4). Plan V fails to
satisfy the ACP test under paragraph (a)(1)(i)(A) of
this section because the ACP of HCEs is more than
125% of the ACP of the NHCEs (6.59% x 1.25 =
8.24%). In addition, Plan V fails to satisfy the ACP
test under paragraph (a)(1)(i)(B) of this section be-
cause the ACP for the HCEs exceeds the ACP of the
other employees by more than 2 percentage points
(6.59% + 2% = 8.59%). Therefore, the plan fails
to satisfy the requirements of section 401(m)(2) and
paragraph (a)(1) of this section unless the ACP fail-
ure is corrected under paragraph (b) of this section.
Example 3. (i) The facts are the same asExample
2, except that the plan provides that the NHCEs’ elec-
tive contributions may be used to meet the require-
ments of section 401(m) to the extent needed under
that section.
(ii) Pursuant to paragraph (a)(6)(ii) of this sec-
tion, the $10,000 of elective contributions for Em-
ployee E may be taken into account in determining
the ACP rather than the ADP to the extent that the
plan satisfies the requirements of §1.401(k)–2(a)(1)
excluding from the ADP this $10,000. In this case,
if the $10,000 were excluded from the ADP for the
NHCEs, the ADP for the HCEs is 6.45% (7.89%
+ 5.00%)/2 and the ADP for the NHCEs would be
6.92% (14.12% + 13.57% + 0% +0%)/4) and the plan
would satisfy the requirements of §1.401(k)–2(a)(1)
excluding from the ADP the elective contributions
for NHCEs that are taken into account under section
401(m).
(iii) After taking into account the $10,000 of elec-
tive contributions for Employee E in the ACP test,
the ACP for the NHCEs is 12.84% (7.06% + 6.79%
+ 37.50% + 0%)/4. Therefore the plan satisfies the
ACP test because the ACP for the HCEs (12.11%) is
less than 1.25 times the ACP for the NHCEs.
Example 4.(i)ThefactsarethesameasExample
2, except that Plan V provides for a higher than 50%
match rate on the elective contributions and employee
contributions for all NHCEs. The match rate is de-
fined as the rate, rounded up to the next whole per-
cent, necessary to allow the plan to satisfy the ACP
test, but not in excess of 100%. In this case, an in-
crease in the match rate from 50% to 74% will be
sufficient to allow the plan to satisfy the ACP test.
Thus, for the 2006 plan year, the compensation, elec-
tive contributions, employee contributions, match-
ing contributions at a 74% match rate of the eligible
NHCEs (employees C through F) are shown in the
following table:
EmployeeCompensationElective ContributionsEmployee ContributionsMatching Contributions
C
$85,000$12,000$0$8,880
D70,000
$ 9,500$0$7,030
E40,000
$10,000$0$7,400
F10,000
$0$0$0
(ii) The matching rate for all NHCEs is 74%
and thus the matching contributions are not dispro-
portionate under paragraph (a)(5)(ii) of this section.
Therefore, the matching contributions may be taken
into account in determining the ACP for the NHCEs.
(iii) The ACP for the NHCEs is 9.75% (10.45%
+ 10.04% + 18.50% + 0%)/4. Because the ACP for
the HCEs (12.11%) is less than 1.25 times the ACP
for the NHCEs, the plan satisfies the requirements of
section 401(m).
Example 5. (i) The facts are the same asExample
4, except that: Employee E’s elective contributions
are $2,000 (rather than $10,000) and pursuant to para-
graph (a)(6)(ii) of this section, the $2,000 of elective
contributions for Employee E are taken into account
in determining the ACP rather than the ADP. In ad-
dition, Plan V provides that the higher match rate is
not limited to 100% and applies only for a specified
group of NHCEs. The only member of that group
is Employee E. Under the plan provision, the higher
match rate is a 400% match. Thus, for the 2006 plan
year, the compensation, elective contributions, em-
ployee contributions, matching contributions of the
eligible NHCEs (employees C through F) are shown
in the following table:
EmployeeCompensationElective ContributionsEmployee ContributionsMatching Contributions
C
$85,000$12,000$0$6,000
D70,000
$ 9,500$0$4,750
E40,000
$ 2,000$0$8,000
F10,000
$0$0$0
(ii) If the entire matching contribution made on
behalf of Employee E were taken into account under
the ACP test, Plan V would satisfy the test, because
the ACP for the NHCEs would be 9.71% (7.06% +
6.79% + 25.00% + 0%)/4. Because the ACP for the
HCEs (12.11%) is less than 1.25 times what the ACP
for the NHCEs would be, the plan would satisfy the
requirements of section 401(m).
(iii) Pursuant to paragraph (a)(5)(ii) of this sec-
tion, however, matching contributions for an eligible
NHCE that exceed the greatest of 5% of compensa-
tion, the employee’s elective deferrals and 2 times the
product of the plan’s representative matching rate and
the employee’s elective deferrals cannot be taken into
account in applying the ACP test. The plan’s repre-
sentative matching rate is the lowest matching rate for
any eligible employee in a group of NHCEs that is at
least half of all eligible employees who are NHCEs
in the plan for the plan year who make elective con-
tributions for the plan year. For Plan V, the group of
NHCEs who make such contributions consists of Em-
ployees C, D and E. The matching rates for these three
employees are 50%, 50% and 400% respectively. The
lowest matching rate for a group of NHCEs that is at
January 31, 20054342005–5 I.R.B.

least half of all the NHCEs who make elective contri-
butions (or 2 NHCEs) is 50%. Because 400% is more
than twice the plan’s representative matching rate and
the matching contributions exceed 5% of compensa-
tion, the full amount of matching contributions is not
taken into account. Only $2,000 of the matching con-
tributions made on behalf of Employee E (matching
contributions that do not exceed the greatest of 5%
of compensation, the employee’s elective deferrals,
or the product of 100% (2 times the representative
matching rate) and the employee’s elective deferrals)
satisfy the requirements of paragraph (a)(5)(ii) of this
section and may be taken into account under the ACP
test. Accordingly, the ACP for the NHCEs is 5.96%
(7.06% + 6.79% + 10% + 0%)/4 and the plan fails
to satisfy the requirements of section 401(m)(2) and
paragraph (a)(1) of this section unless the ACP fail-
ure is corrected under paragraph (b) of this section.
Example 6. (i) The facts are the same asExam-
ple 2, except that Plan V provides a QNEC equal to
13% of pay for Employee F that will be taken into
account under the ACP test to the extent the contri-
butions satisfy the requirements of paragraph (a)(6)
of this section.
(ii) Pursuant to paragraph (a)(6)(v) of this sec-
tion, a QNEC cannot be taken into account in deter-
mining an NHCE’s ACR to the extent it exceeds the
greater of 5% and the product of the employee’s com-
pensation and the plan’s representative contribution
rate. The plan’s representative contribution rate is
two times the lowest applicable contribution rate for
any eligible employee in a group of NHCEs that is at
least half of all eligible employees who are NHCEs
in the plan for the plan year. For Plan V, the appli-
cable contribution rates for Employees C, D, E and
F are 7.06%, 6.79%, 12.5% and 13% respectively.
The lowest applicable contribution rate for a group
of NHCEs that is at least half of all the NHCEs is
12.50% (the lowest applicable contribution rate for
the group of NHCEs that consists of Employees E and
F).
(iii) Under paragraph (a)(6)(v)(B) of this section,
the plan’s representative contribution rate is 2 times
12.50% or 25.00%. Accordingly, the QNECs for Em-
ployee F can be taken into account under the ACP test
only to the extent they do not exceed 25.00% of com-
pensation. In this case, all of the QNECs for Em-
ployee F may be taken into account under the ACP
test.
(iv) After taking into account the QNECs for Em-
ployee F, the ACP for the NHCEs is 9.84% (7.06% +
6.79% + 12.50% + 13%)/4. Because the ACP for the
HCEs (12.11%) is less than 1.25 times the ACP for
the NHCEs, the plan satisfies the requirements of sec-
tion 401(m)(2) and paragraph (a)(1) of this section.
(b)Correction of excess aggregate
contributions—(1)Permissible correc-
tion methods—(i)In general. A plan that
provides for employee contributions or
matching contributions does not fail to sat-
isfy the requirements of section 401(m)(2)
and paragraph (a)(1) of this section if the
employer, in accordance with the terms
of the plan, uses either of the following
correction methods—
(A)Additional contributions.Theem-
ployer makes additional contributions that
are taken into account for the ACP test un-
der this section that, in combination with
the other contributions taken into account
under this section, allow the plan to satisfy
the requirements of paragraph (a)(1) of this
section.
(B)Excess aggregate contributions dis-
tributed or forfeited. Excess aggregate
contributions are distributed or forfeited in
accordance with paragraph (b)(2) of this
section.
(ii)Combination of correction methods.
A plan may provide for the use of either of
the correction methods described in para-
graph (b)(1)(i) of this section, may limit
employee contributions or matching con-
tributions in a manner that prevents excess
aggregate contributions from being made,
or may use a combination of these meth-
ods, to avoid or correct excess aggregate
contributions. If a plan uses a combina-
tion of correction methods, any contribu-
tions made under paragraph (b)(1)(i)(A) of
this section must be taken into account be-
fore application of the correction method
in paragraph (b)(1)(i)(B) of this section.
(iii)Exclusive means of correction.A
failure to satisfy the requirements of para-
graph (a)(1) of this section may not be cor-
rected using any method other than one
described in paragraph (b)(1)(i) or (ii) of
this section. Thus, excess aggregate con-
tributions for a plan year may not be cor-
rected by forfeiting vested matching con-
tributions, distributing nonvested match-
ing contributions, recharacterizing match-
ing contributions, or not making match-
ing contributions required under the terms
of the plan. Similarly, excess aggregate
contributions for a plan year may not re-
main unallocated or be allocated to a sus-
pense account for allocation to one or more
employees in any future year. In addi-
tion, excess aggregate contributions may
not be corrected using the retroactive cor-
rection rules of §1.401(a)(4)–11(g). See
§1.401(a)(4)–11(g)(3)(vii) and (5).
(2)Correction through distribu-
tion—(i)General rule. This paragraph
(b)(2) contains the rules for correction of
excess aggregate contributions through
a distribution from the plan. Correction
through a distribution generally involves
a 4-step process. First, the plan must
determine, in accordance with paragraph
(b)(2)(ii) of this section, the total amount
of excess aggregate contributions that
must be distributed under the plan. Sec-
ond, the plan must apportion the total
amount of excess aggregate contributions
among the HCEs in accordance with para-
graph (b)(2)(iii) of this section. Third,
the plan must determine the income al-
locable to excess aggregate contributions
in accordance with paragraph (b)(2)(iv)
of this section. Finally, the plan must
distribute the apportioned contributions,
together with allocable income (or forfeit
the apportioned matching contributions,
if forfeitable) in accordance with para-
graph (b)(2)(v) of this section. Paragraph
(b)(2)(vi) of this section provides rules
relating to the tax treatment of these dis-
tributions.
(ii)Calculation of total amount to
be distributed. The following procedures
must be used to determine the total amount
of the excess aggregate contributions to be
distributed—
(A)Calculate the dollar amount of
excess aggregate contributions for each
HCE. The amount of excess aggregate
contributions attributable to an HCE for a
plan year is the amount (if any) by which
the HCE’s contributions taken into ac-
count under this section must be reduced
for the HCE’s ACR to equal the highest
permitted ACR under the plan. To calcu-
late the highest permitted ACR under a
plan, the ACR of the HCE with the highest
ACR is reduced by the amount required to
cause that HCE’s ACR to equal the ACR
of the HCE with the next highest ACR. If
a lesser reduction would enable the plan
to satisfy the requirements of paragraph
(b)(2)(ii)(C) of this section, only this lesser
reduction applies.
(B)Determination of the total amount
of excess aggregate contributions.
The process described in paragraph
(b)(2)(ii)(A) of this section must be re-
peated until the plan would satisfy the
requirements of paragraph (b)(2)(ii)(C)
of this section. The sum of all reductions
for all HCEs determined under paragraph
(b)(2)(ii)(A) of this section is the total
amount of excess aggregate contributions
for the plan year.
(C)Satisfaction of ACP.Aplansat-
isfies this paragraph (b)(2)(ii)(C) if the
plan would satisfy the requirements of
paragraph (a)(1)(i) of this section if the
ACR for each HCE were determined af-
ter the reductions described in paragraph
(b)(2)(ii)(A) of this section.
2005–5 I.R.B.435January 31, 2005

(iii)Apportionment of total amount of
excess aggregate contributions among the
HCEs. The following procedures must be
used in apportioning the total amount of
excess aggregate contributions determined
under paragraph (b)(2)(ii) of this section
among the HCEs—
(A)Calculate the dollar amount of
excess aggregate contributions for each
HCE. The contributions with respect to
the HCE with the highest dollar amount
of contributions taken account under this
section are reduced by the amount re-
quired to cause that HCE’s contributions
to equal the dollar amount of contribu-
tions taken into account under this section
for the HCE with the next highest dollar
amount of such contributions. If a lesser
apportionment to the HCE would enable
theplantoapportionthetotalamountof
excess aggregate contributions, only the
lesser apportionment would apply.
(B)Limit on amount apportioned to
any HCE. For purposes of this paragraph
(b)(2)(iii), the contributions for an HCE
whoisaneligibleemployeeinmorethan
one plan of an employer to which matching
contributions and employee contributions
are made is determined by adding together
all contributions otherwise taken into ac-
count in determining the ACR of the HCE
under the rules of paragraph (a)(3)(ii) of
this section. However, the amount of
contributions apportioned with respect to
an HCE must not exceed the amount of
contributions taken into account under this
section that were actually made on behalf
of the HCE to the plan for the plan year.
Thus,inthecaseofanHCEwhoisan
eligible employee in more than one plan
of the same employer to which employee
contributions or matching contributions
are made and whose ACR is calculated
in accordance with paragraph (a)(3)(ii) of
this section, the amount distributed under
this paragraph (b)(2)(iii) will not exceed
such contributions actually contributed to
the plan for the plan year that are taken
into account under this section for the plan
year.
(C)Apportionment to additional HCEs.
The procedure in paragraph (b)(2)(iii)(A)
of this section must be repeated until the
total amount of excess aggregate contribu-
tions have been apportioned.
(iv)Income allocable to excess ag-
gregate contributions—(A)General rule.
The income allocable to excess aggregate
contributions is equal to the sum of the
allocable gain or loss for the plan year
and, to the extent the excess aggregate
contributions are or will be credited with
gain or loss for the gap period (i.e.,the
period after the close of the plan year and
prior to the distribution) if there was a total
distribution of the account, the allocable
gain or loss during that period.
(B)Method of allocating income.A
plan may use any reasonable method for
computing the income allocable to excess
aggregate contributions, provided that the
method does not violate section 401(a)(4),
is used consistently for all participants and
for all corrective distributions under the
plan for the plan year, and is used by the
plan for allocating income to participants’
accounts. See §1.401(a)(4)–1(c)(8). A
plan will not fail to use a reasonable
method for computing the income alloca-
ble to excess contributions merely because
the income allocable to excess aggregate
contributions is determined on a date that
is no more than 7 days before the distribu-
tion.
(C)Alternative method of allocating in-
come for the plan year. A plan may allo-
cate income to excess aggregate contribu-
tions for the plan year by multiplying the
income for the plan year allocable to em-
ployee contributions, matching contribu-
tions and other amounts taken into account
under this section (including the contribu-
tions for the year), by a fraction, the nu-
merator of which is the excess aggregate
contributions for the employee for the plan
year, and the denominator of which is the
sum of the—
(1) Account balance attributable to em-
ployee contributions and matching contri-
butions and other amounts taken into ac-
count under this section as of the beginning
of the plan year; and
(2) Any additional such contributions
for the plan year.
(D)Safe harbor method of allocat-
ing gap period income.Aplanmayuse
the safe harbor method in this paragraph
(b)(2)(iv)(D) to determine income on ex-
cess aggregate contributions for the gap
period. Under this safe harbor method,
income on excess aggregate contributions
for the gap period is equal to 10% of the
income allocable to excess aggregate con-
tributions for the plan year that would be
determined under paragraph (b)(2)(iv)(C)
of this section, multiplied by the number
of calendar months that have elapsed since
the end of the plan year. For purposes of
calculating the number of calendar months
that have elapsed under the safe harbor
method, a corrective distribution that is
made on or before the fifteenth day of a
month is treated as made on the last day
of the preceding monthand a distribution
made after the fifteenth day of a month
is treated as made on the last day of the
month.
(E)Alternative method of allocating
plan year and gap period income.A
plan may determine the allocable gain or
loss for the aggregate of the plan year
and the gap period by applying the al-
ternative method provided by paragraph
(b)(2)(iv)(C) of this section to that ag-
gregate period. This is accomplished by
substituting the income for the plan year
and the gap period for the income for the
plan year and by substituting the contribu-
tions taken into accountunder this section
for the plan year and the gap period for the
contributions taken into account for the
plan year in determining the fraction that
is multiplied by that income.
(F)Allocable income for recharacter-
ized elective contributions. If recharacter-
ized elective contributions are distributed
as excess aggregate contributions, the in-
come allocable to the excess aggregate
contributions is determined as if rechar-
acterized elective contributions had been
distributed as excess contributions. Thus,
income must be allocated to the rechar-
acterized amounts distributed using the
methods in §1.401(k)–2(b)(2)(iv).
(v)Distribution and forfeiture.Within
12 months after the close of the plan year
in which the excess aggregate contribution
arose, the plan must distribute to each HCE
the contributions apportioned to such HCE
under paragraph (b)(2)(iii) of this section
(and the allocable income) to the extent
they are vested or forfeit such amounts, if
forfeitable. Except as otherwise provided
in this paragraph (b)(2)(v), a distribution
of excess aggregate contributions must be
in addition to any other distributions made
during the year and must be designated as a
corrective distribution by the employer. In
the event of a complete termination of the
plan during the plan year in which an ex-
cess aggregate contribution arose, the cor-
rective distribution must be made as soon
as administratively feasible after the date
of termination of the plan, but in no event
January 31, 20054362005–5 I.R.B.

later than 12 months after the date of termi-
nation. If the entire account balance of an
HCE is distributed prior to when the plan
makes a distribution of excess aggregate
contributions in accordance with this para-
graph (b)(2), the distribution is deemed to
have been a corrective distribution of ex-
cess aggregate contributions (and income)
to the extent that a corrective distribution
would otherwise have been required.
(vi)Tax treatment of corrective dis-
tributions—(A)General rule. Except
as otherwise provided in this paragraph
(b)(2)(vi), a corrective distribution of ex-
cess aggregate contributions (and income)
that is made within 2
1
/2months after the
end of the plan year for which the excess
aggregate contributions were made is in-
cludible in the employee’s gross income
for the taxable year of the employee end-
ing with or within the plan year for which
the excess aggregate contributions were
made. A corrective distribution of excess
aggregate contributions (and income) that
is made more than 2
1
/2months after the
plan year for which the excess aggregate
contributions were made is includible in
the employee’s gross income in the taxable
year of the employee in which distributed.
The portion of the distribution that is
treated as an investment in the contract
(and is therefore not subject to tax under
section 72) is determined without regard
to any plan contributions other than those
distributed as excess aggregate contribu-
tions. Regardless of when the corrective
distribution is made, it is not subject to the
early distribution tax of section 72(t). See
paragraph (b)(4) of this section for addi-
tional rules relating to the employer excise
taxonamountsdistributedmorethan2
1
/2
months after the end of the plan year. See
also §1.402(c)–2, A–4 prohibiting rollover
of distributions that are excess aggregate
contributions.
(B)Rule for de minimis distributions.
If the total amount of excess aggregate
contributions determined under this para-
graph (b)(2), and excess contributions
determined under §1.401(k)–2(b)(2) dis-
tributed to a recipient under a plan for any
plan year is less than $100 (excluding in-
come), a corrective distribution of excess
aggregate contributions (and income) is
includible in gross income in the recipi-
ent’s taxable year in which the corrective
distribution is made, except to the extent
the corrective distribution is a return of
employee contributions.
(3)Other rules—(i)No employee or
spousal consent required. A distribution
of excess aggregate contributions (and in-
come) may be made under the terms of
the plan without regard to any notice or
consent otherwise required under sections
411(a)(11) and 417.
(ii)Treatment of corrective distribu-
tions and forfeited contributions as em-
ployer contributions. Excess aggregate
contributions (other than amounts attrib-
utable to employee contributions), in-
cluding forfeited matching contributions,
are treated as employer contributions for
purposes of sections 404 and 415 even
if distributed from the plan. Forfeited
matching contributions that are reallo-
cated to the accounts of other participants
for the plan year in which the forfeiture
occurs are treated under section 415 as
annual additions for the participants to
whose accounts they are reallocated and
for the participants from whose accounts
they are forfeited.
(iii)No reduction of required mini-
mum distribution. A distribution of excess
aggregate contributions (and income) is
not treated as a distribution for purposes
of determining whether the plan satisfies
the minimum distribution requirements
of section 401(a)(9). See §1.401(a)(9)–5,
A–9(b).
(iv)Partial correction. Any distribu-
tion of less than the entire amount of ex-
cess aggregate contributions (and alloca-
ble income) is treated as apro ratadis-
tribution of excess aggregate contributions
and allocable income.
(v)Matching contributions on excess
contributions, excess deferrals and excess
aggregate contributions—(A)Corrective
distributions not permitted.Amatching
contribution may not be distributed merely
because the contribution to which it relates
is treated as an excess contribution, excess
deferral, or excess aggregate contribution.
(B)Coordination with section
401(a)(4). A matching contribution is
taken into account under section 401(a)(4)
even if the match is distributed, unless the
distributed contribution is an excess aggre-
gate contribution. This requires that, after
correction of excess aggregate contribu-
tions, each level of matching contributions
be currently and effectively available to a
group of employees that satisfies section
410(b). See §1.401(a)(4)–4(e)(3)(iii)(G).
Thus, a plan that provides the same rate of
matching contributions to all employees
will not meet the requirements of section
401(a)(4) if employee contributions are
distributed under this paragraph (b) to
HCEs to the extent needed to meet the
requirements of section 401(m)(2), while
matching contributions attributable to
employee contributions remain allocated
to the HCEs’ accounts. This is because
the level of matching contributions will
be higher for a group of employees that
consists entirely of HCEs. Under section
411(a)(3)(G) and §1.411(a)–4(b)(7), a plan
may forfeit matching contributions attrib-
utable to excess contributions, excess ag-
gregate contributions and excess deferrals
toavoidaviolationofsection401(a)(4).
See also §1.401(a)(4)–11(g)(3)(vii)(B) re-
garding the use of additional allocations to
the accounts of NHCEs for the purpose of
correcting a discriminatory rate of match-
ing contributions. A plan is permitted to
provide for which contributions are to be
distributed to satisfy the ACP test so as to
avoid discriminatory matching rates that
would otherwise violate section 401(a)(4).
For example, the plan may provide that
unmatched employee contributions will
be distributed before matched employee
contributions.
(vi)No requirement for recalculation.
If the distributions and forfeitures de-
scribed in paragraph (b)(2) of this section
are made, the employee contributions
and matching contributions are treated as
meeting the nondiscrimination test of sec-
tion 401(m)(2) regardless of whether the
ACP for the HCEs, if recalculated after the
distributions and forfeitures, would satisfy
section 401(m)(2).
(4)Failure to timely correct—(i)Fail-
ure to correct within 2
1
/2months after end
of plan year. If a plan does not correct
excess aggregate contributions within 2
1
/2
months after the close of the plan year for
which the excess aggregate contributions
are made, the employer will be liable for
a 10% excise tax on the amount of the
excess aggregate contributions. See sec-
tion 4979 and §54.4979–1 of this chapter.
Qualified nonelective contributions prop-
erly taken into account under paragraph
(a)(6) of this section for a plan year may
enable a plan to avoid having excess ag-
gregate contributions, even if the contribu-
2005–5 I.R.B.437January 31, 2005

tions are made after the close of the 2
1
/2
month period.
(ii)Failure to correct within 12 months
after end of plan year. If excess aggregate
contributions are not corrected within 12
months after the close of the plan year for
which they were made, the plan will fail to
meet the requirements of section 401(a)(4)
for the plan year for which the excess ag-
gregate contributions were made and all
subsequent plan years in which the excess
aggregate contributions remain in the trust.
(5)Examples. The following examples
illustrate the application of this paragraph.
See also §1.401(k)–2(b) for additional ex-
amples of the parallel correction rules ap-
plicable to cash or deferred arrangements.
For purposes of these examples, none of
the plans provide for catch-up contribu-
tions under section 414(v). The examples
are as follows:
Example 1. (i) Employer L maintains a plan that
provides for employee contributions and fully vested
matching contributions. The plan provides that fail-
ures of the ACP test are corrected by distribution. In
2006, the ACP for the eligible NHCEs is 6%. Thus,
the ACP for the eligible HCEs may not exceed 8%.
The three HCEs who participate have the following
compensation, contributions, and ACRs:
EmployeeCompensationEmployee contributions and matching contributionsActual Contribution Ratio
A200,00014,0007%
B
150,00013,500
9
C100,00012,00012
Average 9.33%
(ii) The total amount of excess aggregate contri-
butions for the HCEs is determined under paragraph
(b)(2)(ii) of this section as follows: the matching
and employee contributions of Employee C (the HCE
with the highest ACR) is reduced by 3% of compen-
sation (or $3,000) in order to reduce the ACR of that
HCEto9%,whichistheACRofEmployeeB.
(iii) Because the ACP of the HCEs determined
after the $3,000 reduction still exceeds 8%, further
reductions in matching contributions and employee
contributions are necessary in order to reduce the
ACP of the HCEs to 8%. The employee contributions
and matching contributions for Employees B and C
are reduced by an additional .5% of compensation or
$1,250 ($750 and $500 respectively). Because the
ACP of the HCEs determined after the reductions
now equals 8%, the plan would satisfy the require-
ments of (a)(1)(ii) of this section.
(iv) The total amount of excess aggregate con-
tributions ($4,250) is apportioned among the HCEs
under paragraph (b)(2)(iii) of this section first to the
HCE with the highest amount of matching contribu-
tions and employee contributions. Therefore, Em-
ployee A is apportioned $500 (the amount required to
cause A’s matching contributions and employee con-
tributions to equal the next highest dollar amount of
matching contributions and employee contributions).
(v) Because the total amount of excess aggregate
contributions has not been apportioned, further ap-
portionment is necessary. The balance ($3,750) of the
total amount of excess aggregate contributions is ap-
portioned equally among Employees A and B ($1,500
to each, the amount required to cause their contri-
butions to equal the next highest dollar amount of
matching contributions and employee contributions).
(vi) Because the total amount of excess aggre-
gate contributions has not been apportioned, further
apportionment is necessary. The balance ($750) of
the total amount of excess aggregate contributions is
apportioned equally among Employees A, B and C
($250 to each, the amount required to allocate the to-
tal amount of excess aggregate contributions for the
plan).
(vii) Therefore, the plan will satisfy the require-
ments of paragraph (a)(1) of this section if, by the end
of the 12 month period following the end of the 2006
plan year, Employee A receives a corrective distribu-
tion of excess aggregate contributions equal to $2,250
($500 + $1,500 + $250) and allocable income, Em-
ployee B receives a corrective distribution of $250
and allocable income and Employee C receives a cor-
rective distribution of $1,750 ($1,500 + $250) and al-
locable income.
Example 2. (i) Employee D is the sole HCE who
is eligible to participate in a cash or deferred arrange-
ment maintained by Employer M. The plan that in-
cludes the arrangement, Plan X, permits employee
contributions and provides a fully vested matching
contribution equal to 50% of elective contributions.
Plan X is a calendar year plan. Plan X corrects ex-
cess contributions by recharacterization and provides
that failures of the ACP test are corrected by distri-
bution. For the 2006 plan year, D’s compensation is
$200,000, and D’s elective contributions are $15,000.
The actual deferral percentages and actual contribu-
tion percentages for Employee D and the other eligi-
ble employees under Plan X are shown in the follow-
ing table:
Actual Deferral PercentageActual Contribution Percentage
Employee D
7.5%3.75%
NHCEs4%2%
(ii) In February 2007, Employer M determines
that D’s actual deferral ratio must be reduced to 6%,
o
r $12,000, which requires a recharacterization of
$3,000 as an employee contribution. This increases
D’s actual contribution ratio to 5.25% ($7,500 in
matching contributions plus $3,000 recharacterized
as employee contributions, divided by $200,000 in
compensation). Since D’s actual contribution ratio
must be limited to 4% for Plan X to satisfy the actual
contribution percentage test, Plan X must distribute
1.25% or $2,500 of D’s employee contributions
and matching contributions together with allocable
income. If $2,500 in matching contributions and
allocable income is distributed, this will correct the
excess aggregate contributions and will not result in
a discriminatory rate of matching contributions. See
Example 8.
E
xample 3. (i)ThefactsarethesameasinEx-
ample 2, except that Employee D also had elective
contributions under Plan Y, maintained by an em-
ployer unrelated to M. In January 2007, D requests
and receives a distribution of $1,200 in excess defer-
rals from Plan X. Pursuant to the terms of Plan X, D
forfeits the $600 match on the excess deferrals to cor-
rect a discriminatory rate of match.
(ii) The $3,000 that would otherwise have been
recharacterized for Plan X to satisfy the actual defer-
ral percentage test is reduced by the $1,200 already
distributed as an excess deferral, leaving $1,800 to
be recharacterized. See §1.401(k)–2(b)(4)(i)(A).
D’s actual contribution ratio is now 4.35% ($7,500
in matching contributions plus $1,800 in recharac-
terized contributions less $600 forfeited matching
c
ontributions attributable to the excess deferrals,
divided by $200,000 in compensation).
(iii) The matching and employee contributions for
Employee D must be reduced by .35% of compen-
sation in order to reduce the ACP of the HCEs to
4%. The plan must provide for forfeiture of addi-
tional matching contributions to prevent a discrimi-
natory rate of matching contributions. SeeExample
8.
Example 4. (i) The facts are the same as inExam-
ple 3, except that D does not request a distribution of
excess deferrals until March 2007. Employer X has
already recharacterized $3,000 as employee contribu-
tions.
January 31, 20054382005–5 I.R.B.

(ii) Under §1.402(g)–1(e)(6), the amount of ex-
cess deferrals is reduced by the amount of excess
contributions that are recharacterized. Because the
amount recharacterized is greater than the excess
deferrals, Plan X is neither required nor permitted
to make a distribution of excess deferrals, and the
recharacterization has corrected the excess deferrals.
Example 5. (i) For the 2006 plan year, Employee
F defers $10,000 under Plan M and $6,000 under Plan
N. Plans M and N, which have calendar plan years are
maintained by unrelated employers. Plan M provides
a fully vested, 100% matching contribution, does not
take elective contributions into account under section
401(m) or take matching contributions into account
under section 401(k) and provides that excess contri-
butions and excess aggregate contributions are cor-
rected by distribution. Under Plan M, Employee F is
allocated excess contributions of $600 and excess ag-
gregate contributions of $1,600. Employee F timely
requests and receives a distribution of the $1,000 ex-
cess deferral from Plan M and, pursuant to the terms
of Plan M, forfeits the corresponding $1,000 match-
ing contribution.
(ii) No distribution is required or permitted to cor-
rect the excess contributions because$1,000 has been
distributed by Plan M as excess deferrals. The distri-
bution required to correct the excess aggregate contri-
butions (after forfeiting the matching contribution) is
$600 ($1,600 in excess aggregate contributions minus
$1,000 in forfeited matching contributions). If Em-
ployee F had corrected the excess deferrals of $1,000
by withdrawing $1,000 from Plan N, Plan M would
have had to correct the $600 excess contributions
in Plan M by distributing $600. Since Employee F
then would have forfeited $600 (instead of $1,000)
in matching contributions, Employee F would have
had $1,000 ($1,600 in excess aggregate contributions
minus $600 in forfeited matching contributions) re-
maining of excess aggregate contributions in Plan M.
These would have been corrected by distributing an
additional $1,000 from Plan M.
Example 6. (i) Employee G is the sole HCE
in a profit sharing plan under which the employer
matches 100% of employee contributions up to 2%
of compensation, and 50% of employee contribu-
tions up to the next 4% of compensation. For the
2008 plan year, Employee G has compensation of
$100,000 and makes a 7% employee contribution
of $7,000. Employee G receives a 4% matching
contribution or $4,000. Thus, Employee G’s actual
contribution ratio (ACR) is 11%. The actual con-
tribution percentage for the NHCEs is 5%, and the
employer determines that Employee G’s ACR must
be reduced to 7% to comply with the rules of section
401(m).
(ii) In this case, the plan satisfies the require-
ments of section if it distributes the unmatched
employee contributions of $1,000, and $2,000 of
matched employee contributions with their related
matches of $1,000. This would leave Employee G
with 4% employee contributions, and 3% matching
contributions, for an ACR of 7%. Alternatively,
the plan could distribute all matching contributions
and satisfy this section. However, the plan could
not distribute $4,000 of Employee G’s employee
contributions without forfeiting the related matching
contributions because thiswould result in a discrim-
inatory rate of matching contributions. See also
Example 7.
Example 7. (i) Employee H is an HCE in Em-
ployer X’s profit sharing plan, which matches 100%
of employee contributions up to 5% of compensation.
The matching contribution is vested at the rate of 20%
per year. In 2006, Employee H makes $5,000 in em-
ployee contributions and receives $5,000 of match-
ing contributions. Employee H is 60% vested in the
matching contributions at the end of the 2006 plan
year. In February 2007, Employer X determines that
Employee H has excess aggregate contributions of
$1,000. The plan provides that only matching contri-
butions will be distributed as excess aggregate con-
tributions.
(ii) Employer X has two options available in dis-
tributing Employee H’s excess aggregate contribu-
tions. The first option is to distribute $600 of vested
matching contributions and forfeit $400 of nonvested
matching contributions. These amounts are in pro-
portion to Employee H’s vested and nonvested inter-
ests in all matching contributions. The second option
is to distribute $1,000 of vested matching contribu-
tions, leaving the nonvested matching contributions
in the plan.
(iii) If the second option is chosen, the plan must
also provide a separate vesting schedule for vesting
these nonvested matching contributions. This is nec-
essary because the nonvested matching contributions
must vest as rapidly as they would have had no dis-
tribution been made. Thus, 50% must vest in each of
the next 2 years.
(iv) The plan will not satisfy the nondiscrimina-
tory availability requirement of section 401(a)(4) if
only nonvested matching contributions are forfeited
because the effect is that matching contributions for
HCEs vest more rapidly than those for NHCEs. See
§1.401(m)–2(b)(3)(v)(B).
Example 8. (i) Employer Y maintains a calen-
dar year profit sharing plan that includes a cash or
deferred arrangement. Elective contributions are
matched at the rate of 100%. After-tax employee
contributions are permitted under the plan only for
NHCEs and are matched at the same rate. No em-
ployees make excess deferrals. Employee J, an HCE,
makes an $8,000 elective contribution and receives
an $8,000 matching contribution.
(ii) Employer Y performs the actual deferral
percentage (ADP) and the actual contribution per-
centage (ACP). To correct failures of the ADP and
ACP tests, the plan distributes to A $1,000 of ex-
cess contributions and $500 of excess aggregate
contributions. After the distributions, Employee
J’s contributions for the year are $7,000 of elective
contributions and $7,500 of matching contributions.
As a result, Employee J has received a higher ef-
fective rate of matching contributions than NHCEs
($7,000 of elective contributions matched by $7,500
is an effective matching rate of 107 percent). If this
amount remains in Employee J’s account without
correction, it will cause the plan to fail to satisfy
section 401(a)(4), because only an HCE receives the
higher matching contribution rate. The remaining
$500 matching contribution may be forfeited (but
not distributed) under section 411(a)(3)(G), if the
plan so provides. The plan could instead correct
the discriminatory rate of matching contributions
by making additional allocations to the accounts of
NHCEs. See §1.401(a)(4)–11(g)(3)(vii)(B) and (6),
Example 7.
(c)Additional rules for prior year test-
ing method—(1)Rules for change in test-
ing method. A plan is permitted to change
fromtheprioryeartestingmethodtothe
current year testing method for any plan
year. A plan is permitted to change from
the current year testing method to the prior
year testing method only in situations de-
scribed in §1.401(k)–2(c)(1)(ii). For pur-
poses of this paragraph (c)(1), a plan that
uses the safe harbor method described in
§1.401(m)–3 or a SIMPLE 401(k) plan is
treated as using the current year testing
method for that plan year.
(2)Calculation of ACP under the prior
year testing method for the first plan
year—(i)Plans that are not successor
plans. If, for the first plan year of any plan
(other than a successor plan), a plan uses
the prior year testing method, the plan is
permitted to use either that first plan year
as the applicable year for determining the
ACP for the eligible NHCEs, or 3% as the
ACP for eligible NHCEs, for applying the
ACP test for that first plan year. A plan
(other than a successor plan) that uses the
prior year testing method but has elected
for its first plan year to use that year as the
applicable year for determining the ACP
for the eligible NHCEs is not treated as
changing its testing method in the second
plan year and is not subject to the limita-
tions on double counting under paragraph
(a)(6)(vi) of this section for the second
plan year.
(ii)First plan year defined.Forpur-
poses of this paragraph (c)(2), the first
plan year of any plan is the first year in
which the plan provides for employee
contributions or matching contributions.
Thus, the rules of this paragraph (c)(2) do
not apply to a plan (within the meaning
of §1.410(b)–7) for a plan year if for such
plan year the plan is aggregated under
§1.401(m)–1(b)(4) with any other plan
that provides for employee or matching
contributions in the prior year.
(iii)Plans that are successor plans.A
plan is a successor plan if 50% or more
of the eligible employees for the first plan
year were eligible employees under an-
other plan maintained by the employer in
the prior year that provides for employee
contributions or matching contributions. If
a plan that is a successor plan uses the prior
year testing method for its first plan year,
the ACP for the group of NHCEs for the
2005–5 I.R.B.439January 31, 2005

applicable year must be determined under
paragraph (c)(4) of this section.
(3)Plans using different testing meth-
ods for the ACP and ADP test. Except
as otherwise provided in this paragraph
(c)(3), a plan may use the current year test-
ing method or prior year testing method for
the ACP test for a plan year without regard
to whether the current year testing method
or prior year testing method is used for the
ADP test for that year. For example, a plan
may use the prior year testing method for
the ACP test and the current year testing
method for its ADP test for the plan year.
However, plans that use different testing
methods under this paragraph (c)(3) can-
not use —
(i) The recharacterization method of
§1.401(k)–2(b)(3) to correct excess con-
tributions for a plan year;
(ii) The rules of paragraph (a)(6)(ii) of
this section to take elective contributions
into account under the ACP test (rather
than the ADP test); or
(iii)Therulesofparagraph
§1.401(k)–2(a)(6) to take qualified
matching contributions into account under
the ADP test (rather than the ACP test).
(4)Rules for plan coverage change—(i)
In general. A plan that uses the prior year
testing method that experiences a plan cov-
erage change during a plan year satisfies
the requirements of this section for that
year only if the plan provides that the ACP
for the NHCEs for the plan year is the
weighted average of the ACPs for the prior
year subgroups.
(ii)Optional rule for minor plan cov-
erage changes. If a plan coverage change
occurs and 90% or more of the total num-
ber of the NHCEs from all prior year sub-
groups are from a single prior year sub-
group, then, in lieu of using the weighted
averages described in paragraph (c)(4)(i)
of this section, the plan may provide that
the ACP for the group of eligible NHCEs
for the prior year under the plan is the
ACP of the NHCEs for the prior year of
the plan under which that single prior year
subgroup was eligible.
(iii)Definitions. The following defini-
tions apply for purposes of this paragraph
(c)(4)—
(A)Plan coverage change.Theterm
plan coverage changemeans a change in
the group or groups of eligible employees
under a plan on account of—
(1) The establishment or amendment of
aplan;
(2) A plan merger or spinoff under sec-
tion 414(l);
(3) A change in the way plans (within
the meaning of §1.410(b)–7) are com-
bined or separated for purposes of
§1.401(m)–1(b)(4) (e.g., permissively
aggregating plans not previously aggre-
gated under §1.410(b)–7(d), or ceasing
to permissively aggregate plans under
§1.410(b)–7(d));
(4) A reclassificationofasubstantial
group of employees that has the same ef-
fect as amending the plan (e.g., a transfer
of a substantial group of employees from
one division to another division); or
(5) A combination of any of paragraphs
(c)(4)(iii)(A)(1) through (4) of this section.
(B)Prior year subgroup.Theterm
prior year subgroupmeansallNHCEsfor
the prior plan year who, in the prior year,
were eligible employees under a specific
plan that provides for employee contri-
butions or matching contributions main-
tained by the employer and who would
have been eligible employees in the prior
year under the plan being tested if the plan
coverage change had first been effective
as of the first day of the prior plan year
instead of first being effective during the
plan year. The determination of whether
an NHCE is a member of a prior year sub-
group is made without regard to whether
the NHCE terminated employment during
the prior year.
(C)Weighted average of the ACPs
for the prior year subgroups.Theterm
weighted average of the ACPs for the
prior year subgroupsmeans the sum, for
all prior year subgroups, of the adjusted
ACPs for the plan year. The termadjusted
ACP with respect to a prior year subgroup
means the ACP for the prior plan year of
the specific plan under which the members
of the prior year subgroup were eligible
employees on the first day of the prior plan
year, multiplied by a fraction, the numer-
ator of which is the number of NHCEs in
the prior year subgroup and denominator
of which is the total number of NHCEs in
all prior year subgroups.
(iv)Example. The following example
illustrate the application of this paragraph
(c)(4). See also §1.401(k)–2(c)(4) for ex-
amples of the parallel rules applicable to
the ADP test. The example is as follows:
Example. (i) Employer B maintains two plans,
Plan N and Plan P, each of which provides for
employee contributions or matching contributions.
The plans were not permissively aggregated under
§1.410(b)–7(d) for the 2005 testing year. Both plans
use the prior year testing method. Plan N had 300
eligible employees who were NHCEs for 2005, and
theirACPforthatyearwas6%. PlanPhad100
eligible employees who were NHCEs for 2005, and
the ACP for those NHCEs for that plan was 4%.
Plan N and Plan P are permissively aggregated under
§1.410(b)–7(d) for the 2006 plan year.
(ii) The permissive aggregation of Plan N and
Plan P for the 2006 testing year under §1.410(b)–7(d)
is a plan coverage change that results in treating the
plans as one plan (Plan NP). Therefore, the prior year
ACP for the NHCEs under Plan NP for the 2006 test-
ing year is the weighted average of the ACPs for the
prior year subgroups.
(iii) The first step in determining the weighted av-
erage of the ACPs for the prior year subgroups is to
identify the prior year subgroups. With respect to
the 2006 testing year, an employee is a member of
a prior year subgroup if the employee was an NHCE
of Employer B for the 2005 plan year, was an eligible
employee for the 2005 plan year under any section
401(k) plan maintained by Employer B, and would
have been an eligible employee in the 2005 plan year
under Plan NP if Plan N and Plan P had been permis-
sively aggregated under §1.410(b)–7(d) for that plan
year. The NHCEs who were eligible employees un-
der separate plans for the 2005 plan year comprise
separate prior year subgroups. Thus, there are two
prior year subgroups under Plan NP for the 2006 test-
ing year: the 300 NHCEs who were eligible employ-
ees under Plan N for the 2005 plan year and the 100
NHCEs who were eligible employees under Plan P
for the 2005 plan year.
(iv) The weighted average of the ACPs for the
prior year subgroups is the sum of the adjusted ACP
with respect to the prior year subgroup that consists of
the NHCEs who were eligible employees under Plan
N, and the adjusted ACP with respect to the prior year
subgroup that consists of the NHCEs who were eligi-
ble employees under Plan P. The adjusted ACP for the
prior year subgroup that consists of the NHCEs who
were eligible employees under Plan N is 4.5%, cal-
culated as follows: 6% (the ACP for the NHCEs un-
der Plan N for the prior year) x 300/400 (the number
of NHCEs in that prior year subgroup divided by the
total number of NHCEs in all prior year subgroups),
which equals 4.5%. The adjusted ACP for the prior
year subgroup that consists of the NHCEs who were
eligible employees under Plan P is 1%, calculated as
follows: 4% (the ACP for the NHCEs under Plan P
for the prior year) x 100/400 (the number of NHCEs
in that prior year subgroup divided by the total num-
ber of NHCEs in all prior year subgroups), which
equals 1%. Thus, the prior year ACP for NHCEs un-
der Plan NP for the 2006 testing year is 5.5% (the sum
of adjusted ACPs for the prior year subgroups, 4.5%
plus 1%).
§1.401(m)–3 Safe harbor requirements.
(a)ACP test safe harbor. Matching
contributions under a plan satisfy the
ACP safe harbor provisions of section
January 31, 20054402005–5 I.R.B.

401(m)(11) for a plan year if the plan
satisfies the safe harbor contribution re-
quirement of paragraphs (b) or (c) of this
section for the plan year, the limitations on
matching contributions of paragraph (d)
of this section, the notice requirement of
paragraph (e) of this section, the plan year
requirements of paragraph (f) of this sec-
tion, and the additional rules of paragraphs
(g), (h) and (j) of this section, as applica-
ble. Pursuant to section 401(k)(12)(E)(ii),
the safe harbor contribution requirement
of paragraphs (b) and (c) of this section
must be satisfied without regard to sec-
tion 401(l). The contributions made under
paragraphs (b) and (c) of this section are
referred to as safe harbor nonelective
contributions and safe harbor matching
contributions, respectively.
(b)Safe harbor nonelective contribu-
tion requirement. A plan satisfies the safe
harbor nonelective contribution require-
ment of this paragraph (b) if it satisfies
the safe harbor nonelective contribution
requirement of §1.401(k)–3(b).
(c)Safe harbor matching contribution
requirement. A plan satisfies the safe har-
bor matching contribution requirement of
this paragraph (c) if it satisfies the safe har-
bor matching contribution requirement of
§1.401(k)–3(c).
(d)Limitation on contributions—(1)
General rule. A plan that provides for
matching contributions meets the require-
ments of this section only if it satisfies the
limitations on contributions set forth in
this paragraph (d).
(2)Matching rate must not increase.A
plan that provides for matching contribu-
tions meets the requirements of this para-
graph (d) only if the ratio of matching con-
tributions on behalf of an employee under
the plan for a plan year to the employee’s
elective deferrals and employee contribu-
tions, does not increase as the amount of
an employee’s elective deferrals and em-
ployee contributions increases.
(3)Limit on matching contributions.A
plan that provides for matching contribu-
tions satisfies the requirements of this sec-
tion only if—
(i) Matching contributions are not
made with respect to elective defer-
rals or employee contributions that ex-
ceed 6% of the employee’s safe harbor
compensation (within the meaning of
§1.401(k)–3(b)(2)); and
(ii) Matching contributions that are dis-
cretionary do not exceed 4% of the em-
ployee’s safe harbor compensation.
(4)Limitation on rate of match.A
plan meets the requirements of this section
only if the ratio of matching contributions
on behalf of an HCE to that HCE’s elec-
tive deferrals or employee contributions
(or the sum of elective deferrals and em-
ployee contributions) for that plan year is
no greater than the ratio of matching con-
tributions to elective deferrals or employee
contributions (or the sum of elective de-
ferrals and employee contributions) that
would apply with respect to any NHCE for
whom the elective deferrals or employee
contributions (or the sum of elective de-
ferrals and employee contributions) are the
same percentage of safe harbor compensa-
tion. An employee is taken into account
for purposes of this paragraph (d)(4) if the
employee is an eligible employee under
the cash or deferred arrangement with re-
spect to which the contributions required
by paragraph (b) or (c) of this section are
being made for a plan year. A plan will not
fail to satisfy this paragraph (d)(4) merely
because the plan provides that matching
contributions will be made separately with
respect to each payroll period (or with re-
spect to all payroll periods ending with
or within each month or quarter of a plan
year) taken into account under the plan
for the plan year, provided that matching
contributions with respect to any elective
deferrals or employee contributions made
during a plan year quarter are contributed
to the plan by the last day of the immedi-
ately following plan year quarter.
(5)HCEs participating in multiple
plans. The rules of section 401(m)(2)(B)
and §1.401(m)–2(a)(3)(ii) apply for pur-
poses of determining the rate of matching
contributions under paragraph (d)(4) of
this section. However, a plan will not
fail to satisfy the safe harbor matching
contribution requirements of this section
merely because an HCE participates dur-
ing the plan year in more than one plan
that provides for matching contributions,
provided that —
(i) The HCE is not simultaneously an
eligible employee under two plans that
provide for matching contributions main-
tained by an employer for a plan year; and
(ii) The period used to determine com-
pensation for purposes of determining
matching contributions under each such
plan is limited to periods when the HCE
participated in the plan.
(6)Permissible restrictions on elective
deferrals by NHCEs—(i)General rule.
A plan does not satisfy the safe harbor
requirements of this section, if elective
deferrals or employee contributions by
NHCEs are restricted, unless the restric-
tions are permitted by this paragraph
(d)(6).
(ii)Restrictions on election periods.A
plan may limit the frequency and dura-
tion of periods in which eligible employ-
ees may make or change contribution elec-
tions under a plan. However, an employee
must have a reasonable opportunity (in-
cluding a reasonable period after receipt of
the notice described in paragraph (e) of this
section) to make or change a contribution
election for the plan year. For purposes of
this section, a 30-day period is deemed to
be a reasonable period to make or change
a contribution election.
(iii)Restrictions on amount of con-
tributions. A plan is permitted to limit
the amount of contributions that may be
made by an eligible employee under a
plan, provided that each NHCE who is
an eligible employee is permitted (unless
the employee is restricted under para-
graph (d)(6)(v) of this section) to make
contributions in an amount that is at least
sufficient to receive the maximum amount
of matching contributions available un-
der the plan for the plan year, and the
employee is permitted to elect any lesser
amount of contributions. However, a plan
may require eligible employees to make
contribution elections in whole percent-
ages of compensation or whole dollar
amounts.
(iv)Restrictions on types of compensa-
tion that may be deferred.Aplanmay
limit the types of compensation that may
be deferred or contributed by an eligible
employee under a plan, provided that each
eligible NHCE is permitted to make con-
tributions under a definition of compen-
sation that would be a reasonable defini-
tion of compensation within the meaning
of §1.414(s)–1(d)(2). Thus, the defini-
tion of compensation from which contri-
butions may be made is not required to sat-
isfy the nondiscrimination requirement of
§1.414(s)–1(d)(3).
(v)Restrictions due to limitations under
the Internal Revenue Code.Aplanmay
2005–5 I.R.B.441January 31, 2005

limit the amount of contributions made by
an eligible employee under a plan—
(A) Because of the limitations of sec-
tion 402(g) or section 415; or
(B) Because, on account of a hard-
ship distribution, an employee’s abil-
ity to make contributions has been sus-
pended for 6 months in accordance with
§1.401(k)–1(d)(3)(iv)(E).
(e)Notice requirement. A plan satisfies
the notice requirement of this paragraph
(e) if it satisfies the notice requirement of
§1.401(k)–3(d).
(f)Plan year requirement—(1)General
rule. Except as provided in this paragraph
(f) or in paragraph (g) of this section, a
plan will fail to satisfy the requirements
of section 401(m)(11) and this section un-
less plan provisions that satisfy the rules
of this section are adopted before the first
day of that plan year and remain in effect
foranentire12-monthplanyear.Inaddi-
tion, except as provided in paragraph (h)
of this section, a plan which includes pro-
visions that satisfy the rules of this sec-
tion will not satisfy the requirements of
§1.401(m)–1(b) if it is amended to change
such provisions for that plan year. More-
over, if, as described in paragraph (j)(4) of
this section, safe harbor matching or non-
elective contributions will be made to an-
other plan for a plan year, provisions under
that other plan specifying that the safe har-
bor contributions will be made and provid-
ing that the contributions will be QNECs
or QMACs must also be adopted before the
first day of that plan year.
(2)Initial plan year.Anewly
established plan (other than a suc-
cessor plan within the meaning of
§1.401(m)–2(c)(2)(iii)) will not be treated
as violating the requirements of this para-
graph (f) merely because the plan year
is less than 12 months, provided that the
plan year is at least 3 months long (or, in
the case of a newly established employer
that establishes the plan as soon as ad-
ministratively feasible after the employer
comes into existence, a shorter period).
Similarly, a plan will not fail to satisfy the
requirements of this paragraph (f) for the
first plan year in which matching contribu-
tions are provided under the plan provided
that—
(i) The plan is not a successor plan; and
(ii) The amendment providing for
matching contributions is made effective
at the same time as the adoption of a cash
or deferred arrangement that satisfies the
requirements of §1.401(k)–3, taking into
account the rules of §1.401(k)–3(e)(2).
(3)Change of plan year. A plan that
has a short plan year as a result of changing
its plan year will not fail to satisfy the re-
quirements of paragraph (f)(1) of this sec-
tion merely because the plan year has less
than 12 months, provided that—
(i) The plan satisfied the requirements
of this section for the immediately preced-
ing plan year; and
(ii) The plan satisfies the requirements
of this section (determined without regard
to paragraph (h) of this section) for the im-
mediately following plan year or for the
immediately following 12 months if the
immediately following plan year is less
than 12 months.
(4)Final plan year. A plan that termi-
nates during a plan year will not fail to sat-
isfy the requirements of paragraph (f)(1) of
this section merely because the final plan
year is less than 12 months, provided that
the plan satisfies the requirement of this
section through the date of termination and
either—
(i) The plan would satisfy the require-
ments of paragraph (h) of this section,
treating the termination of the plan as a
reduction or suspension of safe harbor
matching contributions, other than the
requirement that employees have a rea-
sonable opportunity to change their cash
or deferred elections and, if applicable,
employee contribution elections; or
(ii) The plan termination is in connec-
tion with a transaction described in section
410(b)(6)(C) or the employer incurs a sub-
stantial business hardship, comparable to a
substantial business hardship described in
section 412(d).
(g)Plan amendments adopting non-
elective safe harbor contributions.Not-
withstanding paragraph (f)(1) of this sec-
tion, a plan that provides for the use of
the current year testing method may be
amended after the first day of the plan
year and no later than 30 days before the
last day of the plan year to adopt the safe
harbor method of this section, effective
as of the first day of the plan year, using
nonelective contributions under paragraph
(b) of this section if the plan satisfies the
requirements of §1.401(k)–3(f).
(h)Permissible reduction or suspen-
sion of safe harbor matching contribu-
tions—(1)General rule. A plan that
provides for safe harbor matching con-
tributions will not fail to satisfy the re-
quirements of section 401(m)(2) for a plan
year merely because the plan is amended
during a plan year to reduce or suspend
safe harbor matching contributions on fu-
ture elective deferralsand, if applicable,
employee contributions provided—
(i) All eligible employees are provided
the supplementalnotice in accordance
with paragraph (h)(2) of this section;
(ii) The reduction or suspension of safe
harbor matching contributions is effective
no earlier than the later of 30 days after
eligible employees are provided the no-
tice described in paragraph (h)(2) of this
section and the date the amendment is
adopted;
(iii) Eligible employees are given a rea-
sonable opportunity (including a reason-
able period after receipt of the supplemen-
tal notice) prior to the reduction or suspen-
sion of safe harbor matching contributions
to change their cash or deferred elections
and, if applicable, their employee contri-
bution elections;
(iv) The plan is amended to provide
that the ACP test will be satisfied for
the entire plan year in which the re-
duction or suspension occurs using the
current year testing method described in
§1.401(m)–2(a)(1)(ii); and
(v) The plan satisfies the requirements
of this section (other than this paragraph
(h)) with respect to amounts deferred
through the effective date of the amend-
ment.
(2)Notice of suspension requirement.
The notice of suspension requirement
of this paragraph (h)(2) is satisfied if
each eligible employee is given no-
tice that satisfies the requirements of
§1.401(k)–3(g)(2).
(i) [Reserved].
(j)Other rules—(1)Contributions
taken into account. A contribution is
taken into account for purposes of this
section for a plan year under the same
rules as §1.401(k)–3(h)(1).
(2)Use of safe harbor nonelective
contributions to satisfy other nondiscrim-
ination tests. A safe harbor nonelective
contributionusedtosatisfy the nonelective
contribution requirement under paragraph
(b) of this section may also be taken
into account for purposes of determining
whether a plan satisfies section 401(a)(4)
under the same rules as §1.401(k)–3(h)(2).
January 31, 20054422005–5 I.R.B.

(3)Early participation rules.
Section 401(m)(5)(C) and §1.401(m)–2(a)
(1)(iii)(A) which provide an alterna-
tive nondiscrimination rule for certain
plans that provide forearly participation,
does not apply for purposes of section
401(m)(11) and this section. Thus, a plan
is not treated as satisfying this section with
respect to the eligible employees who have
not completed the minimum age and ser-
vice requirements of section 410(a)(1)(A)
unless the plan satisfies the requirements
of this section with respect to such eligible
employees.
(4)Satisfying safe harbor contribution
requirement under another defined contri-
bution plan. Safe harbor matching or non-
elective contributions may be made to an-
other defined contribution plan under the
same rules as §1.401(k)–3(h)(4). Conse-
quently, each NHCE under the plan pro-
viding for matching contributions must be
eligible under the same conditions under
the other defined contribution plan and the
plan to which the contributions are made
must have the same plan year as the plan
providing for matching contributions.
(5)Contributions used only once.Safe
harbor matching or nonelective contribu-
tions cannot be used to satisfy the require-
ments of this section with respect to more
than one plan.
(6)Plan must satisfy ACP with respect
to employee contributions. If the plan pro-
vides for employee contributions, in addi-
tion to satisfying the requirements of this
section, it must also satisfy the ACP test of
§1.401(m)–2. See §1.401(m)–2(a)(5)(iv)
for special rules under which the ACP test
is permitted to be performed disregarding
some or all matching when this section is
satisfied with respect to the matching con-
tributions.
§1.401(m)–4 Special rules for mergers,
acquisitions and similar events.
[Reserved].
§1.401(m)–5 Definitions.
Unless otherwise provided, the defini-
tions of this section govern for purposes of
section 401(m) and the regulations there-
under.
Actual contribution percentage
(ACP).Actual contribution percentage
orACPmeans the ACP of the group
of eligible employees as defined in
§1.401(m)–2(a)(2)(i).
Actual contribution percentage (ACP)
test.Actual contribution percentage test
orACP testmeans the test described in
§1.401(m)–2(a)(1).
Actual contribution ratio (ACR).Ac-
tual contribution ratioorACRmeans the
ACR of an eligible employee as defined
in §1.401(m)–2(a)(3).
Actual deferral percentage (ADP)
test.Actual deferral percentage testor
ADP testmeans the test described in
§1.401(k)–2(a)(1).
Compensation.Compensationmeans
compensation as defined in section 414(s)
and §1.414(s)–1. The period used to de-
termine an employee’s compensation for a
plan year must be either the plan year or the
calendar year ending within the plan year.
Whichever period is selected must be ap-
plied uniformly to determine the compen-
sation of every eligible employee under the
plan for that plan year. A plan may, how-
ever, limit the period taken into account
under either method to that portion of the
plan year or calendar year in which the em-
ployee was an eligible employee, provided
that this limit is applied uniformly to all
eligible employees under the plan for the
plan year. See also section 401(a)(17) and
§1.401(a)(17)–1(c)(1). For this purpose,
incaseofanHCEwhoseACRisdeter-
mined under §1.401(m)–2(a)(3)(ii), period
of participation includes periods under an-
other plan for which matching contribu-
tions or employee contributions are aggre-
gated under §1.401(m)–2(a)(3)(ii).
Current year testing method.Cur-
rent year testing methodmeans the
testing method under which the appli-
cable year is the current plan year, as
described in §1.401(k)–2(a)(2)(ii) or
1.401(m)–2(a)(2)(ii).
Elective contributions.Elective contri-
butionsmeans elective contributions as de-
fined in §1.401(k)–6.
Elective deferrals.Elective deferrals
means elective deferrals described in sec-
tion 402(g)(3).
Eligible employee—(1)General rule.
Eligible employeemeans an employee
who is directly or indirectly eligible to
make an employee contribution or to
receive an allocation of matching contri-
butions (including matching contributions
derived from forfeitures) under the plan
for all or a portion of the plan year. For
example, if an employee must perform
purely ministerial or mechanical acts (e.g.,
formal application for participation or con-
sent to payroll withholding) in order to be
eligible to make an employee contribution
for a plan year, the employee is an eligible
employee for the plan year without regard
to whether the employee performs these
acts.
(2)Conditions on eligibility.Anem-
ployee who is unable to make employee
contributions or to receive an allocation
of matching contributions because the em-
ployee has not contributed to another plan
is also an eligible employee. By contrast, if
an employee must perform additional ser-
vice (e.g., satisfy a minimum period of ser-
vice requirement) in order to be eligible to
make an employee contribution or to re-
ceive an allocation of matching contribu-
tions for a plan year, the employee is not an
eligible employee for the plan year unless
the service is actually performed. An em-
ployee who would be eligible to make em-
ployee contributions but for a suspension
due to a distribution, a loan, or an election
not to participate in the plan, is treated as
an eligible employee for purposes of sec-
tion 401(m) for a plan year even though the
employee may not make employee contri-
butions or receive an allocation of match-
ing contributions by reason of the suspen-
sion. Finally, an employee does not fail to
be treated as an eligible employee merely
because the employee may receive no ad-
ditional annual additions because of sec-
tion 415(c)(1).
(3)Certain one-time elections.Anem-
ployee is not an eligible employee merely
because the employee, no later than the
employee’s first becoming eligible under
any plan or arrangement described in sec-
tion 219(g)(5)(A) and providing for em-
ployee or matching contributions, is given
a one-time opportunity to elect, and the
employee in fact does elect, not to be el-
igible to make employee contributions or
to receive allocationsof matching contri-
butions under the plan or any other plan or
arrangement maintained by the employer
(including plans not yet established) for
the duration of the employee’s employ-
ment with the employer. In no event is
an election made after December 23, 1994,
treated as a one-time irrevocable election
under this paragraph if the election is made
by an employee who previously became
eligible under another plan or arrangement
2005–5 I.R.B.443January 31, 2005

(whether or not terminated) of the em-
ployer.
Eligible HCE.Eligible HCEmeans an
eligible employee who is an HCE.
Eligible NHCE.Eligible NHCEmeans
an eligible employee who is not an HCE.
Employee.Employeemeans an em-
ployee within the meaning of §1.410(b)–9.
Employee contributions.Employee
contributionsmeans employee contribu-
tions as defined in §1.401(m)–1(a)(3).
Employee stock ownership plan
(ESOP).Employee stock ownership plan
orESOPmeans the portion of a plan
that is an ESOP within the meaning of
§1.410(b)–7(c)(2).
Employer.Employermeans an em-
ployer within the meaning of §1.410(b)–9.
Excess aggregate contributions.Excess
aggregate contributionsmeans, with re-
spect to a plan year, the amount of excess
aggregate contributions apportioned to an
HCE under §1.401(m)–2(b)(2)(iii).
Excess contributions.Excess con-
tributionsmeans with respect to a plan
year, the amount of excess contribu-
tions apportioned to an HCE under
§1.401(k)–2(b)(2)(iii).
Excess deferrals.Excess deferrals
means excess deferrals as defined in
§1.402(g)–1(e)(3).
Highly compensated employee (HCE).
Highly compensated employeeorHCEhas
the meaning provided in section 414(q).
Matching contributions.Matching con-
tributionis defined in §1.401(m)–1(a)(2).
Nonelective contributions.Nonelective
contributionsmeans employer contribu-
tions (other than matching contributions)
with respect to which the employee may
not elect to have the contributions paid
to the employee in cash or other benefits
instead of being contributed to the plan.
Non-employee stock ownership plan
(non-ESOP).Non-employee stock owner-
ship planornon-ESOPmeans the portion
of a plan that is not an ESOP within the
meaning of §1.410(b)–7(c)(2).
Non-highly compensated employee
(NHCE).Non-highly compensated em-
ployeeorNHCEmeans an employee who
is not an HCE.
Plan.Planmeans plan as defined in
§1.401(m)–1(b)(4).
Prior year testing method.Prior
year testing methodmeans the test-
ing method under which the appli-
cable year is the prior plan year, as
described in §1.401(k)–2(a)(2)(ii) or
1.401(m)–2(a)(2)(ii).
Qualified matching contributions
(QMAC).Qualified matching contribu-
tionsorQMACmeans matching contri-
butions that satisfy the requirements of
§1.401(k)–1(c) and (d) at the time the
contribution is made,without regard to
whether the contributions are actually
taken into account as elective contribu-
tions under §1.401(k)–2(a)(6). See also
§1.401(k)–2(b)(4)(iii) for a rule providing
that a matching contribution does not fail
to qualify as a QMAC solely because it
is forfeitable under section 411(a)(3)(G)
because it is a matching contribution with
respect to an excess deferral, excess contri-
bution, or excess aggregate contribution.
Qualified nonelective contributions
(QNEC).Qualified nonelective contribu-
tionsorQNECmeans employer contri-
butions, other than elective contributions
or matching contributions, that satisfy the
requirements of §1.401(k)–1(c) and (d) at
the time the contribution is made, without
regard to whether the contributions are
actually taken into account under the ADP
test under §1.401(k)–2(a)(6) or the ADP
test under §1.401(m)–2(a)(6).
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 6. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7808.
Par. 7. In §602.101, paragraph (b)
is revised by removing the entries for
“1.401(k)–1” and adding a new entry in
numerical order in the table to read, in
part, as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
Control No.
*****
1.401(k)–1........................................................... 1545–1669
*****
Par. 8. In §602.101, paragraph (b) is
amended by adding entries in numerical
order to the table to read, in part, as fol-
lows:
§602.101 OMB Control numbers.
*****
(b) * * *
January 31, 20054442005–5 I.R.B.

CFR part or section where
identified and described
Current OMB
Control No.
*****
1.401(k)–2........................................................... 1545–1669
*****
1.401(k)–3........................................................... 1545–1669
*****
1.401(k)–4........................................................... 1545–1669
*****
1.401(k)–3........................................................... 1545–1699
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 15, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 28,
2004, 8:45 a.m., and published in the issue of the Federal
Register for December 29, 2004, 69 F.R. 78143)
Section 472.—Last-in,
First-out Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores.The November 2004 Bureau of
Labor Statistics price indexes are accepted
for use by department stores employing
the retail inventory and last-in, first-out
inventory methods for valuing inventories
for tax years ended on, or with reference
to, November 30, 2004.
Rev. Rul. 2005–5
The following Department Store In-
ventory Price Indexes for November 2004
were issued by the Bureau of Labor Statis-
tics. The indexes are accepted by the Inter-
nal Revenue Service, under § 1.472–1(k)
of the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for ap-
propriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, November 30, 2004.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups — soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food, liquor,
tobacco, and contract departments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsNov. 2003Nov. 2004
Percent Change
from Nov. 2003
to Nov. 2004
1
1. PieceGoods .............................................480.5507.85.7
2. DomesticsandDraperies..................................548.6535.3-2.4
3. Women’sandChildren’sShoes ............................649.8656.61.0
4. Men’sShoes.............................................845.3842.9-0.3
5. Infants’Wear ............................................598.3584.3-2.3
6. Women’sUnderwear......................................514.2518.50.8
7. Women’sHosiery ........................................343.3342.0-0.4
8. Women’sandGirls’Accessories ...........................555.8583.14.9
9. Women’sOuterwearandGirls’Wear .......................375.7376.80.3
10. Men’sClothing ..........................................549.5542.5-1.3
11. Men’sFurnishings........................................598.3581.5-2.8
12. Boys’ClothingandFurnishings............................451.0430.1-4.6
13. Jewelry..................................................866.8879.01.4
14. Notions .................................................797.2789.1-1.0
15. ToiletArticlesandDrugs..................................976.2998.62.3
16. FurnitureandBedding ....................................612.9601.7-1.8
17. FloorCoverings..........................................594.5590.2-0.7
2005–5 I.R.B.445January 31, 2005

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsNov. 2003Nov. 2004
Percent Change
from Nov. 2003
to Nov. 2004
1
18. Housewares..............................................712.6711.8-0.1
19. MajorAppliances.........................................210.0201.6-4.0
20. RadioandTelevision......................................44.340.7-8.1
21. Recreation and Education
2
.................................82.279.5-3.3
22. Home Improvements
2
.....................................124.9130.64.6
23. Automotive Accessories
2
..................................112.0113.11.0
Groups1–15:SoftGoods .......................................567.7566.4-0.2
Groups16–20:DurableGoods...................................388.9380.5-2.2
Groups 21–2
3: Misc. Goods
2
....................................
93.992.9-1.1
Store Total
3
..............................................503.1499.6-0.7
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
Indexes
on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,
tobacco and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Burkom at (202) 622–7924 (not a
toll-free call).
Section 7508.—Time for
Performing Certain Acts
Postponed by Reason of
ServiceinCombatZoneor
Contingency Operation
Taxpayers are advised that the time for performing
certain acts relating to like-kind exchanges of prop-
erty under § 1031 of the Code may be postponed by
reason of service in a combat zone or contingency op-
eration. See Notice 2005-3, page 447.
Section 7508A.—Authority
to Postpone Certain
Deadlines by Reason of
Presidentially Declared
Disaster or Terroristic or
Military Actions
Taxpayers are advised that certain deadlines relat-
ing to like-kind exchanges of property under § 1031
of the Code may be postponed by reason of Presiden-
tially declared disaster or terroristic or military ac-
tions. See Notice 2005-3, page 447.
January 31, 20054462005–5 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Additional Relief for Like-Kind
Exchanges for Which
Deadlines May Be Postponed
Under §§ 7508 and 7508A of
the Internal Revenue Code
Notice 2005–3
This notice advises taxpayers that the
Internal Revenue Service and Treasury
Department will modify retroactively Rev.
Proc. 2004–13, 2004–4 I.R.B. 335, to
provide additional tax relief to taxpayers
(transferors) involved in § 1031 like-kind
exchange transactions affected by a Presi-
dentially declared disaster, a terroristic or
military action, service in a combat zone,
or service with respect to contingency
operations. Rev. Proc. 2004–13 will be
modified to expand the list of time-sen-
sitive acts under §§ 7508 and 7508A as
described below under EXPANDED LIST
OF TIME-SENSITIVE ACTS. Rev. Proc.
2004–13 also will be modified as de-
scribed below under SPECIAL RELIEF
FOR § 1031 TRANSACTIONS to (1)
expand the categories of taxpayers quali-
fying for relief, and (2) provide additional
postponements of certain § 1031 dead-
lines.
Under this notice, taxpayers are enti-
tledimmediatelyto additional tax relief if,
with respect to a Presidentially declared
disaster, the Service has issued an IRS
News Release or other guidance autho-
rizing postponement of deadlines under
§ 7508A. For example, additional relief
under this notice is immediately available
to victims of Hurricanes Charley, Frances,
Ivan and Jeanne, and Tropical Storm
Bonnie, who were granted relief in prior
IRS News Releases. Taxpayers may rely
on this notice until Rev. Proc. 2004–13 is
modified as described in this notice.
BACKGROUND
Under § 1031, taxpayers generally do
not recognize gain or loss on the exchange
of property held for productive use in a
trade or business or for investment if such
property is exchanged solely for property
of like kind that is to be held either for
productive use in a trade or business or
for investment. In the case of a deferred
like-kind exchange under § 1031(a)(3),
however, two particular requirements
must be met. First, replacement property
must be identified by midnight of the 45
th
day after the taxpayer transfers the relin-
quished property (45-day identification
period). Section 1.1031(k)–1(b)(2)(i) of
the Income Tax Regulations. Second, un-
der § 1.1031(k)–1(b)(2)(ii), the taxpayer
must receive the replacement property by
midnight of the earlier of—
(1) The 180
th
day after the taxpayer
transfers the relinquished property (180-
day exchange period); or
(2) The due date (including extensions)
of the taxpayer’s income tax return for the
taxable year in which the taxpayer trans-
ferred the relinquished property (due date
of return exchange period).
Rev. Proc. 2000–37, 2000–2 C.B. 308,
modified by Rev. Proc. 2004–51, 2004–33
I.R.B. 294, provides a safe harbor under
which transactions will qualify for treat-
ment under § 1031 if a taxpayer meets the
requirements of a 5-business day period to
enter into a qualified exchange accommo-
dation agreement (QEAA), a 45-day iden-
tification period, a 180-day exchange pe-
riod, and a 180-day combined time pe-
riod, which are set forth in section 4.02(3)
through (6) of Rev. Proc. 2000–37.
Generally, section 7508 postpones the
time for performing specified acts for in-
dividuals serving in the Armed Forces of
the United States, or serving in support of
such Armed Forces, in a combat zone, or
with respect to a contingency operation.
Generally, section 7508A permits the
Secretary to postpone specified dead-
lines for taxpayers affected by a Presi-
dentially declared disaster (as defined in
§ 1033(h)(3)) or a terroristic or military
action(asdefinedin§692(c)(2)).
Rev. Proc. 2004–13 provides an up-
dated list of time sensitive acts, the per-
formance of which may be postponed un-
der §§ 7508 and 7508A. The list of acts in
Rev. Proc. 2004–13 supplements the list
of acts that areautomaticallypostponed
under § 7508 and the list of acts in the reg-
ulations under § 7508A for which the Ser-
vice may authorize postponements. Rev.
Proc. 2004–13 does not itself entitle tax-
payers to any postponements under § 7508
or § 7508A. Rather, for taxpayers to be
entitled to a postponement with respect to
any act listed in Rev. Proc. 2004–13, the
Service generally will issue an IRS News
Release or other guidance providing such
relief with respect to a specific Presiden-
tially declared disaster area, terroristic or
military action, service in a combat zone,
or service with respect to contingency op-
erations.
EXPANDED LIST OF
TIME-SENSITIVE ACTS
Section 6 of Rev. Proc. 2004–13 will
be modified to add to the list of time-sensi-
tive acts, the performance of which may be
postponed under §§ 7508 and 7508A, the
acts described in section 4.02(3), (4), (5)
and (6) of Rev. Proc. 2000–37, modified
by Rev. Proc. 2004–51, relating to cer-
tain like-kind exchanges of property under
§ 1031.
SPECIAL RELIEF FOR § 1031
TRANSACTIONS
Overview
Rev. Proc. 2004–13 also will be mod-
ified to include a 120-day postponement
for meeting certain § 1031 like-kind ex-
change deadlines underthe circumstances
set forth below underGeneral Ruleand
Additional Relief for Substantially Dam-
aged Identified Property. Taxpayers may
use the postponement rules provided by
this notice in lieu of the general extension
dates provided by the IRS News Release or
other guidance issued with respect to a spe-
cific Presidentially declared disaster. The
deadlines to which the 120-day postpone-
ments apply are—
(1) The 45-day identification period and
the 180-day exchange period (but not the
due date of return exchange period)for
deferred like-kind exchanges set forth in
§ 1.1031(k)–1(b)(2); and
(2) The 5-business day period to en-
ter into a QEAA, the 45-day identifica-
tion period, the 180-day exchange period,
and the 180-day combined time period set
forthinsection4.02(3)through(6)ofRev.
Proc. 2000–37, modified by Rev. Proc.
2004–51.
2005–5 I.R.B.447January 31, 2005

General Rule
The last day of a 45-day identification
period set forth in § 1.1031(k)–1(b)(2), the
last day of a 180-day exchange period set
forth in § 1.1031(k)–1(b)(2), and the last
day of a period set forth in section 4.02(3)
through (6) of Rev. Proc. 2000–37, mod-
ified by Rev. Proc. 2004–51, that falls
on or after the date of a Presidentially de-
clared disaster is postponed by 120 days or
to the last day of the general disaster ex-
tension period authorized by an IRS News
Release or other guidance announcing tax
relief for victims of the specific Presiden-
tially declared disaster, whichever is later.
A taxpayer who is a transferor qualifies
for a postponement under theGeneral Rule
only if—
(1) The relinquished property was
transferred on or before the date of
the Presidentially declared disaster,
or in a transaction governed by Rev.
Proc. 2000–37, modified by Rev. Proc.
2004–51, qualifiedindiciaof ownership
were transferred to the exchange accom-
modation titleholder on or before that date;
and
(2) The taxpayer (transferor)—
(a) Is an “affected taxpayer” as defined
in § 301.7508A–1(d)(1) of the Procedure
and Administration Regulations; or
(b) Has difficulty meeting the 45-day
identification or 180-day exchange dead-
line set forth in § 1.1031(k)–1(b)(2), or
a deadline set forth in section 4.02(3)
through (6) of Rev. Proc. 2000–37, mod-
ified by Rev. Proc. 2004–51, due to the
Presidentially declared disaster for the
following or similar reasons:
(i) The relinquished property or the
replacement property is located in a
covered disaster area (as defined in
§ 301.7508A–1(d)(2)) as provided in the
IRS News Release or other guidance (the
covered disaster area);
(ii) The principal place of business of
any party to the transaction (for exam-
ple, a qualified intermediary, exchange ac-
commodation titleholder, transferee, set-
tlement attorney, lender, financial institu-
tion, or a title insurance company) is lo-
cated in the covered disaster area;
(iii) Any party to the transaction (or an
employee of such a party who is involved
in the § 1031 transaction) is killed, injured,
or missing as a result of the Presidentially
declared disaster;
(iv) A document prepared in connection
with the exchange (for example, the agree-
ment between the transferor and the qual-
ified intermediary or the deed to the relin-
quished property or replacement property)
or a relevant land record is destroyed, dam-
aged, or lost as a result of the Presidentially
declared disaster;
(v) A lender decides not to fund either
permanently or temporarily a real estate
closing due to the Presidentially declared
disaster or refuses to fund a loan to the
taxpayer because flood, disaster, or other
hazard insurance is not available due to the
Presidentially declared disaster; or
(vi) A title insurance company is not
able to provide the required title insurance
policy necessary to settle or close a real
estate transaction due to the Presidentially
declared disaster.
Additional Relief for Substantially
DamagedIdentifiedProperty
The postponement described in the
General Rulealso applies to the last day
of a 45-day identification period described
in § 1.1031(k)–1(b)(2) and the last day of
a 45-day identification period described
in section 4.05(4) of Rev. Proc. 2000–37,
modified by Rev. Proc. 2004–51, that falls
prior to the date of a Presidentially de-
clared disaster if an identified replacement
property (in the case of an exchange de-
scribed in § 1.1031(k)–1), or an identified
relinquished property (in the case of an ex-
change described in Rev. Proc. 2000–37,
modified by Rev. Proc. 2004–51) is sub-
stantially damaged by the Presidentially
declared disaster.
EFFECTIVE DATE
Taxpayers may apply the proposed
modifications to Rev. Proc. 2004–13 de-
scribed in this notice for acts that may be
performed on or after January 26, 2004,
the effective date of Rev. Proc. 2004–13.
DRAFTING INFORMATION
The principal author of this notice is
Michael F. Schmit of the Office of Asso-
ciate Chief Counsel (Income Tax and Ac-
counting). For further information regard-
ing this notice, contact Mr. Schmit at (202)
622–4960 or J. Peter Baumgarten at (202)
622–4920 (not toll-free calls).
Announcement of Rule
to be Included in Final
Regulations Under Section
367(a) Regarding Certain
ExchangesofSecuritiesfor
Stock or Securities
Notice 2005–6
This notice announces that Trea-
sury and the Internal Revenue Service
(“the Service”) will amend Treas. Reg.
§1.367(a)–3 regarding certain exchanges
under section 354 by U.S. persons of secu-
rities of a foreign corporation in a reorgani-
zation described in section 368(a)(1)(E) or
securities of a domestic or foreign corpo-
ration pursuant to an asset reorganization
described in section 368(a)(1).
BACKGROUND
Section 354(a)(1) provides that no gain
or loss shall be recognized by a share-
holder if stock or securities in a corpora-
tion that is a party to a reorganization are,
in pursuance of the plan of reorganization,
exchanged solely for stock or securities in
such corporation or in another corporation
a party to the reorganization. Section 354
further provides that a security holder may
surrender securities and receive securities
in the same principal amount or in a lesser
principal amount without the recognition
of gain or loss.
Under section 367(a), gain is recog-
nized if a U.S. person transfers property to
a foreign corporation in connection with
an exchange described in section 354 un-
less an exception applies. Treasury Reg.
§1.367(a)–3(a) provides, in part, that if in
an exchange described in section 354, a
U.S. person exchanges stock of a foreign
corporation in a reorganization described
in section 368(a)(1)(E), or a U.S. person
exchanges stock of a domestic or foreign
corporation for stock of a foreign corpo-
ration pursuant to an asset reorganization
described in section 368(a)(1)(C), (D) or
(F) that is not treated as an indirect stock
transfer under Treas. Reg. §1.367(a)–3(d),
such section 354 exchange is not a trans-
fer to a foreign corporation subject to
section 367(a). This language excludes
from the scope of section 367(a) certain
stock-for-stock exchanges under section
354 by U.S. persons, but does not address
January 31, 20054482005–5 I.R.B.

whether exchanges of securities for stock
or exchanges of securities for securities,
that would qualify for nonrecognition
under section 354, are subject to section
367(a).
DISCUSSION
The Treasury Department and the Ser-
vice will issue regulations under Treas.
Reg. §1.367(a)–3 to provide that an ex-
change described in section 354 by a U.S.
person of securities of a foreign corpora-
tion for stock or securities of the foreign
corporation in a reorganization described
in section 368(a)(1)(E) will not be subject
to section 367(a). The regulations will fur-
ther provide that an exchange described
in section 354 by a U.S. person of secu-
rities of a domestic or a foreign corpora-
tion for stock or securities of a foreign cor-
poration pursuant to an asset reorganiza-
tion described in section 368(a)(1), that is
not treated as an indirect transfer described
in Treas. Reg. §1.367(a)–3(d), will not
be subject to section 367(a). Conforming
amendments to other portions of the regu-
lations under sections 367 and 6038B will
be made as well.
EFFECTIVE DATE
Regulations to be issued incorporating
the guidance set forth in this notice will
apply to transfers of securities after Jan-
uary 5, 2005. Until such regulations are
issued, taxpayers may rely on this notice.
Taxpayers also may apply the provisions of
this notice to transfers of securities occur-
ring on or after July 20, 1998 (the effec-
tive date of Treas. Reg. §1.367(a)–3(a))
and on or before January 5, 2005. Taxpay-
ers applying this notice, however, must do
so consistently to all transactions within its
scope.
COMMENTS
Written comments on the issues ad-
dressed in this notice may be submitted
to the Office of Associate Chief Coun-
sel International, Attention: Mark R.
Pollard (Notice 2004–6), room 4555,
CC:INTL:BR3, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC 20224. Alternatively,
taxpayers may submit comments electron-
ically toNotice.Comments@m1.irscoun-
sel.treas.gov.Comments will be available
for public inspection and copying. Trea-
sury and the IRS request comments by
April 28, 2005.
DRAFTING INFORMATION
The principal author of this notice is
Mark R. Pollard of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Mr. Pollard at (202) 622–3860 (not a toll-
free call).
2005–5 I.R.B.449January 31, 2005

Part IV. Items of General Interest
Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2005-2
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility, will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid institution or con-
clusion of a proceeding for his or her dis-
barment or suspension from practice be-
fore the Internal Revenue Service, may of-
fer his or her consent to suspension from
such practice. The Director, Office of Pro-
fessional Responsibility, in his discretion,
may suspend an attorney, certified public
accountant, enrolled agent, or enrolled ac-
tuary in accordance with the consent of-
fered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Nadler, HerbertNew York, NYEnrolled ActuaryNovember 1, 2004
to
February 28, 2005
Distribution From a Pension
Plan Under a Phased
Retirement Program; Hearing
Announcement 2005–10
AGENCY Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of public hearing on pro-
posed rulemaking.
SUMMARY: This document contains a
notice of public hearing on a proposed
rulemaking (REG–114726–04, 2004–47
I.R.B. 857) that provide rules permitting
distributions to be made from a pension
plan under a phased retirement program
and set forth requirements for abona fide
phased retirement program.
January 31, 20054502005–5 I.R.B.

DATES: The public hearing is being held
on March 14, 2005, at 10 a.m. The IRS
must receive outlines of the topics to be
discussed at the hearing by February 21,
2005.
ADDRESSES: The public hearing is be
held in the Auditorium, Internal Rev-
enue Service Building, 1111 Consti-
tution Avenue, NW, Washington, DC.
Send submissions to: CC:PA:LPD:PR
(REG–114726–04), Room 5203, Inter-
nal Revenue Service, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Mon-
day through Friday between the hours of
8 a.m. and 4 p.m. to CC:PA:LPD:PR
(REG–114726–04), Courier’s Desk, In-
ternal Revenue Service, 1111 Consti-
tution Avenue, NW, Washington, DC,
or sent electronically, via the IRS In-
ternet site athttp://www.irs.gov/regs
or via the Federal eRulemaking Por-
tal atwww.regulations.gov(IRS and
REG–114726–04).
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Cathy Vohs, (202) 622–6090; concerning
submissions, the hearing, and/or place-
ment on the building access list to attend
the hearing, Sonya M. Cruse of the Pub-
lications and Regulations Branch, Legal
Processing Division, Associate Chief
Counsel (Procedure and Administration),
at (202) 622–4693 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
The subject of the public hearing
is the notice of proposed rulemaking
(REG–114726–04) that was published
in theFederal Registeron Wednesday,
November 10, 2004 (69 FR 65108).
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing.
Persons who have submitted written
comments and wish to present oral com-
ments at the hearing, must submit an
outline of the topics to be discussed and
the amount of time to be devoted to each
topic (signed original and eight (8) copies)
by February 21, 2005.
A period of 10 minutes is allotted to
each person for presenting oral comments.
After the deadline for receiving out-
lines has passed, the IRS will prepare an
agenda containing the schedule of speak-
ers. Copies of the agenda will be made
available, free of charge, at the hearing.
Because of access restrictions, the IRS
will not admit visitors beyond the imme-
diate entrance area more than 15 minutes
before the hearing starts. For informa-
tion about having your name placed on
the building access list to attend the hear-
ing, see the “FOR FURTHER INFORMA-
TION CONTACT” section of this docu-
ment.
Cynthia E. Grigsby,
Acting Chief, Publications
and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on December 27,
2004, 8:45 a.m., and published in the issue of the Federal
Register for December 28, 2004, 69 F.R. 77678)
Section 707 Regarding
Disguised Sales, Generally;
Correction
Announcement 2005–11
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of pro-
posed rulemaking and notice of public
hearing.
SUMMARY: This document contains
a correction to proposed regulations
(REG–149519–03, 2004–51 I.R.B. 1009)
which were published in theFederal Reg-
isteron Friday, November 26, 2004 (69
FR 68838). The proposed regulations
relates to the treatment of transactions
between a partnership and its partners as
disguised sales of partnership interests
between the partners.
FOR FURTHER INFORMATION
CONTACT: Deane M. Burke or
Christopher L. Trump, (202) 622–3070
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
BACKGROUND
The proposed regulations that is the
subject of this correction is under sec-
tion 707(a)(2)(B) of the Internal Revenue
Code.
Need for correction
As published, the notice of proposed
rulemaking and notice of public hearing
contain an error that may prove to be mis-
leading and is in needof clarification.
Correction to Publication
Accordingly, the publication of the
proposed regulations (REG–149519–03),
which was the subject of FR Doc.
04–26112, is corrected as follows:
On page 68843, column 3, in the pre-
amble under the paragraph heading, “Re-
view of Existing Regulations”, line 5,
the language “§§ 1.707–3, 1.707–4, and
1.707-5.” is corrected to read “§§ 1.707–3,
1.707–4, 1.707–5 and 1.707–6.”.
Cynthia E. Grigsby,
Acting Chief, Regulations
and Publications Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on December 20,
2004, 8:45 a.m., and published in the issue of the Federal
Register for December 21, 2004, 69 F.R. 76422)
2005–5 I.R.B.451January 31, 2005

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
January 31, 2005i2005–5 I.R.B.

Numerical Finding List
1
Bulletins 2005–1 through 2005–5
Announcements:
2005-1, 2005-1 I.R.B.257
2005-2, 2005-2 I.R.B.319
2005-3, 2005-2 I.R.B.270
2005-4, 2005-2 I.R.B.319
2005-5, 2005-3 I.R.B.353
2005-6, 2005-4 I.R.B.377
2005-7, 2005-4 I.R.B.377
2005-8, 2005-4 I.R.B.380
2005-9, 2005-4 I.R.B.380
2005-10, 2005-5 I.R.B.450
2005-11, 2005-5 I.R.B.451
Notices:
2005-1, 2005-2 I.R.B.274
2005-2, 2005-3 I.R.B.337
2005-3, 2005-5 I.R.B.447
2005-4, 2005-2 I.R.B.289
2005-5, 2005-3 I.R.B.337
2005-6, 2005-5 I.R.B.448
2005-7, 2005-3 I.R.B.340
2005-8, 2005-4 I.R.B.368
2005-9, 2005-4 I.R.B.369
Proposed Regulations:
REG-129709-03, 2005-3 I.R.B.351
REG-139683-04, 2005-4 I.R.B.371
REG-159824-04, 2005-4 I.R.B.372
Revenue Procedures:
2005-1, 2005-1 I.R.B.1
2005-2, 2005-1 I.R.B.86
2005-3, 2005-1 I.R.B.118
2005-4, 2005-1 I.R.B.128
2005-5, 2005-1 I.R.B.170
2005-6, 2005-1 I.R.B.200
2005-7, 2005-1 I.R.B.240
2005-8, 2005-1 I.R.B.243
2005-9, 2005-2 I.R.B.303
2005-10, 2005-3 I.R.B.341
2005-11, 2005-2 I.R.B.307
2005-12, 2005-2 I.R.B.311
Revenue Rulings:
2005-1, 2005-2 I.R.B.258
2005-2, 2005-2 I.R.B.259
2005-3, 2005-3 I.R.B.334
2005-4, 2005-4 I.R.B.366
2005-5, 2005-5 I.R.B.445
Tax Conventions:
2005-3, 2005-2 I.R.B.270
Treasury Decisions:
9164, 2005-3 I.R.B.320
9165, 2005-4 I.R.B.357
9167, 2005-2 I.R.B.261
9168, 2005-4 I.R.B.354
9169, 2005-5 I.R.B.381
9170, 2005-4 I.R.B.363
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin
2004–52, dated December 27, 2004.
2005–5 I.R.B.iiJanuary 31, 2005

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2005–1 through 2005–5
Notices:
88-30
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
88-132
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-29
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-38
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
Proposed Regulations:
REG-149519-03
Corrected by
Ann. 2005-11, 2005-5 I.R.B.451
REG-114726-04
Corrected by
Ann. 2005-10, 2005-5 I.R.B.450
Revenue Procedures:
98-16
Modified and superseded by
Rev. Proc. 2005-11, 2005-2 I.R.B.307
2001-22
Superseded by
Rev. Proc. 2005-12, 2005-2 I.R.B.311
2002-9
Modified and amplified by
Rev. Proc. 2005-9, 2005-2 I.R.B.303
2004-1
Superseded by
Rev. Proc. 2005-1, 2005-1 I.R.B.1
2004-2
Superseded by
Rev. Proc. 2005-2, 2005-1 I.R.B.86
2004-3
Superseded by
Rev. Proc. 2005-3, 2005-1 I.R.B.118
2004-4
Superseded by
Rev. Proc. 2005-4, 2005-1 I.R.B.128
2004-5
Superseded by
Rev. Proc. 2005-5, 2005-1 I.R.B.170
Revenue Procedures— Continued:
2004-6
Superseded by
Rev. Proc. 2005-6, 2005-1 I.R.B.200
2004-7
Superseded by
Rev. Proc. 2005-7, 2005-1 I.R.B.240
2004-8
Superseded by
Rev. Proc. 2005-8, 2005-1 I.R.B.243
2004-13
Modified by
Notice 2005-3, 2005-5 I.R.B.447
2004-35
Corrected by
Ann. 2005-4, 2005-2 I.R.B.319
2004-60
Superseded by
Rev. Proc. 2005-10, 2005-3 I.R.B.341
Revenue Rulings:
92-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
95-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
2004-103
Superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27,
2004.
January 31, 2005iii2005–5 I.R.B.

INDEX
Internal Revenue Bulletins 2005–1 through
2005–5
The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parentheses refer to the Internal Revenue Bulletin in which the item
may be found and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Corporations, prohibited allocations of securities in an S corpo-
ration (TD 9164) 3,320; (REG–129709–03) 3,351
Determination letters, issuing procedures (RP 6) 1,200
Full funding limitations, weighted average interest rate for:
January 2005 (Notice 9) 4,369
Letter rulings:
And, determination letters, areas which will not be issued
from:
Associates Chief Counsel and Division Counsel (TE/GE)
(RP 3) 1,118
Associate Chief Counsel (International ) (RP 7) 1,240
And information letters, procedures (RP 4) 1,128
User fees, request for letter rulings (RP 8) 1,243
Nonqualified deferred compensation, new section 409A (Notice
1) 2,274
Proposed Regulations:
26 CFR 1.409(p)–1, added; prohibited allocations of securi-
ties in an S corporation (REG–129709–03) 3,351
Qualified retirement plans:
Automatic rollover, model language (Notice 5) 3,337
Benefits during phased retirement, REG–114726–04, hearing
(Ann 10) 5,450
Cash or deferred arrangements under section 401(k), match-
ing contributions or employee contributions under section
401(m) (TD 9169) 5,381
Regulations:
26 CFR 1.409(p)–1T, revised; prohibited allocations of secu-
rities in an S corporation (TD 9164) 3,320
26 CFR 1.401(k)–0, –1, revised; 1.401(k)–2 thru –6, added;
1.401(m)–0 thru –2, revised; 1.401(m)–3 thru –5, added;
1.410(b)–3, revised; 602.101,revised; cash or deferred ar-
rangements under section 401(k) and matching contribu-
EMPLOYEE PLANS—Cont.
tions or employee contributions under section 401(m) reg-
ulations (TD 9169) 5,381
Technical advice to IRS employees (RP 5) 1,170
EMPLOYMENT TAX
Form W-2, 2005, new code Z, Box 12 (Ann 5) 3,353
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Partnership’s contributions to partner’s Health Savings Account
(HSA), S corporation’s contributions to HSAs of 2-percent
shareholder-employees (Notice 8) 4,368
Regulations:
26 CFR 31.3121(b)(2)–1, revised; 31.3121(b)(10)–2,
amended; 31.3306(c)(10)–2, amended; student FICA
exception (TD 9167) 2,261
Student FICA exception:
Application under sections 3121(b)(10) and 3306(c)(10)(B)
(TD 9167) 2,261
Treatment of amounts paid by certain institutions of higher
education (RP 11) 2,307
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,86
ESTATE TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,86
EXCISE TAX
Alcohol and biodiesel fuels, aviation grade kerosene, sales of
gasoline to state and local governments and nonprofit organi-
zations (Notice 4) 2,289
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,86
EXEMPT ORGANIZATIONS
Annual notice to donors regarding pending and settled declara-
tory judgment suits (Ann 1) 1,257
Declaratory judgment suits (Ann 9) 4,380
Letter rulings:
And determination letters, areas which will not be issued
from, Associates Chief Counsel and Division Counsel
(TE/GE) (RP 3) 1,118
And information letters, procedures (RP 4) 1,128
2005–5 I.R.B.ivJanuary 31, 2005

EXEMPT ORGANIZATIONS—Cont.
User fees, request for letter rulings (RP 8) 1,243
List of organizations classified as private foundations (Ann 7) 4,
377
Revocations (Ann 8) 4,380
Technical advice to IRS employees (RP 5) 1,170
GIFT TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,86
INCOME TAX
Accounting methods, change to a method provided in sections
1.263(a)–4, 1.263(a)–5, and 1.167(a)–3(b) (RP 9) 2,303
Annual notice to donors regarding pending and settled declara-
tory judgment suits (Ann 1) 1,257
Corporations:
Clarification of section 1374 effective dates, S corporations
(TD 9170) 4,363; (REG–139683–04) 4,371
S corporation, relief for late shareholders, Rev. Proc.
2004–35, correction (Ann 4) 2,319
Credits:
Low-income housing credit:
Satisfactory bond, “bond factor” amounts for the period:
January through March 2005 (RR 1) 2,258
Declaratory judgment suits (Ann 9) 4,380
Disciplinary actions involving attorneys, certified public accoun-
tants, enrolled agents and enrolled actuaries (Ann 2) 2,319
Disguised sales, section 707, REG–149519–03, correction (Ann
11) 5,451
Form 656, Offer in Compromise, revision, check-the-box (Ann
6) 4,377
Information reporting for acquisitions (Notice 7) 3,340
Interest:
Investment:
Federal short-term, mid-term, and long-term rates for:
January 2005 (RR 2) 2,259
Suspension applicability toamended returns (RR 4) 4,366
Inventory:
LIFO, price indexes used by department stores for:
November 2004 (RR 5) 5,445
Letter rulings:
And determination letters, areas which will not be issued
from:
Associates Chief Counsel and Division Counsel (TE/GE)
(RP 3) 1,118
Associate Chief Counsel (International ) (RP 7) 1,240
And information letters issued by Associate Offices, determi-
nation letters issued by Operating Divisions (RP 1) 1,1
Nonqualified deferred compensation, new section 409A (Notice
1) 2,274
INCOME TAX—Cont.
Optional 10-year writeoff, rules governing the time and manner
for making and revoking an election under section 59(e) (TD
9168) 4,354
Partnership’s contributions to partner’s Health Savings Account
(HSA), S corporation’s contributions to HSAs of 2-percent
shareholder-employees (Notice 8) 4,368
Per diem allowances updated, 2005 (RP 10) 3,341
Practice before the Internal Revenue Service:
Best practices (TD 9165) 4,357
State or local bond opinions (REG–159824–04) 4,372
Pre-Filing Agreement (PFA) (RP 12) 2,311
Presidentially declared disasters, like-kind exchanges affected by
(Notice 3) 5,447
Private foundations, organizations now classified as (Ann 7) 4,
377
Proposed Regulations:
26 CFR 1.1374–8, –10, amended; section 1374 effective dates
(REG–139683–04) 4,371
31 CFR 10.35, amended; 10.36, 10.38, revised; 10.39, added;
10.52, revised; regulations governing practice before the
Internal Revenue Service (REG–159824–04) 4,372
Regulations:
26 CFR 1.59–1, added; 602.101, amended; optional 10-year
writeoff of certain tax preferences (TD 9168) 4,354
26 CFR 1.1374–8, –10, amended; 1.1374–8T, –10T, added;
section 1374 effective dates (TD 9170) 4,363
31 CFR 10.33, amended; 10.35 thru 10.38, added; 10.52,
amended; regulations governing practice before the Inter-
nal Revenue Service (TD 9165) 4,357
Revocations, exempt organizations (Ann 8) 4,380
Section 901(j)(5) Presidential waiver, section 901(j)(1) no longer
applies to Libya (RR 3) 3,334
Stock, exchange of securities of foreign corporation, domestic
corporation (Notice 6) 5,448
Tax conventions, U.S. and Swiss pension plans for tax treaty ben-
efits, agreement (Ann 3) 2,270
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,86
Tonnage tax regime, election (Notice 2) 3,337
SELF-EMPLOYMENT TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Partnership’s contributions to partner’s Health Savings Account
(HSA), S corporation’s contributions to HSAs of 2-percent
shareholder-employees (Notice 8) 4,368
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,86
January 31, 2005v2005–5 I.R.B.
*U.S.Government PrintingOffice:2005—310–365/60172