[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.401(a)(4)-1]

[Page 94-96]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.401(a)(4)-1  Nondiscrimination requirements of section 401(a)(4).

    (a) In general. Section 401(a)(4) provides that a plan is a 
qualified plan only if the contributions or the benefits provided under 
the plan do not discriminate in favor of HCEs. Whether a plan satisfies 
this requirement depends on the form of the plan and on its effect in 
operation. In making this determination, intent is irrelevant. This 
section sets forth the exclusive rules for determining whether a plan 
satisfies section 401(a)(4). A plan that complies in form and operation 
with the rules in this section therefore satisfies section 401(a)(4).
    (b) Requirements a plan must satisfy--(1) In general. In order to 
satisfy section 401(a)(4), a plan must satisfy each of the requirements 
of this paragraph (b).
    (2) Nondiscriminatory amount of contributions or benefits--(i) 
General rule. Either the contributions or the benefits provided under 
the plan must be nondiscriminatory in amount. It need not be shown that 
both the contributions and the benefits provided are nondiscriminatory 
in amount, but only that either the contributions alone or the benefits 
alone are nondiscriminatory in amount.
    (ii) Defined contribution plans--(A) General rule. A defined 
contribution plan satisfies this paragraph (b)(2) if the contributions 
allocated under the plan (including forfeitures) are nondiscriminatory 
in amount under Sec. 1.401(a)(4)-2. Alternatively, a defined 
contribution plan (other than an ESOP) satisfies this paragraph (b)(2) 
if the equivalent benefits provided under the plan are nondiscriminatory 
in amount under Sec. 1.401(a)(4)-8(b). Section 1.401(a)(4)-8(b) 
includes a safe-harbor testing method for contributions provided under a 
target benefit plan.
    (B) Section 401(k) plans and section 401(m) plans. A section 401(k) 
plan is deemed to satisfy this paragraph (b)(2) because Sec. 1.410(b)-9 
defines a section 401(k) plan as a plan consisting of elective 
contributions under a qualified cash or deferred arrangement (i.e., one 
that satisfies section 401(k)(3), the nondiscriminatory amount 
requirement applicable to qualified cash or deferred arrangements). A 
section 401(m) plan satisfies this paragraph (b)(2) only if the plan 
satisfies Sec. Sec. 1.401(m)-1(b) and 1.401(m)-2. Contributions under a 
nonqualified cash or deferred arrangement, elective contributions 
described in Sec. 1.401(k)-1(b)(4)(iv) that fail to satisfy the 
allocation and compensation requirements of Sec. 1.401(k)-1(b)(4)(i), 
matching contributions that fail to satisfy Sec. 1.401(m)-
1(b)(4)(ii)(A), and qualified nonelective contributions treated as 
elective or matching contributions for certain purposes under Sec. Sec. 
1.401(k)-1(b)(5) and 1.401(m)-1(b)(5), respectively, are not subject to 
the special rule in this paragraph (b)(2)(ii)(B), because they are not 
treated as part of a section 401(k) plan or section 401(m) plan as those 
terms are defined in Sec. 1.410(b)-9. The contributions described in 
the preceding sentence must satisfy paragraph (b)(2)(ii)(A) of this 
section.
    (iii) Defined benefit plans. A defined benefit plan satisfies this 
paragraph (b)(2) if the benefits provided under the plan are 
nondiscriminatory in amount under Sec. 1.401(a)(4)-3. Alternatively, a 
defined benefit plan satisfies this paragraph (b)(2) if the equivalent 
allocations provided under the plan are nondiscriminatory in amount 
under Sec. 1.401(a)(4)-8(c). Section 1.401(a)(4)-8(c) includes a safe-
harbor testing method for benefits provided under a cash balance plan. 
In addition, Sec. 1.401(a)(4)-8(d) provides a safe-harbor testing 
method for benefits provided under a defined

[[Page 95]]

benefit plan that is part of a floor-offset arrangement.
    (3) Nondiscriminatory availability of benefits, rights, and 
features. All benefits, rights, and features provided under the plan 
must be made available in the plan in a nondiscriminatory manner. Rules 
for determining whether this requirement is satisfied are set forth in 
Sec. 1.401(a)(4)-4.
    (4) Nondiscriminatory effect of plan amendments and terminations. 
The timing of plan amendments must not have the effect of discriminating 
significantly in favor of HCEs. Rules for determining whether this 
requirement is satisfied are set forth in Sec. 1.401(a)(4)-5(a). 
Section 1.401(a)(4)-5(b) provides additional requirements regarding plan 
terminations.
    (c) Application of requirements--(1) In general. The requirements of 
paragraph (b) of this section must be applied in accordance with the 
rules set forth in this paragraph (c).
    (2) Interpretation. The provisions of Sec. Sec. 1.401(a)(4)-1 
through 1.401(a)(4)-13 must be interpreted in a reasonable manner 
consistent with the purpose of preventing discrimination in favor of 
HCEs.
    (3) Plan-year basis of testing. The requirements of paragraph (b) of 
this section are generally applied on the basis of the plan year and on 
the basis of the terms of the plan in effect during the plan year. Thus, 
unless otherwise provided, the compensation, contributions, benefit 
accruals, and other items used to apply these requirements must be 
determined with respect to the plan year being tested. However, Sec. 
1.401(a)(4)-11(g) provides rules allowing for corrective amendments made 
after the close of the plan year to be taken into account in satisfying 
certain requirements under paragraph (b) of this section.
    (4) Application of section 410(b) rules--(i) Relationship between 
sections 401(a)(4) and 410(b). To be a qualified plan, a plan must 
satisfy both sections 410(b) and 401(a)(4). Section 410(b) requires that 
a plan benefit a nondiscriminatory group of employees, and section 
401(a)(4) requires that the contributions or benefits provided to 
employees benefiting under the plan not discriminate in favor of HCEs. 
Consistent with this requirement, the definition of a plan subject to 
testing under section 401(a)(4) is the same as the definition of a plan 
subject to testing under section 410(b), i.e., the plan determined after 
applying the mandatory disaggregation rules of Sec. 1.410(b)-7(c) and 
the permissive aggregation rules of Sec. 1.410(b)-7(d). In addition, 
whichever testing option is used for the plan year under Sec. 1.410(b)-
8(a) (e.g., quarterly testing) must also be used for purposes of 
determining whether the plan satisfies section 401(a)(4) for the plan 
year.
    (ii) Special rules for certain aggregated plans. Special rules are 
set forth in Sec. 1.401(a)(4)-9(b) for applying the nondiscriminatory 
amount and availability requirements of paragraphs (b)(2) and (b)(3) of 
this section to a plan that includes one or more defined benefit plans 
and one or more defined contribution plans that have been permissively 
aggregated under Sec. 1.410(b)-7(d).
    (iii) Restructuring. In certain circumstances, a plan may be 
restructured on the basis of employee groups and treated as comprising 
two or more plans, each of which is treated as a separate plan that must 
independently satisfy sections 401(a)(4) and 410(b). Rules relating to 
restructuring plans for purposes of applying the requirements of 
paragraph (b) of this section are set forth in Sec. 1.401(a)(4)-9(c).
    (iv) References to section 410(b). Except as otherwise specifically 
provided, references to satisfying section 410(b) in Sec. Sec. 
1.401(a)(4)-1 through 1.401(a)(4)-13 mean satisfying Sec. 1.410(b)-2 
(taking into account any special rules available in satisfying that 
section, other than the permissive aggregation rules of Sec. 1.410(b)-
7(d)). In the case of a plan described in section 410(c)(1) that has not 
made the election described in section 410(d) and is not subject to 
section 403(b)(12)(A)(i), references in Sec. Sec. 1.401(a)(4)-1 through 
1.401(a)(4)-13 to satisfying section 410(b) mean satisfying section 
410(c)(2).
    (5) Collectively-bargained plans. The requirements of paragraph (b) 
of this section are treated as satisfied by a collectively-bargained 
plan that automatically satisfies section 410(b) under Sec. 1.410(b)-
2(b)(7).

[[Page 96]]

    (6) Former employees. In applying the nondiscriminatory amount and 
availability requirements of paragraphs (b)(2) and (b)(3) of this 
section, former employees are tested separately from active employees, 
unless otherwise provided. Rules for applying paragraphs (b)(2) and 
(b)(3) of this section to former employees are set forth in Sec. 
1.401(a)(4)-10.
    (7) Employee-provided contributions and benefits. In applying the 
nondiscriminatory amount requirement of paragraph (b)(2) of this 
section, employee-provided contributions and benefits are tested 
separately from employer-provided contributions and benefits, unless 
otherwise provided. Rules for determining the amount of employer-
provided benefits under a defined benefit plan that include employee 
contributions not allocated to separate accounts are set forth in Sec. 
1.401(a)(4)-6(b), and rules for applying paragraph (b)(2) of this 
section to employee contributions under such a plan are set forth in 
Sec. 1.401(a)(4)-6(c). See paragraph (b)(2)(ii)(B) of this section for 
rules applicable to employee contributions allocated to separate 
accounts.
    (8) Allocation of earnings. Notwithstanding any other provision in 
Sec. Sec. 1.401(a)(4)-1 through 1.401(a)(4)-13, a defined contribution 
plan does not satisfy paragraph (b)(2) of this section if the manner in 
which income, expenses, gains, or losses are allocated to accounts under 
the plan discriminates in favor of HCEs or former HCEs.
    (9) Rollovers, transfers, and buybacks. In applying the requirements 
of paragraph (b) of this section, rollover (including direct rollover) 
contributions described in section 402(c), 402(e)(6), 403(a)(4), 
403(a)(5), or 408(d)(3), elective transfers described in Sec. 1.411(d)-
4, Q&A-3(b), transfers of assets and liabilities described in section 
414(l), and employee buybacks are treated in accordance with the rules 
set forth in Sec. 1.401(a)(4)-11(b).
    (10) Vesting. A plan does not satisfy the nondiscriminatory amount 
requirement of paragraph (b)(2) of this section unless it satisfies 
Sec. 1.401(a)(4)-11(c) with respect to the manner in which employees 
vest in their accrued benefits.
    (11) Crediting service. A plan does not satisfy paragraphs (b)(2) 
and (b)(3) of this section unless it satisfies Sec. 1.401(a)(4)-11(d) 
with respect to the manner in which employees' service is credited under 
the plan. Service other than actual service with the employer may not be 
taken into account in determining whether the plan satisfies paragraphs 
(b)(2) and (b)(3) of this section except as provided in Sec. 
1.401(a)(4)-11(d).
    (12) Governmental plans. The rules of this section apply to a 
governmental plan within the meaning of section 414(d), except as 
provided in Sec. Sec. 1.401(a)(4)-11(f) and 1.401(a)(4)-13(b).
    (13) Employee stock ownership plans. [Reserved]
    (14) Section 401(h) benefits. In applying the requirements of 
paragraph (b) of this section, the portion of a plan providing benefits 
described in section 401(h) is tested separately from the portion of the 
same plan providing retirement benefits, and thus is not required to 
satisfy this section. Rules applicable to section 401(h) benefits are 
set forth in Sec. 1.401-14(b)(2).
    (15) Definitions. In applying the requirements of this section, the 
definitions in Sec. 1.401(a)(4)-12 govern.
    (16) Effective dates and fresh-start rules. In applying the 
requirements of this section, the effective dates set forth in Sec. 
1.401(a)(4)-13 govern. Section 1.401(a)(4)-13 also provides certain 
transition and fresh-start rules that apply for purposes of this 
section.
    (d) Additional guidance. The Commissioner may, in revenue rulings, 
notices, and other guidance, published in the Internal Revenue Bulletin, 
provide any additional guidance that may be necessary or appropriate in 
applying the nondiscrimination requirements of section 401(a)(4), 
including additional safe harbors and alternative methods and procedures 
for satisfying those requirements. See Sec. 601.601(d)(2)(ii)(b) of 
this chapter.

[T.D. 8485, 58 FR 46780, Sept. 3, 1993]