[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)-10]

[Page 162-163]
 
                       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)-10  Testing of former employees.

    (a) Introduction. This section provides rules for determining 
whether a plan satisfies the nondiscriminatory amount and 
nondiscriminatory availability requirements of Sec. 1.401(a)(4)-1(b)(2) 
and (3), respectively, with respect to former employees. Generally, this 
section is relevant only in the case of benefits provided through an 
amendment to the plan effective in the current plan year. See the 
definitions of employee and former employee in Sec. 1.401(a)(4)-12.
    (b) Nondiscrimination in amount of contributions or benefits--(1) 
General rule. A plan satisfies Sec. 1.401(a)(4)-1(b)(2) with respect to 
the amount of contributions or benefits provided to former employees if, 
under all of the relevant facts and circumstances, the amount of 
contributions or benefits provided to former employees does not 
discriminate significantly in favor of former HCEs. For this purpose, 
contributions or benefits provided to former employees includes all 
contributions or benefits provided to former employees or, at the 
employer's option, only those contributions or benefits arising out of 
the amendment providing the contributions or benefits. A plan under 
which no former employee currently benefits (within the meaning of Sec. 
1.410(b)-3(b)) is deemed to satisfy this paragraph (b).
    (2) Permitted disparity. Section 401(l) and Sec. 1.401(a)(4)-7 
generally apply to benefits provided to former employees in the same 
manner as those provisions apply to employees. Thus, for example, for 
purposes of determining a former employee's cumulative permitted 
disparity limit, the sum of the former employee's total annual disparity 
fractions (within the meaning of Sec. 1.401(l)-5) as an employee 
continues to be taken into account. However, the permitted disparity 
rate applicable to a former employee is determined under Sec. 1.401(l)-
3(e) as of the age the former employee commenced receipt of benefits, 
not as of the date the employee receives the accrual for the current 
plan year.
    (3) Examples. The following examples illustrate the rules in this 
paragraph (b):


[[Page 163]]


    Example 1. Employer X maintains a section 401(l) plan, Plan A, that 
uses maximum permitted disparity. Plan A is amended to increase the 
benefits of all former employees in pay status. The percentage increase 
for each former employee is reasonably comparable to the adjustment in 
social security benefits under section 215(i)(2)(A) of the Social 
Security Act since the former employee commenced receipt of benefits. 
Plan A does not fail to satisfy this paragraph (b) merely because of the 
amendment.
    Example 2. The facts are the same as in Example 1, except that the 
amendment provides an across-the-board 20 percent increase in benefits 
for all former employees in pay status. The cost of living has increased 
at an average rate of three percent in the two years preceding the 
amendment, and some HCEs have retired and become former HCEs during that 
period. Because this amendment increases the disparity in the plan 
formula beyond the maximum permitted disparity adjusted for any 
reasonable approximation of the increase in the cost of living since the 
HCEs retired, Plan A discriminates significantly in favor of former 
HCEs, and thus does not satisfy this paragraph (b).
    Example 3. The facts are the same as in Example 1, except that Plan 
A is only amended to increase the benefits of former employees in pay 
status who terminated employment with Employer X after attaining early 
retirement age. The determination of whether the amendment causes Plan A 
to fail to satisfy this paragraph (b) must take into account the 
relative numbers of former HCEs and former NHCEs who have terminated 
employment with Employer X after attaining early retirement age.

    (c) Nondiscrimination in availability of benefits, rights, or 
features. A plan satisfies section 401(a)(4) with respect to the 
availability of benefits, rights, and features provided to former 
employees if any change in the availability of any benefit, right, or 
feature to any former employee is applied in a manner that, under all of 
the relevant facts and circumstances, does not discriminate 
significantly in favor of former HCEs. For purposes of demonstrating 
that a plan satisfies section 401(a)(4) with respect to the availability 
of loans provided to former employees, an employer may treat former 
employees who are parties in interest within the meaning of section 
3(14) of the Employee Retirement Income Security Act of 1974 as 
employees.

[T.D. 8485, 58 FR 46812, Sept. 3, 1993]