[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(m)-1]

[Page 355-371]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.401(m)-1  Employee and matching contributions.

    (a) General Rules--(1) Nondiscriminatory amount of contributions. A 
defined contribution plan does not satisfy section 401(a)(4) for a plan 
year unless the amount of employee and matching contributions to the 
plan for the plan year satisfies section 401(a)(4). See Sec. 
1.401(a)(4)-1(b)(2)(ii). Except as specifically provided otherwise, for 
plan years beginning after December 31, 1986 (or such later date 
provided in paragraph (g) of this section) the amount of employee and 
matching contributions under a plan satisfies the requirements of 
section 401(a)(4) only if the employee and matching contributions under 
the plan satisfy the actual contribution percentage test of section 
401(m)(2) and paragraph (b) of this section. See Sec. 1.401(a)(4)-
1(b)(2)(ii)(B). Also, except as specifically provided otherwise, for 
plan years beginning after December 31, 1988 (or such later date 
provided in Sec. 1.401(m)-2(d)), the amount of employee and matching 
contributions under a plan satisfies the requirements of sections 401(m) 
and 401(a)(4) only if any multiple use of the alternative methods of 
compliance with sections 401 (k) and (m) (contained in sections 
401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii), respectively) is corrected 
under Sec. 1.401(m)- 2(c). See section 401(m)(9) and Sec. 1.401(m)-2. 
For these purposes, the employee and matching contributions are combined 
with the elective and qualified nonelective contributions, if any, that 
are treated as matching contributions, and the recharacterized elective 
contributions, if any, that are treated as employee contributions for 
purposes of section 401(m).
    (2) Other nondiscrimination rules. Nondiscrimination requirements in 
addition to those described in paragraph (a)(1) of this section apply to 
employee and matching contributions under sections 401(a)(4) and 410(b). 
For example,

[[Page 356]]

under section 401(a)(4) a plan may not discriminate with respect to the 
availability of benefits, rights, and features under the plan. See Sec. 
1.401(a)(4)-1(b)(3). The right to make each level of employee 
contributions, and the right to each level of matching contributions, 
are benefits, rights, or features subject to this requirement, and each 
level must therefore generally be available to a group of employees that 
satisfies section 410(b). See Sec. 1.401(a)(4)-4(e)(3) (i) and (iii) 
(F) through (G). Thus, for example, a plan does not satisfy section 
401(a)(4) if it provides a higher rate of matching contributions for 
highly compensated employees than for nonhighly compensated employees. 
See paragraph (e)(4) of this section for rules relating to the 
application of section 401(a)(4) to the correction of excess aggregate 
contributions. See Sec. 1.401(a)(4)-11(g)(3)(vii) for special rules 
relating to correction of violations of the minimum coverage 
requirements or discriminatory rates of match in a section 401(m) plan. 
For special rules governing the application of section 410(b) to 
employee and matching contributions, see Sec. Sec. 1.410(b)-7(c)(1) and 
1.410(b)-8(a)(1).
    (3) Rules applicable to collectively bargained plans. The 
requirements of this section are treated as satisfied by employee and 
matching contributions under a collectively bargained plan (or the 
portion of a plan) that automatically satisfies section 410(b). See 
Sec. Sec. 1.401(a)(4)-1(c)(5) and 1.410(b)-2(b)(7). There are no excess 
aggregate contributions under a plan (or a portion of a plan) that is 
treated under this paragraph (a)(3) as satisfying the requirements of 
this section. Thus, the provisions of section 4979 and Sec. 54.4979-1 
of this chapter do not apply to contributions described in the first 
sentence of this paragraph (a)(3).
    (b) Actual contribution percentage test--(1) General rule. (i) For 
plan years beginning after December 31, 1986, or such later date 
provided in paragraph (g) of this section, the actual contribution 
percentage test is satisfied if--
    (A) The actual contribution percentage for the group of eligible 
highly compensated employees is not more than the actual contribution 
percentage for the group of all other eligible employees multiplied by 
1.25; or
    (B) The excess of the actual contribution percentage for the group 
of eligible highly compensated employees over the actual contribution 
percentage for the group of all other eligible employees is not more 
than two percentage points, and the actual contribution percentage for 
the group of eligible highly compensated employees is not more than the 
actual contribution percentage for the group of all other eligible 
employees multiplied by two.
    (ii) A plan does not fail to satisfy the requirements of this 
paragraph (b)(1) merely because all of the eligible employees under the 
plan for a year are highly compensated employees.
    (2) Plan provision requirement. For plan years beginning after 
December 31, 1986, or such later date provided in paragraph (g) of this 
section, a plan that permits employee or matching contributions does not 
satisfy the requirements of section 401(a) unless it provides that the 
actual contribution percentage test of section 401(m)(2) will be met. 
For purposes of this paragraph (b)(2), the plan may incorporate the 
provisions of section 401(m)(2), this paragraph (b), and, if applicable, 
section 401(m)(9) and Sec. 1.401(m)-2.
    (3) Aggregation of plans--(i) General rule. See Sec. 1.401(m)-
1(f)(14) for the definition of a plan used for purposes of this section 
and Sec. 1.401(m)-2. That definition contains the exclusive rules for 
aggregation and disaggregation of plans for purposes of this section and 
Sec. 1.401(m)-2.
    (ii) Restructuring and Permissive Disaggregation. Effective for plan 
years beginning after December 31, 1991, restructuring under Sec. 
1.401(a)(4)-9(c) may not be used to demonstrate compliance with the 
requirements of section 401(m). See Sec. 1.401(a)(4)- 9(c)(3)(ii). For 
plan years beginning before January 1, 1992, see Sec. 1.401(m)-
1(g)(5)(ii). An employer may, however, treat a plan benefiting otherwise 
excludable employees as two separate plans for purposes of sections 
401(m) and 410(b) in accordance with Sec. Sec. 1.410(b)-6(b)(3) and 
1.410(b)-7(c)(3).
    (4) Employee and matching contributions taken into account under the 
actual contribution percentage test--(i) Employee contributions--(A) 
General rule. An employee contribution is taken into

[[Page 357]]

account under paragraph (b)(1) of this section for the plan year in 
which the contribution is made to the trust. For this purpose, a payment 
by the employee to an agent of the plan is treated as a contribution to 
the trust at the time of payment to the agent if the funds paid are 
transmitted to the trust within a reasonable period after the payment to 
the agent.
    (B) Recharacterized elective contributions. An excess contribution 
that is recharacterized under Sec. 1.401(k)-1(f)(3) is taken into 
account as an employee contribution for the plan year that includes the 
time at which the excess contribution is includible in the gross income 
of the employee under Sec. 1.401(k)-1(f)(3)(ii).
    (ii) Matching contributions--(A) General rule. A matching 
contribution is taken into account under paragraph (b)(1) of this 
section for a plan year only if the contribution is allocated to the 
employee's account under the terms of the plan as of any date within the 
plan year, is actually paid to the trust no later than 12 months after 
the close of the plan year, and is made on behalf of an employee on 
account of the employee's elective contributions or employee 
contributions for the plan year. Matching contributions that do not 
satisfy these requirements are not taken into account under paragraph 
(b)(1) of this section for any plan year. Instead, the amount of these 
matching contributions must satisfy the requirements of section 
401(a)(4) (without regard to the special nondiscrimination rule in 
paragraph (b)(1) of this section) for the plan year for which they are 
allocated under the plan, as if they were nonelective contributions and 
were the only nonelective employer contributions for that year. See 
Sec. Sec. 1.401(a)(4)-1(b)(2)(ii)(B); 1.410(b)-7(c)(1).
    (B) Matching contributions and qualified nonelective contributions 
used to satisfy actual deferral percentage test. A matching contribution 
that is treated as an elective contribution is subject to the actual 
deferral percentage test of section 401(k)(3) and is not taken into 
account under paragraph (b)(1) of this section. See Sec. 1.401(k)-
1(b)(5)(iii) for the rule relating to years before January 1, 1987. A 
qualified nonelective contribution that is treated as an elective 
contribution is subject to the actual deferral percentage test of 
section 401(k)(3) and is not taken into account as a matching 
contribution under paragraph (b)(1) or (5) of this section.
    (C) Treatment of forfeited matching contributions. A matching 
contribution that is forfeited to correct excess aggregate 
contributions, or because the contribution to which it relates is 
treated as an excess contribution, excess deferral, or excess aggregate 
contribution, is not taken into account under paragraph (b)(1) of this 
section.
    (5) Qualified nonelective contributions and elective contributions 
that may be taken into account under the actual contribution percentage 
test. Except as specifically provided otherwise, for purposes of 
paragraph (b)(1) of this section, all or part of the qualified 
nonelective contributions and elective contributions made with respect 
to any or all employees who are eligible employees under the plan of the 
employer being tested may be treated as matching contributions provided 
that each of the following requirements (to the extent applicable) is 
satisfied:
    (i) The amount of nonelective contributions, including those 
qualified nonelective contributions treated as matching contributions 
for purposes of the actual contribution percentage test, satisfies the 
requirements of section 401(a)(4). See Sec. 1.401(a)(4)-1(b)(2).
    (ii) The amount of nonelective contributions, excluding those 
qualified nonelective contributions treated as matching contributions 
for purposes of the actual contribution percentage test and those 
qualified nonelective contributions treated as elective contributions 
under Sec. 1.401(k)-1(b)(5) for purposes of the actual deferral 
percentage test, satisfies the requirements of section 401(a)(4). See 
Sec. 1.401(a)(4)-1(b)(2).
    (iii) The elective contributions, including those treated as 
matching contributions for purposes of the actual contribution 
percentage test, satisfy the requirements of section 401(k)(3).
    (iv) The qualified nonelective contributions are allocated to the 
employee under the plan as of a date within the plan year (within the 
meaning of Sec. 1.401(k)-1(b)(4)(i)(A)), and the elective contributions 
satisfy Sec. 1.401(k)-1(b)(4)(i) for the plan year.

[[Page 358]]

    (v) For plan years beginning after December 31, 1988, or such later 
date provided in paragraph (g) of this section, the plan that takes 
qualified nonelective contributions and elective contributions into 
account in determining whether employee and matching contributions 
satisfy the requirements of section 401(m)(2)(A), and the plans to which 
the qualified nonelective contributions and elective contributions are 
made, could be aggregated under Sec. 1.410(b)-7(d) after application of 
the mandatory disaggregation rules of Sec. 1.410(b)-7(c), as modified 
in Sec. 1.401(k)-1(g)(11). If the plan year of the section 401(m) plan 
is changed to satisfy the requirement under Sec. 1.410(b)-7(d)(5) that 
the aggregated plans have the same plan year, the elective contributions 
may be taken into account in the resulting short plan year only if these 
contributions satisfy the requirements of Sec. 1.401(k)-1(b)(4) with 
respect to the short year, and the qualified nonelective contributions 
may be taken into account in the resulting short plan year only if these 
contributions satisfy the requirements of Sec. 1.401(k)-1(b)(4)(i)(A) 
with respect to the short year as if they were elective contributions.
    (c) Additional requirements--(1) Coordination with other plans. 
Except as expressly permitted under section 401(k) or 401(m), for plan 
years beginning after December 31, 1988, or such later date provided in 
paragraph (g) of this section, employee or matching contributions (or 
elective contributions treated as matching contributions under paragraph 
(b)(5) of this section) may not be taken into account for purposes of 
determining whether any other contributions under any plan (including 
the plan to which the employee or matching contributions are made) 
satisfy the requirements of section 401(a). Indeed, the portion of a 
plan that consists of employee and matching contributions is treated as 
a separate plan for purposes of sections 401(a)(4) and 410(b). See Sec. 
1.410(b)-7(c)(1). Similarly, although matching contributions and 
qualified nonelective contributions may be used to enable a plan to 
satisfy the minimum contribution or benefit requirements under section 
416, matching contributions that are used in this way are not treated as 
matching contributions, and must therefore satisfy the nondiscrimination 
requirements of section 401(a)(4) without regard to section 401(k) or 
401(m). See Sec. 1.416-1, M-18 & M-19 and paragraph (f)(12)(iii) of 
this section. See also Sec. 1.401(k)-1(b)(5) for circumstances under 
which matching contributions may be used to determine whether a plan 
satisfies the requirements of section 401(k). This paragraph does not 
apply for purposes of determining whether a plan satisfies the average 
benefit percentage test of section 410(b)(2)(A)(ii).
    (2) Recordkeeping requirement. A plan satisfies this section only if 
the employer maintains the records necessary to demonstrate compliance 
with the applicable nondiscrimination requirements of paragraph (b) of 
this section, including records showing the extent to which qualified 
nonelective contributions and elective contributions are taken into 
account.
    (3) Consistent application of separate line of business rules. If an 
employer is treated as operating qualified separate lines of business 
under section 414(r) in accordance with Sec. 1.414(r)-1(b) for purposes 
of applying section 410(b), and applies the special rule for employer-
wide plans in Sec. 1.414(r)-1(c)(2)(ii) to the portion of the plan that 
consists of matching contributions or to the portion of the plan that 
consists of employee contributions (the ``matching and employee 
contribution portions''), then the requirements of this section, section 
401(m), and Sec. 1.401(m)-2 must be applied on an employer-wide rather 
than a qualified-separate-line-of-business basis to all of the plans or 
portions of plans taken into account in determining whether those 
requirements are satisfied by the matching and employee contribution 
portions of the plan (regardless of whether the other plans or portions 
of plans also satisfy the requirements necessary to apply the special 
rule in Sec. 1.414(r)-1(c)(2)(ii)). Conversely, if an employer is 
treated as operating qualified separate lines of business under section 
414(r) in accordance with Sec. 1.414(r)-1(b) for purposes of applying 
section 410(b), and does not apply the special rule for employer-

[[Page 359]]

wide plans in Sec. 1.414(r)1-(c)(2)(ii) to either the matching or 
employee contribution portions of the plan, then the requirements of 
this section, section 401(m) and Sec. 1.401(m)-2 must be applied on a 
qualified-separate-line-of-business rather than an employer-wide basis 
to all of the plans or portions of plans taken into account in 
determining whether those requirements are satisfied by the matching and 
employee contribution portions of the plan (regardless of whether one or 
more of the other plans or portions of plans is tested under the special 
rule Sec. 1.414(r)-1(c)(2)(ii)). This requirement applies solely for 
purposes of determining whether the requirements of this section, 
section 401(m), and Sec. 1.401(m)-2 are satisfied by the matching and 
employee contribution portions of the plan. The rules of this paragraph 
are illustrated by the following example.

    Example. (i) Employer A maintains a profit-sharing plan that 
includes a cash or deferred arrangement in which all of the employees of 
Employer A are eligible to participate. Under the profit-sharing plan, 
each $1.00 of elective contributions under the cash or deferred 
arrangement is matched by $0.50 of employer contributions. Employer A is 
treated as operating qualified separate lines of business under section 
414(r) in accordance with Sec. 1.414(r)-1(b) for purposes of applying 
section 410(b). However, Employer A applies the special rule for 
employer-wide plans in Sec. 1.414(r)-1(c)(2)(ii) to the portion of its 
profitsharing plan that consists of matching contributions. Employer A 
makes qualified nonelective contributions to the profit-sharing plan for 
the 1995 plan year.
    (ii) Under these facts, the requirements of sections 401(a)(4) and 
410(b) must be applied on an employer-wide rather than a qualified-
separate-line-of-business basis in determining whether these qualified 
nonelective contributions (and any elective contributions under the cash 
or deferred arrangement) satisfy the requirements of Sec. 1.401(m)-
1(b)(5), and thus whether they may be taken into account under the 
actual contribution percentage test. Thus, in order for the nonelective 
contributions to be used to satisfy the actual contribution percentage 
test, both (1) the total amount of nonelective contributions under the 
profit-sharing plan, including the qualified nonelective contributions 
to be used to satisfy the actual contribution percentage test, and (2) 
the total amount of nonelective contributions under the profit-sharing 
plan, excluding the qualified nonelective contributions to be used to 
satisfy the actual contribution percentage test, must satisfy the 
requirements of section 401(a)(4) on an employer-wide basis. Further, in 
order for any elective contributions under the cash or deferred 
arrangement to be used to satisfy the actual contribution percentage 
test, the total amount of elective contributions, including any treated 
as matching contributions under the actual contribution percentage test, 
must satisfy the requirements of section 401(k)(3) on an employer-wide 
basis. Of course, in order for the profit-sharing plan to satisfy 
section 401(a), it must still satisfy sections 410(b) and 401(a)(4) on a 
qualified-separate-line-of-business basis.

    (d) Examples. The provisions of paragraphs (a) through (c) of this 
section are illustrated by the following examples. Assume in each case 
that the employer is a corporation, and that the employer's taxable year 
and plan year are the calendar year. Also assume that the employee 
contributions, elective contributions, matching contributions and 
qualified nonelective contributions meet the applicable requirements of 
sections 401(a)(4) and 410. For methods to be used to correct excess 
aggregate contributions, see paragraph (e) of this section.

    Example 1. (i) Employer L maintains a profit-sharing plan providing 
for voluntary employee contributions. L does not maintain a plan that 
includes a cash or deferred arrangement. For the 1988 plan year, the 
actual contribution percentages (ACPs) for the highly compensated 
employees and nonhighly compensated employees are shown in the following 
chart:

------------------------------------------------------------------------
                                                              Actual
                                                           contribution
                                                            percentage
------------------------------------------------------------------------
Highly compensated.....................................               10
Nonhighly compensated..................................                5
------------------------------------------------------------------------

    (ii) This plan fails to qualify under either of the tests of section 
401(m)(2)(A) because the ACP for highly compensated employees is more 
than 125 percent of the ACP for nonhighly compensated employees, and 
exceeds the ACP for the nonhighly compensated employees by more than two 
percentage points. L must either reduce the ACP for the highly 
compensated employees to seven percent (to satisfy the 200 percent/two 
percentage point test) or increase the ACP of the nonhighly compensated 
employees to eight percent (to satisfy the 125 percent test).
    Example 2. (i) Employer M maintains a plan under which each dollar 
of employee contributions is matched with $.50 of employer 
contributions. M maintains no other plan. For the 1988 plan year, the 
average percentage of compensation contributed to the plan

[[Page 360]]

for the employees is shown in the following chart:

------------------------------------------------------------------------
                                 Employee       Matching       Actual
                              contributions  contributions  contribution
                                (percent)      (percent)     percentage
------------------------------------------------------------------------
Highly compensated..........         10              5             15
Nonhighly compensated.......          5              2.5            7.5
------------------------------------------------------------------------

    (ii) This plan fails to satisfy either of the tests of section 
401(m)(2)(A). Employer M must either reduce the actual contribution 
percentage of the highly compensated employees to 9.5 percent (to 
satisfy the 200 percent/two percentage point test) or increase the 
actual contribution percentage of the nonhighly compensated employees to 
12 percent (to satisfy the 125 percent test).
    Example 3. (i) Employer N maintains a plan that contains a cash or 
deferred arrangement and permits employee contributions. Employer N 
includes elective contributions in compensation as permitted under Sec. 
1.414(s)-1(c)(4)(i). See Sec. 1.401(k)-1(g)(2)(i). For the 1988 plan 
year, the average percentages of compensation contributed to the plan by 
the highly compensated and nonhighly compensated employees as elective 
contributions and employee contributions are shown in the chart below. 
Elective contributions meet the requirements of paragraph (b)(5) of this 
section.

------------------------------------------------------------------------
                                             Elective        Employee
                                           Contributions   Contributions
                                             (percent)       (percent)
------------------------------------------------------------------------
Highly compensated......................              10              10
Nonhighly compensated...................              10               6
------------------------------------------------------------------------

    (ii) The plan fails to meet the requirements of section 401(m) 
because the actual contribution percentage (ACP) of highly compensated 
employees is more than 125 percent of the ACP of the other employees, 
and exceeds the ACP of the other employees by more than two percentage 
points.
    (iii) The plan provides that elective contributions made by 
nonhighly compensated employees may be used to meet the requirements of 
section 401(m) to the extent needed under that section. Under this 
provision, the plan uses elective contributions equal to two percent of 
the compensation of the nonhighly compensated employees in the ACP test. 
After this adjustment, the actual deferral percentages (ADPs) and ACPs 
are as follows:

------------------------------------------------------------------------
                                           ADP (percent)   ACP (percent)
------------------------------------------------------------------------
Highly compensated......................              10              10
Nonhighly compensated...................               8               8
------------------------------------------------------------------------

    (iv) The ACP of the highly compensated employees meets the 
requirements of section 401(m)(2)(A)(i) because it is 125 percent of 
that for nonhighly compensated employees. The ADP of the highly 
compensated employees similarly satisfies the 125 percent test. The plan 
would also meet the requirements of section 401(m) if all elective 
contributions were used in the ACP test. This is because the ACP for the 
highly compensated employees (20 percent) would be 125 percent of the 
ACP for the nonhighly compensated employees (16 percent).
    Example 4. (i) Employer P maintains a plan that includes a cash or 
deferred arrangement. Elective contributions, qualified nonelective 
contributions (QNCs), employee contributions, and matching contributions 
are made to the plan. Employer P includes elective contributions in 
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). The elective 
contributions and QNCs meet the requirements of paragraph (b)(5) of this 
section. For the 1989 plan year, the QNCs, elective contributions, and 
employee and matching contributions, expressed as a percentage of 
compensation, are shown in the following table:

------------------------------------------------------------------------
                                                             Employee/
                                    QNCs       Elective       Matching
                                 (percent)  Contributions  Contributions
                                              (percent)      (percent)
------------------------------------------------------------------------
Highly compensated.............          3            5              6
Nonhighly compensated..........          3            4              2
------------------------------------------------------------------------

    (ii) The elective contributions meet the test of section 
401(k)(3)(A)(ii). The employee and matching contributions, however, do 
not meet the actual contribution percentage (ACP) test. P may not use 
any QNCs of the nonhighly compensated employees to meet the ACP test 
because the remaining QNCs would discriminate in favor of the highly 
compensated employees. However, P could make additional QNCs or matching 
contributions of two percent of compensation on behalf of the nonhighly 
compensated employees. Alternatively, P could treat all QNCs for all 
employees and elective contributions equal to one percent of 
compensation for nonhighly compensated employees as matching 
contributions and make additional QNCs of 1.2 percent of compensation on 
behalf of nonhighly compensated employees. The ACPs for highly and 
nonhighly compensated employees would then be nine percent and 7.2 
percent, respectively, thus satisfying the 125 percent test. The actual 
deferral percentages would be five and three percent, respectively, 
which would satisfy the 200 percent/two percentage point test.
    Example 5. (i) Employer P maintains a cash or deferred arrangement. 
Elective contributions, qualified nonelective contributions (QNCs), 
employee contributions, and matching contributions are made to the plan. 
The elective contributions and the QNCs meet the requirements of 
paragraph (b)(5) of this section. For the 1989 plan year, the 
contributions are shown in the following table:

[[Page 361]]



------------------------------------------------------------------------
                                                             Employee/
                                    QNCs       Elective       matching
                                 (percent)  contributions  contributions
                                              (percent)      (percent)
------------------------------------------------------------------------
Highly compensated.............          0            6              6
Nonhighly compensated..........          3            3              3
------------------------------------------------------------------------

    (ii) The QNCs may be used in the actual deferral percentage (ADP) 
test, the actual contribution percentage (ACP) test, or a combination of 
the two. If P treats one-third of the QNCs as elective contributions and 
two-thirds as matching contributions, the ADPs for the highly 
compensated and nonhighly compensated employees are six and four 
percent, respectively, and satisfy the 200 percent/two percentage point 
test. Similarly, the ACPs for the two groups are six and five percent, 
respectively, and satisfy the 125 percent test.

    (e) Correction of excess aggregate contributions--(1) General rule--
(i) Permissible correction methods. A plan satisfies the requirements of 
section 401(m)(2) and paragraph (b)(1) of this section with respect to 
the amount of employee and matching contributions under the plan if the 
employer, in accordance with the terms of the plan and paragraph (b)(5) 
of this section, makes qualified nonelective contributions or elective 
contributions that, in combination with employee and matching 
contributions, satisfy the actual contribution percentage test. In 
addition, a plan subject to the requirements of section 401(m) satisfies 
section 401(m)(2) and paragraph (b)(1) of this section if, in accordance 
with the terms of the plan, excess aggregate contributions on behalf of 
highly compensated employees (and the income allocable to these 
contributions) are distributed in accordance with paragraph (e)(3) of 
this section. Matching contributions (and the income allocable to 
matching contributions) that are not vested (determined without regard 
to any increase in vesting that may occur after the date of the 
forfeiture) may also be forfeited to correct excess aggregate 
contributions. Finally, a plan may limit employee or matching 
contributions in a manner that prevents excess aggregate contributions 
from being made.
    (ii) Combination of correction methods. The plan may permit a 
combination of the methods listed in paragraph (e)(1)(i) of this section 
to avoid or correct excess aggregate contributions.
    (iii) Impermissible correction methods. Excess aggregate 
contributions may not be corrected by forfeiting vested matching 
contributions, recharacterizing matching contributions, or not making 
matching contributions required under the terms of the plan. Excess 
aggregate 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 aggregate contributions may not 
be corrected using the retroactive correction rules of Sec. 
1.401(a)(4)-11(g). See Sec. 1.401(a)(4)-11(g)(3)(vii) and (5). See 
paragraph (e)(5) of this section for the effects of a failure to correct 
excess aggregate contributions. See Sec. 1.411(a)-4(b)(7) regarding 
permissible forfeitures of matching contributions.
    (iv) Partial correction. Any distribution of less than the entire 
amount of excess aggregate contributions (and income) is treated as a 
pro rata distribution of excess aggregate contributions and income.
    (2) Amount of excess aggregate contributions--(i) General rule. The 
amount of excess aggregate contributions for a highly compensated 
employee for a plan year is the amount (if any) by which the employee's 
employee and matching contributions must be reduced for the employee's 
actual contribution ratio to equal the highest permitted actual 
contribution ratio under the plan. To calculate the highest permitted 
actual contribution ratio under a plan, the actual contribution ratio of 
the highly compensated employee with the highest actual contribution 
ratio is reduced by the amount required to cause the employee's actual 
contribution ratio to equal the ratio of the highly compensated employee 
with the next highest actual contribution ratio. If a lesser reduction 
would enable the arrangement to satisfy the actual contribution 
percentage test, only this lesser reduction may be made. This process 
must be repeated until the plan satisfies the actual contribution 
percentage test. The highest actual contribution ratio remaining under 
the plan after leveling is the highest permitted actual contribution

[[Page 362]]

ratio. For each highly compensated employee, the amount of excess 
aggregate contributions for a plan year is equal to the total employee 
and matching contributions, plus qualified nonelective contributions and 
elective contributions taken into account in determining the employee's 
actual contribution ratio under paragraph (f)(1) of this section, minus 
the amount determined by multiplying the employee's actual contribution 
ratio (determined after application of this paragraph (e)(2)) by the 
compensation used in determining the ratio. In no case may the amount of 
excess aggregate contributions with respect to any highly compensated 
employee exceed the amount of employee and matching contributions made 
on behalf of the highly compensated employee for the plan year.
    (ii) Coordination with correction of excess contributions. The 
amount of excess aggregate contributions with respect to an employee for 
a plan year is calculated after determining the excess contributions to 
be recharacterized as employee contributions for the plan year.
    (iii) Correction of family members. The determination and correction 
of excess aggregate contributions of a highly compensated employee whose 
actual contribution ratio is determined under the family aggregation 
rules of paragraph (f)(1)(ii)(C) of this section, is accomplished by 
reducing the actual contribution ratio as required under this paragraph 
(e)(2) and allocating the excess aggregate contributions for the family 
group among the family members in proportion to the employee and 
matching contributions of each family member that are combined to 
determine the actual contribution ratio.
    (3) Corrective distribution of excess aggregate contributions (and 
income)--(i) Genera1 rule. Excess aggregate contributions (and income 
allocable thereto) are distributed in accordance with this paragraph 
(e)(3) only if the excess aggregate contributions and allocable income 
are designated by the employer as a distribution of excess aggregate 
contributions (and income), and are distributed to the appropriate 
highly compensated employees after the close of the plan year in which 
the excess aggregate contributions arose and within 12 months after the 
close of that plan year. In the event of a complete termination of the 
plan during the plan year in which an excess aggregate contribution 
arose, the corrective distribution must be made as soon as 
administratively feasible after the date of termination of the plan, but 
in no event later than 12 months after the date of termination. If the 
entire account balance of a highly compensated employee is distributed 
during the plan year in which the excess aggregate contribution arose, 
the distribution is deemed to have been a corrective distribution of 
excess aggregate contributions (and income) to the extent that a 
corrective distribution would otherwise have been required.
    (ii) Income allocable to excess aggregate 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, if the plan 
so provides, the allocable gain or loss for the period between the end 
of the plan year and the date of distribution (the ``gap 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 Sec. 
1.401(a)(4)-1(c)(8).
    (C) Alternative method of allocating income. A plan may allocate 
income to excess aggregate contributions by multiplying the income for 
the plan year (and the gap period, if the plan so provides) allocable to 
employee contributions, matching contributions, and amounts treated as 
matching contributions by a fraction. The numerator of the fraction is 
the excess aggregate contributions for the employee for the plan year. 
The denominator of the fraction is equal to the sum of:
    (1) The total account balance of the employee attributable to 
employee and matching contributions, and amounts treated as matching 
contributions as of the beginning of the plan year; plus
    (2) The employee and matching contributions, and amounts treated as

[[Page 363]]

matching contributions for the plan year and for the gap period if gap 
period income is allocated.
    (D) Safe harbor method of allocating gap period income. Under the 
safe harbor method, income on excess aggregate contributions for the gap 
period is equal to 10 percent of the income allocable to excess 
aggregate contributions for the plan year (calculated under the method 
described in paragraph (e)(3)(ii)(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 the month is treated as 
made on the last day of the preceding month. A distribution made after 
the fifteenth day of the month is treated as made on the first day of 
the next month.
    (E) Allocable income for recharacterized elective contributions. If 
recharacterized elective contributions are distributed as excess 
aggregate contributions, the income allocable to the excess aggregate 
contributions is determined as if recharacterized elective contributions 
had been distributed as excess contributions. Thus, income must be 
allocated to the recharacterized amounts distributed using the methods 
in Sec. 1.401(k)-1(f)(4)(ii).
    (iii) No employee or spousal consent required. A distribution of 
excess aggregate contributions (and income) 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.
    (iv) Treatment of corrective distributions and forfeited 
contributions as employer contributions. Excess aggregate contributions, 
including 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 reallocated 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.
    (v) Tax treatment of corrective distributions--(A) Genera1 rule. 
Except as otherwise provided in this paragraph (e)(3)(v), a corrective 
distribution of excess aggregate contributions (and income) that is made 
within 2\1/2\ months after the end of the plan year for which the excess 
aggregate contributions were made is includible in the employee's gross 
income for the taxable year of the employee ending 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\1/2\ months 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 under section 72 is determined without regard to any plan 
contributions other than those distributed as excess aggregate 
contributions. Regardless of when the corrective distribution is made, 
it is not subject to the early distribution tax of section 72(t) and is 
not treated as a distribution for purposes of applying the excise tax 
under section 4980A. See paragraph (e)(5) of this section for additional 
rules relating to the employer excise tax on amounts distributed more 
than 2\1/2\ months after the end of the plan year.
    (B) Rule for de minimis distributions. If the total excess 
contributions and excess aggregate contributions distributed to a 
recipient under a plan for any plan year are less than $100 (excluding 
income), a corrective distribution of excess aggregate contributions 
(and income) is includible in gross income in the recipient's taxable 
year in which the corrective distribution is made.
    (C) Rule for certain 1987 and 1988 excess aggregate contributions. 
Distributions for plan years beginning in 1987 and 1988 to which the de 
minimis rule of this paragraph (e)(3)(v) of this section would otherwise 
apply may be reported by the recipient, at the recipient's option, 
either in the year described in paragraph (e)(3)(v)(A) of this section, 
or in the year described in paragraph (e)(3)(v)(B) of this section. This 
special rule may be used only for distributions

[[Page 364]]

made within 2\1/2\ months after the close of the plan year, but not 
later than April 17, 1989.
    (vi) No reduction of required minimum 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).
    (vii) No corrective distribution of matching contributions other 
than excess aggregate contributions. A matching contribution that is an 
excess aggregate contribution may be distributed as provided in section 
401(m)(6) and Sec. 1.401(m)-1(e)(3). A matching 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. See Sec. Sec. 1.401(k)-1(f)(5)(iii) and 1.411(a)-4(b)(7) 
regarding permissible forfeitures of matching contributions that relate 
to excess contributions, excess deferrals, or excess aggregate 
contributions.
    (4) Coordination with section 401(a)(4). A matching contribution is 
taken into account under section 401(a)(4) even if it is distributed, 
unless the distributed contribution is an excess aggregate contribution. 
However, the method of distributing excess aggregate contributions 
provided in the plan must satisfy the requirements of section 401(a)(4). 
This requires that after correction each level of matching contributions 
be currently and effectively available to a group of employees that 
satisfies section 410(b). See Sec. 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 (e) to 
highly compensated employees to the extent needed to meet the 
requirements of section 401(m)(2), while matching contributions 
attributable to employee contributions remain allocated to the highly 
compensated employees' accounts. See Sec. 1.411(a)-4(b)(7) for a rule 
that allows forfeiture of these matching contributions to avoid a 
violation of section 401(a)(4). See also Sec. 1.401(a)(4)-
11(g)(3)(vii)(B) regarding the use of additional allocations to the 
accounts of nonhighly compensated employees for the purpose of 
correcting a discriminatory rate of matching contributions. A method of 
distributing excess aggregate contributions will not be considered 
discriminatory solely because, in accordance with the terms of the plan, 
unmatched employee contributions that exceed the highest rate at which 
employee contributions are matched are distributed before matched 
employee contributions, or matching contributions are distributed (or 
forfeited) prior to employee contributions. See Example 6 in paragraph 
(e)(6) of this section.
    (5) Failure to correct--(i) Failure to correct within 2\1/2\ months 
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 percent excise tax on the amount of the excess aggregate 
contributions. See section 4979 and Sec. 54.4979-1. Qualified 
nonelective contributions properly taken into account under paragraph 
(b)(5) of this section for a plan year may enable a plan to avoid having 
excess aggregate contributions, even if the contributions 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 aggregate contributions were made and all subsequent 
plan years in which the excess aggregate contributions remain in the 
plan.
    (6) Examples. The principles of this paragraph (e) are illustrated 
by the following examples. Assume in each example that no income or loss 
is allocable to elective, employee, or matching contributions.

    Example 1. (i) Employer A maintains a thrift plan that does not 
include a cash or deferred arrangement. In 1990, the actual contribution 
percentage (ACP) for nonhighly compensated employees is four percent.

[[Page 365]]

Thus, the ACP for the group of highly compensated employees may not 
exceed six percent. The three highly compensated employees who 
participate have the following compensation, contributions, and actual 
contribution ratios (ACRs):

----------------------------------------------------------------------------------------------------------------
                                                                                 Employee and        Actual
                          Employee                              Compensation       matching       contribution
                                                                                contributions    ratio (percent)
----------------------------------------------------------------------------------------------------------------
A...........................................................          100,000           10,000             10
B...........................................................           90,000            6,300              7
C...........................................................           75,000            3,750              5
                                                                                               -----------------
    Average.................................................  ...............  ...............              7.33
----------------------------------------------------------------------------------------------------------------

    (ii) The maximum amount of employee and matching contributions 
permitted on behalf of A, B, and C is determined by reducing 
contributions in order of their ACRs, beginning with the highest ACR. 
Thus, A's contribution is first reduced to $7,000 or 7.0 percent. Since 
the resulting ACP of 6.33 percent still exceeds the permitted highly 
compensated ACP of six percent, the contributions allocated to A and B 
must be further reduced to 6.5 percent. This results in an ACP of six 
percent, which meets the 200 percent/two percentage point test. The 
excess aggregate contributions for A and B are $3,500 and $450, 
respectively.
    Example 2. (i) Employee A is the sole highly compensated participant 
in a cash or deferred arrangement maintained by Employer X. The plan 
that includes the arrangement, Plan X, provides a fully vested matching 
contribution equal to 50 percent of elective contributions. Plan X is a 
calendar year plan. Employer X includes elective contributions in 
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). See Sec. 
1.401(k)-1(g)(2)(i). Plan X corrects excess contributions by 
recharacterization. For the 1988 plan year, A's compensation is $58,333, 
and A's elective contributions are $7,000. The actual deferral 
percentages and actual contribution percentages of A and other employees 
under Plan X are shown below:

------------------------------------------------------------------------
                                                  Actual       Actual
                                                 deferral   contribution
                                                percentage   percentage
------------------------------------------------------------------------
Employee A....................................         12            6
Nonhighly compensated.........................          8            4
------------------------------------------------------------------------

    (ii) In February 1989, Employer X determines that A's actual 
deferral ratio must be reduced to 10 percent, or $5,833, which requires 
a recharacterization of $1,167 as an employee contribution. This 
increases A's actual contribution ratio to eight percent ($3,500 in 
matching contributions plus $1,167 recharacterized as employee 
contributions, divided by $58,333 in compensation). Since A's actual 
contribution ratio must be limited to six percent for Plan X to satisfy 
the actual contribution percentage test, Plan X must distribute $1,167 
of A's employee and matching contributions. If $1,167 in matching 
contributions is distributed, this will correct the excess aggregate 
contributions and will not result in a discriminatory rate of matching 
contributions. See Example 8.
    Example 3. Same as Example 2, except that in 1988 A also had 
elective contributions of $1,313 under Plan Y, maintained by an employer 
unrelated to X. In January 1989, A requests and receives a distribution 
of $1,000 in excess deferrals from Plan X. Pursuant to the terms of Plan 
X, A forfeits the $500 match on the excess deferrals to correct a 
discriminatory rate of match (see Example 8). The $1,167 that would 
otherwise have been recharacterized for Plan X to satisfy the actual 
deferral percentage test is reduced by the $1,000 already distributed as 
an excess deferral, leaving $167 to be recharacterized. See Sec. 
1.401(k)-1(f)(5)(i). Pursuant to the terms of Plan X, A forfeits the 
$83.50 match on the recharacterized $167 to correct a discriminatory 
rate of match. A's actual contribution ratio is now 5.29 percent 
($2,916.50 ($3,500-$500-$83.50)) in matching contributions plus $167 in 
employee contributions, divided by $58,333 in compensation. Since Plan X 
satisfies the actual contribution percentage test, no further 
distribution is required or permitted.
    Example 4. Same as Example 3, except that A does not request a 
distribution of excess deferrals until March 1989. Employer X has 
already recharacterized $1,167 as employee contributions. Under Sec. 
1.402(g)-1(e)(6), the amount of excess 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. For the 1987 plan year, Employee B defers $7,000 under 
Plan C and $1,000 under plan D. Plans C and D are maintained by 
unrelated Employers C and D; both Plans C and D have calendar plan 
years. Plan C provides a fully vested, 100 percent matching contribution 
and does not take elective contributions into account under section 
401(m) or take matching contributions into account

[[Page 366]]

under section 401(k). Employer C determines that B has excess 
contributions of $600 and excess aggregate contributions of $1,600. B 
timely requests and receives a distribution of the $1,000 excess 
deferral from Plan C, and pursuant to the terms of Plan C, forfeits the 
corresponding $1,000 matching contribution to correct a discriminatory 
rate of match (see Example 8). Plan C provides that excess contributions 
and excess aggregate contributions are corrected by distribution. No 
distribution is required or permitted to correct the excess 
contributions because $1,000 has been distributed from this plan as 
excess deferrals. The distribution required to correct the excess 
aggregate contributions (after forfeiting the matching contribution) is 
$600 ($1,600 in excess aggregate contributions minus $1,000 in forfeited 
matching contributions). If B had corrected the excess deferrals of 
$1,000 by withdrawing $1,000 from Plan D, Plan C would have had to 
correct the $600 excess contributions in Plan C by distributing $600. 
Since B then would have forfeited $600 (instead of $1,000) in matching 
contributions, B would have had $1,000 ($1,600 in excess aggregate 
contributions minus $600 in forfeited matching contributions) remaining 
of excess aggregate contributions in Plan C. These would have been 
corrected by distributing an additional $1,000 from Plan C.
    Example 6. Employee B is the sole highly compensated employee in a 
thrift plan under which the employer matches 100 percent of employee 
contributions up to two percent of compensation, and 50 percent of 
employee contributions up to the next four percent of compensation. For 
the 1988 plan year, B has compensation of $100,000. B makes an employee 
contribution of $7,000, or seven percent, and receives a four percent 
matching contribution of $4,000. Thus, B's actual contribution ratio 
(ACR) is 11 percent. The actual contribution percentage for the 
nonhighly compensated employees is five percent, and the employer 
determines that B's ACR must be reduced to seven percent to comply with 
the rules of section 401(m). In this case, the plan satisfies the 
requirements of this paragraph 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 B with four 
percent employee contributions, and three percent matching 
contributions, for an ACR of seven percent. The plan could instead 
distribute all matching contributions. The plan would fail to meet the 
requirements of this paragraph if it distributed $4,000 (four percent) 
of B's employee contributions and none of B's matching contributions 
because this would result in a discriminatory rate of matching 
contributions. See Sec. 1.401(m)-1(e)(2) and (4). See also Example 8.
    Example 7. (i) Employee C is a highly compensated employee in 
Employer X's thrift plan, which matches 100 percent of employee 
contributions up to five percent of compensation. The matching 
contribution is vested at the rate of 20 percent per year. In 1991, C 
makes $5,000 in employee contributions and receives $5,000 of matching 
contributions. C is 60 percent vested in the matching contributions at 
the end of the 1991 plan year.
    (ii) In February 1992, X determines that C has excess aggregate 
contributions of $1,000. The plan provides that only matching 
contributions will be distributed as excess aggregate contributions.
    (iii) X has two options available in distributing C's excess 
contributions. The first option is to distribute $600 of vested matching 
contributions and forfeit $400 of nonvested matching contributions. 
These amounts are in proportion to C's vested and nonvested interests in 
all matching contributions. The second option is to distribute $1,000 of 
vested matching contributions, leaving the nonvested matching 
contributions in the plan.
    (iv) If the second option is chosen, the plan must also provide a 
separate vesting schedule for vesting these nonvested matching 
contributions. This is necessary because the nonvested matching 
contributions must vest as rapidly as they would have had no 
distribution been made. Thus, 50 percent must vest in each of the next 
two years.
    (v) The plan will not satisfy the nondiscriminatory availability 
requirement of section 401(a)(4) if only nonvested matching 
contributions are distributed because the effect is that matching 
contributions for highly compensated employees vest more rapidly than 
those for nonhighly compensated employees. See Sec. 1.401(m)-1(e)(4).
    Example 8. (i) Employer B maintains a calendar year profit sharing 
plan that includes a cash or deferred arrangement. Elective 
contributions are matched at the rate of 100 percent. After-tax employee 
contributions are permitted under the plan only for nonhighly 
compensated employees and are matched at the same rate. No employees 
make excess deferrals. Employee A, a highly compensated employee, makes 
an $8,000 elective contribution and receives an $8,000 matching 
contribution.
    (ii) Employer B performs the actual deferral percentage (ADP), the 
actual contribution percentage (ACP), and the multiple use tests. To 
correct failures of the ADP and ACP tests, the plan distributes to A 
$1,000 of excess contributions and $500 of excess aggregate 
contributions. After the distributions, A's contributions for the year 
are $7,000 of elective contributions and $7,500 of matching 
contributions. As a result, A has received a higher effective rate of 
matching contributions than nonhighly compensated employees ($7,000 of 
elective contributions matched by $7,500 is an effective matching rate 
of 107

[[Page 367]]

percent). If this amount remains in A's account without correction, it 
will cause the plan to fail to satisfy section 401(a)(4), because only a 
highly compensated employee 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 
nonhighly compensated employees. See Sec. 1.401(a)(4)-11(g)(3)(vii)(B) 
and (6), Example 7.

    (f) Definitions. The following definitions apply for purposes of 
this section and Sec. 1.401(m)-2 except as otherwise specifically 
provided:
    (1) Actual contribution percentage--(i) General rule. The actual 
contribution percentage for a group of employees for a plan year is the 
average of the actual contribution ratios of the employees in the group. 
For plan years beginning after December 31, 1988, or such later date 
provided in paragraph (g) of this section, actual contribution ratios 
and the actual contribution percentage for a group are calculated to the 
nearest one-hundredth of a percentage point.
    (ii) Actual contribution ratio--(A) General rule. An employee's 
actual contribution ratio is the sum of the employee and matching 
contributions allocated to the employee's account for the plan year, and 
the qualified nonelective and elective contributions treated as matching 
contributions for the plan year, divided by the employee's compensation 
for the plan year. If an eligible employee makes no employee 
contributions and no matching, qualified nonelective contributions, or 
elective contributions are taken into account with respect to the 
employee, the actual contribution ratio of the employee is zero. See 
paragraphs (b)(4), (b)(5), and (f)(2) of this section for rules 
regarding the employee and matching contributions, qualified nonelective 
and elective contributions, and compensation that are taken into account 
in calculating this fraction.
    (B) Highly compensated employee eligible under more than one plan. 
The actual contribution ratio of a highly compensated employee who is 
eligible to participate in more than one plan of an employer to which 
employee or matching contributions are made is calculated by treating 
all the plans in which the employee is eligible to participate as one 
plan. However, plans that are not permitted to be aggregated under Sec. 
1.410(b)-7(c), as modified in Sec. 1.401(k)-1(g)(11), are not 
aggregated for this purpose. For example, if a highly compensated 
employee with compensation of $80,000 may receive matching contributions 
under two plans of an employer, the employee's actual contribution ratio 
under each plan is calculated by dividing the employee's total matching 
contributions under both plans by $80,000, unless the plans are required 
to be disaggregated. In that case, the actual contribution ratio of the 
employee under each plan is to be calculated by dividing the employee's 
matching contributions under that plan by $80,000. See paragraph (b)(3) 
of this section for the treatment of certain multiple plans. For plan 
years beginning after December 31, 1988, or such later date provided in 
paragraph (g) of this section, if a highly compensated employee 
participates in two or more plans that have different plan years, this 
paragraph (f)(1)(ii) is applied by treating all plans whose plan years 
end with or within the same calendar year as a single plan.
    (C) Employees subject to family aggregation rules--(1) Aggregation 
of employee contributions and other amounts. For plan years beginning 
after December 31, 1986, or such later date provided in paragraph (g) of 
this section, if a highly compensated employee is subject to the family 
aggregation rules of section 414(q)(6) because that employee is either a 
five-percent owner or one of the 10 most highly compensated employees, 
the combined actual contribution ratio for the family group (treated as 
one highly compensated employee) must be determined by combining the 
employee contributions, matching contributions, amounts treated as 
matching contributions, and compensation of all family members.
    (2) Effect on actual contribution percentage of nonhighly 
compensated employees. The employee and matching contributions, amounts 
treated as

[[Page 368]]

matching contributions, and compensation of all family members are 
disregarded for purposes of determining the actual contribution 
percentage for the group of highly compensated employees, and the group 
of nonhighly compensated employees.
    (3) Multiple family groups. If an employee is required to be 
aggregated as a member of more than one family group in a plan, all 
eligible employees who are members of those family groups that include 
that employee are aggregated as one family group.
    (2) Compensation. The term compensation means compensation as 
defined in Sec. 1.401(k)-1(g)(2)(i).
    (3) Elective contributions. The term ``elective contribution'' means 
elective contribution as defined in Sec. 1.401(k)-1(g)(3).
    (4) Eligible employee--(i) General rule. The term ``eligible 
employee'' means an employee who is directly or indirectly eligible to 
make an employee contribution or to receive an allocation of matching 
contributions (including matching contributions derived from 
forfeitures) under the plan for a plan year. For example, if an employee 
must perform ministerial or mechanical acts (e.g., formal application 
for participation or consent 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. An employee who is unable to make an 
employee contribution or to receive an allocation of matching 
contributions 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 service 
requirement) in order to be eligible to make an employee contribution or 
to receive an allocation of matching contributions for a plan year, the 
employee is not an eligible employee for the plan year unless the 
service is actually performed. An employee who would be eligible to make 
employee contributions but for a suspension due to a distribution, a 
loan, or an election not to participate in the plan, is an eligible 
employee for purposes of section 401(m) for a plan year even though the 
employee may not make an employee contribution or receive an allocation 
of matching contributions by reason of the suspension. Finally, an 
employee does not fail to be an eligible employee merely because the 
employee may receive no additional annual additions because of section 
415(c)(1) or 415(e).
    (ii) Certain one-time elections. An employee is not an eligible 
employee merely because the employee, upon commencing employment with 
the employer or upon the employee's first becoming eligible under any 
plan of the employer providing for employee or matching contributions, 
is given a one-time opportunity to elect, and the employee does in fact 
elect, not to be eligible to make employee contributions or to receive 
allocations of matching contributions under the plan or any other plan 
maintained by the employer (including plans not yet established) for the 
duration of the employee's employment 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 (whether or 
not terminated) of the employer.
    (5) Employee. The term ``employee'' means an employee as defined in 
Sec. 1.401(k)-1(g)(5).
    (6) Employee contributions. The term ``employee contribution'' means 
any mandatory or voluntary contribution to the plan that is treated at 
the time of contribution as an after-tax employee contribution (e.g., by 
reporting the contribution as taxable income subject to applicable 
withholding requirements) and is allocated to a separate account to 
which the attributable earnings and losses are allocated. See Sec. 
1.401(k)-1(a)(2)(ii). The term includes:
    (i) Employee contributions to the defined contribution portion of a 
plan described in section 414(k);
    (ii) Employee contributions to a qualified cost-of-living 
arrangement described in section 415(k)(2)(B);
    (iii) Employee contributions applied to the purchase of whole life 
insurance protection or survivor benefit protection under a defined 
contribution plan;
    (iv) Amounts attributable to excess contributions within the meaning 
of

[[Page 369]]

section 401(k)(8)(B) that are recharacterized as employee contributions; 
and
    (v) Employee contributions to an annuity contract described in 
section 403(b).

The term does not include repayment of loans, repayment of distributions 
described in section 411(a)(7)(C), or employee contributions that are 
transferred to a plan from another plan. For purposes of this paragraph 
(f)(6), employee contributions described in paragraph (f)(6)(ii) of this 
section are deemed contributed to a defined contribution plan.
    (7) Employer. The term ``employer'' means the employer as defined in 
Sec. 1.401(k)-1(g)(6).
    (8) Excess aggregate contributions. The term ``excess aggregate 
contribution'' means, with respect to any plan year, the excess of the 
aggregate amount of the employee and matching contributions (and any 
qualified nonelective contribution or elective deferral taken into 
account in computing the contribution percentage) actually made on 
behalf of highly compensated employees for the plan year, over the 
maximum amount of contributions permitted under the limitations of 
section 401(m)(2)(A). The amount of excess aggregate contributions for 
each highly compensated employee is determined by using the method 
described in paragraph (e)(2) of this section. For purposes of this 
paragraph, qualified matching contributions treated as elective 
contributions in accordance with Sec. 1.401(k)-1(b)(5) are disregarded.
    (9) Excess contributions. The term ``excess contribution'' means an 
excess contribution as defined in Sec. 1.401(k)-1(g)(7)(i).
    (10) Excess deferrals. The term ``excess deferrals'' means excess 
deferral as defined in Sec. 1.402(g)-1(e)(1)(iii).
    (11) Highly compensated employee. The term ``highly compensated 
employee'' means a highly compensated employee as defined in section 
414(q).
    (12) Matching contributions--(i) In general. The term ``matching 
contribution'' means:
    (A) Any employer contribution (including 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 (including a contribution made at the 
employer's discretion) to a defined contribution plan on account of an 
elective deferral (as defined in Sec. 1.402(g)-1(b)); and
    (C) Any forfeiture allocated on the basis of employee contributions, 
matching contributions, or elective contributions.
    (ii) Employer contributions made on account of employee or elective 
contributions. For purposes of paragraph (f)(12)(i) of this section, 
whether an employer contribution is made on account of an employee 
contribution or an elective contribution is determined on the basis of 
all relevant facts and circumstances, including the relationship between 
the employer contribution and employee actions outside the plan. Thus, 
for example, an employer contribution made to a defined contribution 
plan on account of contributions made by an employee under an employer-
sponsored savings arrangement that are not held in a plan that is 
intended to be a qualified plan or a plan described in Sec. 1.402(g)-
1(b) is not a matching contribution. Notwithstanding the foregoing, for 
plan years beginning before January 1, 1992, an employer may elect to 
take into account as matching contributions, contributions made to a 
plan pursuant to an arrangement under which the employer makes 
contributions to the plan on account of either employee contributions to 
the plan or contributions made by an employee to an employer-sponsored 
savings arrangement that are not held in the plan, provided that the 
arrangement was in effect prior to August 8, 1988.
    (iii) Contributions used to meet the requirements of section 416. 
For plan years beginning after December 31, 1988, a contribution or 
allocation that is used to meet the minimum contribution or benefit 
requirement of section 416 is not treated as made on account of an 
employee or elective contribution and therefore is not a matching 
contribution.
    (13) Nonelective contributions. The term ``nonelective 
contribution'' means

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nonelective contributions as defined in Sec. 1.401(k)-1(g)(10).
    (14) Plan. The term ``plan'' means a plan as defined in Sec. 
1.401(k)-1(g)(11).
    (15) Qualified nonelective contributions. The term ``qualified 
nonelective contribution'' means qualified nonelective contributions as 
defined in Sec. 1.401(k)-1(g)(13)(ii).
    (16) Section 401(k) plan. The term section 401(k) plan means a 
section 401(k) plan within the meaning of Sec. 1.410(b)-9.
    (17) Section 401(m) plan. The term section 401(m) plan means a 
section 401(m) plan within the meaning of Sec. 1.410(b)-9.
    (g) Effective dates--(1) General rule. Except as provided in 
paragraphs (g)(2), (g)(3), (g)(4), and (g)(5) of this section, or as 
specifically provided otherwise in this section, this section is 
effective for plan years beginning after December 31, 1986.
    (2) Collectively bargained plans. In the case of a plan maintained 
pursuant to one or more collective bargaining agreements between 
employee representatives and one or more employers ratified before March 
1, 1986, this section does not apply to years beginning before the 
earlier of--
    (i) January 1, 1989, or
    (ii) The date on which the last collective bargaining agreement 
terminates (determined without regard to any extension thereof after 
February 28, 1986).
    (3) Certain annuity contracts--(i) In the case of an annuity 
contract under section 403(b), not maintained pursuant to a collective 
bargaining agreement, except as otherwise provided in paragraph (g)(5) 
of this section, this section applies to plan years beginning after 
December 31, 1988.
    (ii) In the case of an annuity contract described in section 403(b) 
maintained pursuant to a collective bargaining agreement described in 
paragraph (g)(2)(i) of this section, this section does not apply to 
years beginning before the earlier of
    (A) The later of--
    (1) January 1, 1989, or
    (2) The date determined under paragraph (g)(2)(ii) of this section; 
or
    (B) January 1, 1991.
    (4) State and local government plans. A governmental plan described 
in section 414(d), including a plan subject to section 403(b)(12)(A)(i) 
(nonelective plan) is treated as satisfying section 401(m) for plan 
years beginning before the later of January 1, 1996, or 90 days after 
the opening of the first legislative session beginning on or after 
January 1, 1996, of the governing body with authority to amend the plan, 
if that body does not meet continuously. For purposes of this paragraph 
(g)(4), the term governing body with authority to amend the plan means 
the legislature, board, commission, council, or other governing body 
with authority to amend the plan.
    (5) Transition rule for plan years beginning before 1992--(i) 
General rule. For plan years beginning before January 1, 1992, a 
reasonable interpretation of the rules set forth in section 401 (k) and 
(m) of the Internal Revenue Code (as in effect during those years) may 
be relied upon to determine whether a plan was qualified during those 
years.
    (ii) Restructuring--(A) General rule. In determining whether the 
requirements of section 401(m) are satisfied for plan years beginning 
before January 1, 1992, a plan may be treated as consisting of two or 
more component plans, each consisting of all of the allocations and 
other benefits, rights, and features provided to a group of employees 
under the plan. See Sec. 1.401(a)(4)-9(c). An employee may not be 
included in more than one component plan of the same plan for a plan 
year under this method. If this method is used for a plan year, the 
requirements of section 401(m) are applied separately with respect to 
each component plan for the plan year. Thus, for example, the actual 
contribution ratio and the amount of excess aggregate contributions, if 
any, of each eligible employee under each component plan must be 
determined as if the component plan were a separate plan. This method 
applies solely for purposes of section 401(m). Thus, for example, the 
requirements of section 410(b) must still be satisfied by the entire 
plan.
    (B) Identification of component plans--(1) Minimum coverage 
requirement. The group of eligible employees described in Sec. 
1.401(m)-1(f)(4) under each component plan must separately satisfy the 
requirements of section 410(b) as if the component plan were a separate 
plan. Component plans may not be aggregated to satisfy this requirement.

[[Page 371]]

    (2) Commonality requirement. The group of employees used to identify 
a component plan must share some common attribute or attributes, other 
than similar actual contribution ratios. Permissible common attributes 
include, for example, employment at the same work site, in the same job 
category, for the same division or subsidiary, or for a unit acquired in 
a specific merger or acquisition, employment for the same number of 
years, compensation under the same method (e.g., salaried or hourly), 
coverage under the same contribution formula, and attributes that could 
be used as the basis of a classification that would be treated as 
reasonable under Sec. 1.410(b)-4(b). Employees whose only common 
attribute is the same or similar actual contribution ratios, or another 
attribute having substantially the same effect as the same or similar 
actual contribution ratios, are not considered as sharing a common 
attribute for this purpose. This rule applies regardless of whether the 
component plan or the plan of which it is a part satisfies the ratio or 
percentage test of section 410(b).

[T.D. 8357, 56 FR 40534, Aug. 15, 1991, as amended by T.D. 8376, 56 FR 
63432, Dec. 4, 1991; T.D. 8357, 57 FR 10290, Mar. 25, 1992; T.D. 8581, 
59 FR 66175, Dec. 23, 1994; TD 8581, 60 FR 12416, Mar. 7, 1995]