[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)-2]

[Page 371-374]
 
                       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)-2  Multiple use of alternative limitation.

    (a) In general. The rules in this section prevent the multiple use 
of the alternative methods of compliance with sections 401 (k) and (m) 
contained in section 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) 
respectively. Paragraph (b) of this section discusses the scope of this 
section and contains the general rule for determination of a multiple 
use of the alternative limitation. Paragraph (c) of this section 
contains rules for the correction of multiple use. The consequences of 
multiple use of the alternative methods of compliance are described in 
Sec. 1.401(m)-1(a)(1).
    (b) General rule for determination of multiple use--(1) In general. 
(i) Multiple use of the alternative limitation occurs if all of the 
conditions of this paragraph (b)(1) are satisfied:
    (A) One or more highly compensated employees of the employer are 
eligible employees in both a cash or deferred arrangement subject to 
section 401(k) and a plan maintained by the employer subject to section 
401(m).
    (B) The sum of the actual deferral percentage of the entire group of 
eligible highly compensated employees under the arrangement subject to 
section 401(k) and the actual contribution percentage of the entire 
group of eligible highly compensated employees under the plan subject to 
section 401(m) exceeds the aggregate limit of paragraph (b)(3) of this 
section.
    (C) The actual deferral percentage of the entire group of eligible 
highly compensated employees under the arrangement subject to section 
401(k) exceeds the amount described in section 401(k)(3)(A)(ii)(I).
    (D) The actual contribution percentage of the entire group of 
eligible highly compensated employees under the arrangement subject to 
section 401(m) exceeds the amount described in section 401(m)(2)(A)(i).
    (ii) The actual deferral percentage and actual contribution 
percentage of the group of eligible highly compensated employees are 
determined after use of qualified nonelective contributions and 
qualified matching contributions to meet the requirements of section 
401(k)(3)(A)(ii) and after use of qualified nonelective contributions 
and elective contributions to meet the requirements of section 
401(m)(2)(A). The actual deferral percentage and actual contribution 
percentage of the group of eligible highly compensated employees are 
determined after any corrective distribution or forfeiture of excess 
deferrals, excess contributions, or excess aggregate contributions and 
after any recharacterization of excess contributions required without 
regard to this section. Only plans and arrangements maintained by the 
same employer are taken into account under this paragraph (b)(1). If the 
employer maintains two or more plans after application of the rules 
under Sec. 1.401(k)- 1(g)(11), multiple use is tested separately with 
respect to each plan. Thus, for example, if an employer maintains a cash 
or deferred arrangement with matching contributions, under which 
elective contributions may be made under either an ESOP or a non-ESOP, 
multiple use

[[Page 372]]

is tested separately with respect to elective contributions and matching 
contributions under the ESOP, and with respect to elective contributions 
and matching contributions under the non-ESOP.
    (2) Alternative limitation. For purposes of this section, the term 
``alternative limitation'' means the 200 percent or 2 percentage point 
limits in sections 401(k)(3)(A)(ii)(ii) and 401(m)(2)(A)(ii).
    (3) Aggregate limit--(i) In general. For purposes of this section, 
the aggregate limit is the greater of:
    (A) The sum of--
    (1) 1.25 times the greater of the relevant actual deferral 
percentage or the relevant actual contribution percentage, and
    (2) Two percentage points plus the lesser of the relevant actual 
deferral percentage or the relevant actual contribution percentage. In 
no event, however, may this amount exceed twice the lesser of the 
relevant actual deferral percentage or the relevant actual contribution 
percentage; or
    (B) The sum of--
    (1) 1.25 times the lesser of the relevant actual deferral percentage 
or the relevant actual contribution percentage, and
    (2) Two percentage points plus the greater of the relevant actual 
deferral percentage or the relevant actual contribution percentage. In 
no event, however, may this amount exceed twice the greater of the 
relevant actual deferral percentage or the relevant actual contribution 
percentage.
    (ii) Relevant actual deferral percentage and relevant actual 
contribution percentage defined. For purposes of paragraph (b)(3)(i) of 
this section, the term ``relevant actual deferral percentage'' means the 
actual deferral percentage of the group of nonhighly compensated 
employees eligible under the arrangement subject to section 401(k) for 
the plan year, and the term ``relevant actual contribution percentage'' 
means the actual contribution percentage of the group of nonhighly 
compensated employees eligible under the plan subject to section 401(m) 
for the plan year beginning with or within the plan year of the 
arrangement subject to section 401(k).
    (iii) Examples. The provisions of this paragraph (b) are illustrated 
by the following examples:

    Example 1. (i) Assume that Employer G maintains a plan that contains 
a cash or deferred arrangement under which the actual deferral 
percentages of highly compensated and nonhighly compensated employees 
are 5.5 and four percent respectively. The plan also permits employee 
contributions, and the actual contribution percentages for the two 
groups are 4.2 and three percent respectively. The multiple use of the 
alternative limitation is tested as follows:

(1) Greater of the relevant actual deferral percentage or the       4.00
 relevant actual contribution percentage........................
(2) 1.25 times (1)..............................................    5.00
(3) Lesser of the relevant actual deferral percentage or the        3.00
 relevant actual contribution percentage........................
(4) (3) plus two percentage points..............................    5.00
(5) (2)+(4).....................................................   10.00
(6) 1.25 times (3)..............................................    3.75
(7) (1) plus two percentage points..............................    6.00
(8) (6)+(7).....................................................    9.75
(9) Aggregate limit greater of (5) or (8).......................   10.00


    (ii) In this case, the sum of the actual deferral percentage and the 
actual contribution percentage of highly compensated employees is 9.70 
percent, which is less than the aggregate limit. Therefore, there is no 
multiple use of the alternative limitation.
    Example 2. Employer F maintains a plan subject to section 401(k) 
with a plan year beginning January 1, and a plan subject to section 
401(m) with a plan year beginning July 1. The plan subject to section 
401(k) does not correct excess contributions by recharacterization. The 
first actual deferral percentage taken into account is that for the plan 
year beginning January 1, 1989. The first actual contribution percentage 
taken into account is that for the plan year beginning July 1, 1989.
    Example 3. (i) Employer E maintains a plan that contains a cash or 
deferred arrangement and provides for matching contributions. The actual 
deferral and contribution percentages for a plan year are as follows:

------------------------------------------------------------------------
                                                  Actual       Actual
                                                 deferral   contribution
                                                percentage   percentage
------------------------------------------------------------------------
Highly compensated...........................          3.6          1.69
Nonhighly compensated........................          1.8          1.35
------------------------------------------------------------------------

    (ii) The actual deferral percentage of the highly compensated 
employees exceeds the normal limit (1.25 times 1.8, or 2.25%) but not 
the alternative limit (two plus 1.8, but not more than twice 1.8, or 
3.6%). The actual

[[Page 373]]

contribution percentage of the highly compensated employees does not 
exceed the normal limit (1.25 times 1.35, or 1.69%). Accordingly, the 
plan satisfies both the actual deferral and contribution percentage 
tests. Since the actual contribution percentage of the highly 
compensated employees does not exceed the normal limit, condition (iv) 
of paragraph (b)(1) of this section is not satisfied. Therefore, there 
is no multiple use of the alternative limitation.

    (c) Correction of multiple use--(1) In general. If multiple use of 
the alternative limitation occurs with respect to two or more plans or 
arrangements maintained by an employer, it must be corrected by reducing 
the actual deferral percentage, the actual contribution percentage of 
highly compensated employees, or a combination of the two, in the manner 
described in paragraph (c)(3) of this section. Instead of making this 
reduction, the employer may eliminate the multiple use of the 
alternative limitation by making qualified nonelective contributions in 
accordance with Sec. 1.401(k)-1(b)(5) and (f)(1) or Sec. 1.401(m)-
1(b)(5) and (e)(1).
    (2) Treatment of required reduction. The required reduction is 
treated as an excess contribution under the arrangement subject to 
section 401(k) or excess aggregate contribution under the plan subject 
to section 401(m). However, if an excess contribution arising under this 
section is recharacterized as an employee contribution, the 
recharacterized amount is treated as an excess aggregate contribution.
    (3) Required reduction. The amount of the reduction of the actual 
deferral percentage of the entire group of highly compensated employees 
eligible in the arrangement subject to section 401(k) is calculated in 
the manner described in Sec. 1.401(k)-1(f)(2) or the amount of the 
reduction of the actual contribution percentage of the entire group of 
highly compensated employees eligible in the plan subject to section 
401(m) is calculated in the manner described in Sec. 1.401(m)-1(e)(2), 
as designated in the plan, so that there is no multiple use of the 
alternative limitation. The employer may elect to reduce the actual 
deferral ratios or the actual contribution ratios, as designated in the 
plan, either for all highly compensated employees under the plan or 
arrangements subject to reduction or for only those highly compensated 
employees who are eligible in both the arrangement subject to section 
401(k) and the plan subject to section 401(m).
    (4) Examples. The principles of this paragraph (c) are illustrated 
by the following examples. In all cases, the employer maintains both an 
arrangement subject to section 401(k) and a plan subject to section 
401(m). Assume that there is no income or loss allocable to the 
elective, employee, or matching contributions.

    Example 1. (i) All employees of Employer Q are eligible in both an 
arrangement subject to section 401(k) and a plan subject to section 
401(m). Both plans have a calendar plan year. The plans provide that 
multiple use of the alternative limitation will be corrected in the plan 
subject to section 401(m) and that any required reduction in actual 
contribution ratios will apply only to employees eligible to participate 
in both arrangements. Employer Q 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). Employees X and Y are highly compensated. Each 
received compensation of $100,000, deferred $6,000, received a $3,000 
matching contribution, and made employee contributions of $3,000. Actual 
deferral and contribution percentages under the arrangement and plan for 
the 1989 plan year are shown below. No excess deferrals, excess 
contributions, or excess aggregate contributions have yet been required 
to be distributed, forfeited, or recharacterized under the plan.

------------------------------------------------------------------------
                                                  Actual       Actual
                                                 deferral   contribution
                                                percentage   percentage
------------------------------------------------------------------------
Highly compensated............................          6            6
Nonhighly compensated.........................          4            4
------------------------------------------------------------------------

    (ii) The aggregate limit and amount required, to be corrected are 
determined as follows:


                Step 1: Determination of Aggregate Limit
(1) Greater of relevant actual deferral percentage or relevant       4.0
 actual contribution percentage................................
(2) 1.25 times (1).............................................      5.0
(3) Lesser of relevant actual deferral percentage or relevant        4.0
 actual contribution percentage................................
(4) (3) plus two percentage points.............................      6.0
(5) (2)+(4)....................................................     11.0
(6) 1.25 times (3).............................................      5.0
(7) (1) plus two percentage points.............................      6.0
(8) (6)+(7)....................................................     11.0
(9) Aggregate limit Greater of (5) or (8)......................     11.0


[[Page 374]]


                Step 2: Calculation of Correction Amount
(10) Actual deferral percentage of highly compensated..........      6.0
(11) Maximum permitted actual contribution percentage of highly      5.0
 compensated ((9)-(10))........................................
(12) Amount taken into account in determining actual              $6,000
 contribution percentage of highly compensated Employee X......
(13) Maximum amount permitted without use of alternative          $5,000
 limitation ((11)xcompensation of Employee X)..................
(14) Excess aggregate contribution ((12)-(13)).................   $1,000



    (iii) A similar correction must be made for Employee Y.
    Example 2. Same as Example 1, but the plan corrects the multiple use 
in the arrangement subject to section 401(k) and provides that excess 
contributions are recharacterized. In this case, the aggregate limit for 
the plans will be 11 percent. Similarly, the excess contributions for 
Employees X and Y, determined in a manner analogous to that used in 
Example 1, will be $1,000. When this is recharacterized, the actual 
contribution percentage for these employees will increase to seven 
percent, resulting in an excess aggregate contribution of $1,000 that 
must be distributed.
    Example 3. Same as Example 1, except that Employee Y is not eligible 
to participate in the arrangement subject to section 401(k). No 
reduction of Y's actual contribution ratio is required because Y is only 
in the plan subject to section 401(m). In order to reduce the actual 
contribution percentage of the entire group of highly compensated 
employees eligible for the plan subject to section 401(m) to five 
percent, the plan must reduce X's actual contribution percentage to four 
percent. X's employee and matching contributions are limited to $4,000. 
Therefore X has an excess aggregate contribution of $2,000.

    (d) Effective date--(1) General rule. This section is effective for 
plan years beginning after December 31, 1988, or such later date 
provided in Sec. 1.402(m)-1(g).
    (2) Transition rule. For plan years beginning before January 1, 
1992, a reasonable interpretation of the rules set forth in sections 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. For plan years beginning before January 1, 1992, a 
plan may be restructured only in accordance with Sec. 1.401(k)-
1(h)(3)(iii) or Sec. 1.401(m)-1(g)(5)(ii).

[T.D. 8357, 56 FR 40543, Aug. 15, 1991, as amended at 57 FR 10290, Mar. 
25, 1992; T.D. 8581, 59 FR 66179, Dec. 23, 1994]