[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: 26CFR1.401-4]

[Page 19-23]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.401-4  Discrimination as to contributions or benefits (before 1994).

    (a)(1)(i) In order to qualify under section 401(a), a trust must not 
only meet the coverage requirements of section 401(a)(3), but, as 
provided in section 401(a)(4), it must also be part of a plan under 
which there is no discrimination in contributions or benefits in favor 
of officers, shareholders, employees whose principal duties consist in 
supervising the work of other employees, or highly compensated employees 
as against other employees whether within or without the plan.
    (ii) Since, for the purpose of section 401, a profit-sharing plan is 
a plan which provides for distributing the funds accumulated under the 
plan after a fixed number of years, the attainment of a stated age, or 
upon the prior occurrence of some event such as illness, disability, 
retirement, death, layoff, or severance of employment, any amount 
allocated to an employee which is withdrawn before the expiration of 
such a period of time or the occurrence of such a contingency shall not 
be considered in determining whether the contributions under the plan 
discriminate in favor of officers, shareholders, employees whose 
principal duties consist in supervising the work of other employees, or 
highly compensated employees. Thus, in case a plan permits employees to 
receive immediately the whole or any part of the amounts allocated to 
their accounts, or to have the whole or any part of such amounts paid to 
a profit-sharing plan for them, any amounts which are received 
immediately shall not, for the purpose of section 401, be considered 
contributed to a profit-sharing plan.
    (iii) Funds in a stock bonus or profit-sharing plan arising from 
forfeitures on termination of service, or other reason, must not be 
allocated to the remaining participants in such a manner as will effect 
the prohibited discrimination. With respect to forfeitures in a pension 
plan, see Sec. 1.401-7.
    (2)(i) Section 401(a)(5) sets out certain provisions which will not 
in and of themselves be discriminatory within the meaning of section 401 
a) (3) or (4). See Sec. 1.401-3. Thus, a plan will not be considered 
discriminatory merely because the contributions or benefits bear a 
uniform relationship to total compensation or to the basic or regular 
rate of compensation, or merely because the contributions or benefits 
based on that part of the annual compensation of employees which is 
subject to the Federal Insurance Contributions Act (chapter 21 of the 
Code) differ from the contributions or benefits based on any excess of 
such annual compensation over such part. With regard to the application 
of the rules of section 401(a)(5) in the case of a plan which benefits a 
self-employed individual, see paragraph (c) of Sec. 1.401-11.
    (ii) The exceptions specified in section 401(a)(5) are not an 
exclusive enumeration, but are merely a recital of provisions frequently 
encountered which will not of themselves constitute forbidden 
discrimination in contributions or benefits.

[[Page 20]]

    (iii) Variations in contributions or benefits may be provided so 
long as the plan, viewed as a whole for the benefit of employees in 
general, with all its attendant circumstances, does not discriminate in 
favor of employees within the enumerations with respect to which 
discrimination is prohibited. Thus, benefits in a stock bonus or profit-
sharing plan which vary by reason of an allocation formula which takes 
into consideration years of service, or other factors, are not 
prohibited unless they discriminate in favor of such employees.
    (b) A plan which excludes all employees whose entire remuneration 
constitutes wages under section 3121(a)(1) (relating to the Federal 
Insurance Contributions Act), or a plan under which the contributions or 
benefits based on that part of an employee's remuneration which is 
excluded from ``wages'' under such act differs from the contributions or 
benefits based on that part of the employee's remuneration which is not 
so excluded, or a plan under which the contributions or benefits differ 
because of any retirement benefit created under State or Federal law, 
will not be discriminatory because of such exclusion or difference, 
provided the total benefits resulting under the plan and under such law 
establish an integrated and correlated retirement system satisfying the 
tests of section 401(a).
    (c)(1) Although a qualified plan may provide for termination at will 
by the employer or discontinuance of contributions thereunder, this will 
not of itself prevent a trust from being a qualified trust. However, a 
qualified pension plan must expressly incorporate provisions which 
comply with the restrictions contained in subparagraph (2) of this 
paragraph at the time the plan is established, unless (i) it is 
reasonably certain at the inception of the plan that such restrictions 
would not affect the amount of contributions which may be used for the 
benefit of any employee, or (ii) the Commissioner determines that such 
provisions are not necessary to prevent the prohibited discrimination 
that may occur in the event of any early termination of the plan. 
Although these provisions are the only provisions required to be 
incorporated in the plan to prevent the discrimination that may arise 
because of an early termination of the plan, the plan may in operation 
result in the discrimination prohibited by section 401(a)(4), unless 
other provisions are later incorporated in the plan. Any pension plan 
containing a provision described in this paragraph shall not fail to 
satisfy section 411(a), (d)(2) and (d)(3) merely by reason of such a 
plan provision. Paragraph (c)(7) of this section sets forth special 
early termination rules applicable to certain qualified defined benefit 
plans for plan years affected by the Employee Retirement Income Security 
Act of 1974 (``ERISA''). Paragraph (c)(7) of this section does not 
contain all the rules required by the enactment of ERISA.
    (2)(i) If employer contributions under a qualified pension plan may 
be used for the benefit of an employee who is among the 25 highest paid 
employees of the employer at the time the plan is established and whose 
anticipated annual pension under the plan exceeds $1,500, such plan must 
provide that upon the occurrence of the conditions described in 
subdivision (ii) of this subparagraph, the employer contributions which 
are used for the benefit of any such employee are restricted in 
accordance with subdivision (iii) of this subparagraph.
    (ii) The restrictions described in subdivision (iii) of this 
subparagraph become applicable if--
    (A) The plan is terminated within 10 years after its establishment,
    (B) The benefits of an employee described in subdivision (i) of this 
subparagraph become payable within 10 years after the establishment of 
the plan, or
    (C) The benefits of an employee described in subdivision (i) of this 
subparagraph become payable after the plan has been in effect for 10 
years, and the full current costs of the plan for the first 10 years 
have not been funded. In the case of an employee described in (B) of 
this subdivision, the restrictions will remain applicable until the plan 
has been in effect for 10 years, but if at that time the full current 
costs have been funded the restrictions will no longer apply to the 
benefits payable to

[[Page 21]]

such an employee. In the case of an employee described in (B) or (C) of 
this subdivision, if at the end of the first 10 years the full current 
costs are not met, the restrictions will continue to apply until the 
full current costs are funded for the first time.
    (iii) The restrictions required under subdivision (i) of this 
subparagraph must provide that the employer contributions which may be 
used for the benefit of an employee described in such subdivision shall 
not exceed the greater of $20,000, or 20 percent of the first $50,000 of 
the annual compensation of such employee multiplied by the number of 
years between the date of the establishment of the plan and--
    (A) The date of the termination of the plan,
    (B) In the case of an employee described in subdivision (ii)(B) of 
this subparagraph, the date the benefit of the employee becomes payable, 
if before the date of the termination of the plan, or
    (C) In the case of an employee described in subdivision (ii)(C) of 
this subparagraph, the date of the failure to meet the full current 
costs of the plan. However, if the full current costs of the plan have 
not been met on the date described in (A) or (B) of this subdivision, 
whichever is applicable, then the date of the failure to meet such full 
current costs shall be substituted for the date referred to in (A) or 
(B) of this subdivision. For purposes of determining the contributions 
which may be used for the benefit of an employee when (b) of this 
subdivision applies, the number of years taken into account may be 
recomputed for each year if the full current costs of the plan are met 
for such year.
    (iv) For purposes of this subparagraph, the employer contributions 
which, at a given time, may be used for the benefits of an employee 
include any unallocated funds which would be used for his benefits if 
the plan were then terminated or the employee were then to withdraw from 
the plan, as well as all contributions allocated up to that time 
exclusively for his benefits.
    (v) The provisions of this subparagraph apply to a former or retired 
employee of the employer, as well as to an employee still in the 
employer's service.
    (vi) The following terms are defined for purposes of this 
subparagraph--
    (A) The term ``benefits'' includes any periodic income, any 
withdrawal values payable to a living employee, and the cost of any 
death benefits which may be payable after retirement on behalf of an 
employee, but does not include the cost of any death benefits with 
respect to an employee before retirement nor the amount of any death 
benefits actually payable after the death of an employee whether such 
death occurs before or after retirement.
    (B) The term full current costs means the normal cost, as defined in 
Sec. 1.404(a)-6, for all years since the effective date of the plan, 
plus interest on any unfunded liability during such period.
    (C) The term annual compensation of an employee means either such 
employee's average regular annual compensation, or such average 
compensation over the last five years, or such employee's last annual 
compensation if such compensation is reasonably similar to his average 
regular annual compensation for the five preceding years.
    (3) The amount of the employer contributions which can be used for 
the benefit of a restricted employee may be limited either by limiting 
the annual amount of the employer contributions for the designated 
employee during the period affected by the limitation, or by limiting 
the amount of funds under the plan which can be used for the benefit of 
such employee, regardless of the amount of employer contributions.
    (4) The restrictions contained in subparagraph (2) of this paragraph 
may be exceeded for the purpose of making current retirement income 
benefit payments to retired employees who would otherwise be subject to 
such restrictions, if--
    (i) The employer contributions which may be used for any such 
employee in accordance with the restrictions contained in subparagraph 
(2) of this paragraph are applied either (A) to provide level amounts of 
annuity in the basic form of benefit provided for under the plan for 
such employee at retirement (or, if he has already retired, beginning 
immediately), or (B) to provide level amounts of annuity in an optional

[[Page 22]]

form of benefit provided under the plan if the level amount of annuity 
under such optional form of benefit is not greater than the level amount 
of annuity under the basic form of benefit provided under the plan;
    (ii) The annuity thus provided is supplemented, to the extent 
necessary to provide the full retirement income benefits in the basic 
form called for under the plan, by current payments to such employee as 
such benefits come due; and
    (iii) Such supplemental payments are made at any time only if the 
full current costs of the plan have then been met, or the aggregate of 
such supplemental payments for all such employees does not exceed the 
aggregate employer contributions already made under the plan in the year 
then current.


If disability income benefits are provided under the plan, the plan may 
contain like provisions with respect to the current payment of such 
benefits.
    (5) If a plan has been changed so as to increase substantially the 
extent of possible discrimination as to contributions and as to benefits 
actually payable in event of the subsequent termination of the plan or 
the subsequent discontinuance of contributions thereunder, then the 
provisions of this paragraph shall be applied to the plan as so changed 
as if it were a new plan established on the date of such change. 
However, the provision in subparagraph (2)(iii) of this paragraph that 
the unrestricted amount of employer contributions on behalf of any 
employee is at least $20,000 is applicable to the aggregate amount 
contributed by the employer on behalf of such employee from the date of 
establishment of the original plan, and, for purposes of determining if 
the employee's anticipated annual pension exceeds $1,500, both the 
employer contributions on the employee's behalf prior to the date of the 
change in the plan and those expected to be made on his behalf 
subsequent to the date of the change (based on the employee's rate of 
compensation on the date of the change) are to be taken into account.
    (6) This paragraph shall apply to taxable years of a qualified plan 
commencing after September 30, 1963. In the case of an early termination 
of a qualified pension plan during any such taxable year, the employer 
contributions which may be used for the benefit of any employee must 
conform to the requirements of this paragraph. However, any pension plan 
which is qualified on September 30, 1963, will not be disqualified 
merely because it does not expressly include the provisions prescribed 
in this paragraph.
    (7)(i) A qualified defined benefit plan subject to section 412 
(without regard to section 412(h)(2)) shall not be required to contain 
the restriction described in paragraph (c)(2)(ii)(c) of this section 
applicable to an employee in a plan whose full current costs for the 
first 10 years have not been funded.
    (ii) A qualified defined benefit plan covered by section 4021(a) of 
ERISA (``qualified Title IV plan'') shall satisfy the restrictions in 
paragraph (c)(2) of this section only if the plan satisfies this 
paragraph (c)(7). A plan satisfies this paragraph (c)(7) by providing 
that employer contributions which may be used for the benefit of an 
employee described in paragraph (c)(2) of this section who is a 
substantial owner, as defined in section 4022(b)(5) of ERISA, shall not 
exceed the greater of the dollar amount described in paragraph 
(c)(2)(iii) of this section or a dollar amount which equals the present 
value of the benefit guaranteed for such employee under section 4022 of 
ERISA, or if the plan has not terminated, the present value of the 
benefit that would be guaranteed if the plan terminated on the date the 
benefit commences, determined in accordance with regulations of the 
Pension Benefit Guaranty Corporation (``PBGC'').
    (iii) A plan satisfies this paragraph (c)(7) by providing that 
employer contributions which may be used for the benefit of all 
employees described in paragraph (c)(2) of this section (other than an 
employee who is a substantial owner as defined in section 4022(b)(5) of 
ERISA) shall not exceed the greater of the dollar amount described in 
paragraph (c)(2)(iii) of this section or a dollar amount which equals 
the present value of the maximum benefit described in section 
4022(b)(3)(B) of ERISA (determined on the date the plan terminates or on 
the date benefits

[[Page 23]]

commence, whichever is earlier and determined in accordance with 
regulations of PBGC) without regard to any other limitations in section 
4022 of ERISA.
    (iv) A plan provision satisfying this paragraph (c)(7) may be 
adopted by amendment or by incorporation at the time of establishment. 
Any allocation of assets attributable to employer contributions to an 
employee which exceeds the dollar limitation in this paragraph (c)(7) 
may be reallocated to prevent prohibited discrimination.
    (v) The early termination rules in the preceding subparagraphs (1) 
through (6) apply to a qualified Title IV plan except where such rules 
are determined by the Commissioner to be inconsistent with the rules of 
this paragraph (c)(7), Sec. 1.411(d)-2, and section 4044(b)(4) of 
ERISA. The early termination rules of this paragraph (c)(7) contain some 
of the rules under section 401(a)(4) and (a)(7), as in effect on 
September 2, 1974, and section 411(d) (2) and (3). Section 1.411(d)-2 
also contains certain discrimination and vesting rules which are 
applicable to plan terminations.
    (vi) Paragraph (c)(7) of this section applies to plan terminations 
occurring on or after March 12, 1984. For distributions not on account 
of plan terminations, paragraph (c)(7) applies to distributions in plan 
years beginning after December 31, 1983. However, a plan may elect to 
apply that paragraph to distributions not on account of plan termination 
on or after January 10, 1984.
    (d)(1) Except as provided in paragraph (d)(2) of this section, the 
provisions of this section do not apply to plan years beginning on or 
after January 1, 1994. For rules applicable to plan years beginning on 
or after January 1, 1994, see Sec. Sec. 1.401(a)(4)-1 through 
1.401(a)(4)-13.
    (2) In the case of plans maintained by organizations exempt from 
income taxation under section 501(a), including plans subject to section 
403(b)(12)(A)(i) (nonelective plans), the provisions of this section do 
not apply to plan years beginning on or after January 1, 1996. For rules 
applicable to plan years beginning on or after January 1, 1996, see 
Sec. Sec. 1.401(a)(4)-1 through 1.401(a)(4)-13.

(Secs. 411 (d)(2) and (3) and 7805 of the Internal Revenue Code of 1954 
(68A Stat. 917, 88 Stat. 912; 26 U.S.C. 411(d)(2) and (3) and 7805))

[T.D. 6500, 25 FR 11674, Nov. 26, 1960, as amended by T.D. 6675, 28 FR 
10119, Sept. 17, 1963; T.D. 7934, 49 FR 1183, Jan. 10, 1984; 49 FR 2104, 
Jan. 18, 1984; T.D. 8360, 56 FR 47536, Sept. 19, 1991; T.D. 8485, 58 FR 
46778, Sept. 3, 1993]