[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: 26CFR1.410(b)-5]

[Page 561-566]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.410(b)-5  Average benefit percentage test.

    (a) General rule. A plan satisfies the average benefit percentage 
test of this section for a plan year if and only if the average benefit 
percentage of the plan for the plan year is at least 70 percent. A plan 
is deemed to satisfy this requirement if it satisfies paragraph (f) of 
this section for the plan year.
    (b) Determination of average benefit percentage. The average benefit 
percentage of a plan for a plan year is the percentage determined by 
dividing the actual benefit percentage of the nonhighly compensated 
employees in plans in the testing group for the testing period that 
includes the plan year by the actual benefit percentage of the highly 
compensated employees in plans in the

[[Page 562]]

testing group for that testing period. See paragraph (d)(3)(ii) of this 
section for the definition of testing period.
    (c) Determination of actual benefit percentage. The actual benefit 
percentage of a group of employees for a testing period is the average 
of the employee benefit percentages, calculated separately with respect 
to each of the employees in the group for the testing period. All 
nonexcludable employees of the employer are taken into account for this 
purpose, even if they are not benefiting under any plan that is taken 
into account.
    (d) Determination of employee benefit percentages--(1) Overview. 
This paragraph (d) provides rules for determining employee benefit 
percentages. See paragraph (e) of this section for alternative methods 
for determining employee benefit percentages.
    (2) Employee contributions and employee-provided benefits 
disregarded. Only employer-provided contributions and benefits are taken 
into account in determining employee benefit percentages. Therefore, 
employee contributions (including both employee contributions allocated 
to separate accounts and employee contributions not allocated to 
separate accounts), and benefits derived from such contributions, are 
not taken into account in determining employee benefit percentages.
    (3) Plans and plan years taken into account--(i) Testing group. All 
plans included in the testing group under Sec. 1.410(b)-7(e)(1), and 
only those plans, are taken into account in determining an employee's 
employee benefit percentage.
    (ii) Testing period. An employee's employee benefit percentage is 
determined on the basis of plan years ending with or within the same 
calendar year. These plan years are referred to in this section as the 
relevant plan years or, in the aggregate, as the testing period.
    (4) Contributions or benefits basis. Employee benefit percentages 
may be determined on either a contributions or a benefits basis. 
Employee benefit percentages for any testing period must be determined 
on the same basis (contributions or benefits) for all plans in the 
testing group.
    (5) Determination of employee benefit percentage--(i) General rule. 
The employee benefit percentage for an employee for a testing period is 
the rate that would be determined for that employee for purposes of 
applying the general test for nondiscrimination in Sec. Sec. 
1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8 or 1.401(a)(4)-9, if all the 
plans in the testing group were aggregated for purposes of section 
410(b). Thus, if employee benefit percentages are determined on a 
contributions basis, each employee's employee benefit percentage is the 
aggregate normal allocation rate that would be determined for the 
employee under Sec. 1.401(a)(4)-9(b)(2)(ii)(A) (if the plans in the 
testing group include both defined benefit and defined contribution 
plans), the allocation rate that would be determined for the employee 
under Sec. 1.401(a)(4)-2(c)(2) (if the plans in the testing group 
include only defined contribution plans), or the equivalent normal 
allocation rate that would be determined for the employee under Sec. 
1.401(a)(4)-8(c)(2) (if the plans in the testing group include only 
defined benefit plans). Similarly, if employee benefit percentages are 
determined on a benefits basis, each employee's employee benefit 
percentage is the aggregate normal accrual rate that would be determined 
for the employee under Sec. 1.401(a)(4)-9(b)(2)(ii)(B), the normal 
accrual rate that would be determined for the employee under Sec. 
1.401(a)(4)-3(d), or the equivalent accrual rate that would be 
determined for the employee under Sec. 1.401(a)(4)-8(b)(2), depending 
on whether the plans in the testing group include both defined benefit 
and defined contribution plans, only defined benefit plans, or only 
defined contribution plans.
    (ii) Plans with differing plan years. If not all the plans in the 
testing group share the same plan year, Sec. 1.410(b)-7(d)(5) would 
ordinarily prohibit them from being aggregated for purposes of section 
410(b). In such a case, employee benefit percentages are determined by 
applying the rules of paragraph (d)(5)(i) of this section separately to 
each subset of plans in the testing group that share the same plan year 
(or the same accrual computation period) and aggregating the results for 
all plans in the

[[Page 563]]

testing group. Thus, an employee's employee benefit percentage is 
determined as the sum of these separate employee benefit percentages 
that are determined consistently for all the plans in the testing group 
(except for differences attributable solely to the differences in plan 
years).
    (iii) Options and consistency requirements. In determining employee 
benefit percentages under this paragraph (d)(5), any optional or 
alternative methods or rules available for determining rates in 
Sec. Sec. 1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8, or 1.401(a)(4)-
9, whichever is applicable, may be applied. Thus, for example, employee 
benefit percentages may generally be calculated using any of the 
alternative methods of determining average annual compensation or plan 
year compensation under Sec. 1.401(a)(4)-12, and using any underlying 
definition of compensation that satisfies section 414(s). Except as 
otherwise specifically permitted, the determination of employee benefit 
percentages must be made on a consistent basis for all employees and for 
all plans in the testing group as required by Sec. Sec. 1.401(a)(4)-
2(c)(2)(vi), 1.401(a)(4)-3(d)(2)(i), 1.401(a)(4)-8(b)(2)(iv), 
1.401(a)(4)-8(c)(2)(iv) or 1.401(a)(4)-9(b)(2)(iv).
    (6) Permitted disparity--(i) In general. Permitted disparity may be 
imputed in determining employee benefit percentages as provided in 
Sec. Sec. 1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8, or 1.401(a)(4)-
9, whichever is applicable. When separate employee benefit percentages 
are determined for individual plans under paragraph (e)(2) of this 
section (or for subsets of plans that have the same plan year as 
described in paragraph (d)(5)(ii) of this section), permitted disparity 
may be imputed for an employee only in one individual plan (or subset of 
plans) and may not be imputed for the same employee in another 
individual plan (or subset of plans). However, if the same average 
annual compensation or plan year compensation is used to determine 
employee benefit percentages in more than one plan, the employee's 
employee benefit percentages for those plans may be summed prior to 
imputing permitted disparity.
    (ii) Plans which may not use permitted disparity. Permitted 
disparity may be reflected in the determination of rates only to the 
extent that the plans for which rates are being determined are plans for 
which the permitted disparity of section 401(l) is available. Thus, for 
example, if a section 401(k) plan is included in the testing group and 
permitted disparity is imputed under Sec. 1.401(a)(4)-2(c)(iv), then 
employee benefit percentages are determined by first calculating an 
adjusted allocation rate (within the meaning of Sec. 1.401(a)(4)-
7(b)(1)) without regard to the amount of allocations under the section 
401(k) plan and adding to it the allocation rate for the section 401(k) 
plan. See Sec. 1.401(l)-1(a)(4) for a list of types of plans for which 
permitted disparity is not available.
    (7) Requirements for certain plans providing early retirement 
benefits--(i) General rule. If any defined benefit plan in the testing 
group provides for early retirement benefits in addition to normal 
retirement benefits to any highly compensated employee, and the average 
actuarial reduction for any one of these benefits commencing in the five 
years prior to the plan's normal retirement age is less than four 
percent per year, then the aggregate most valuable allocation rate, 
equivalent most valuable allocation rate, aggregate most valuable 
accrual rate, or most valuable accrual rate must be substituted for the 
related normal rates in paragraph (d)(5) of this section.
    (ii) Exception. Paragraph (d)(7)(i) of this section does not apply 
if early retirement benefits with average actuarial reductions described 
in that paragraph are currently available, within the meaning of Sec. 
1.401(a)(4)-4(b), under plans in the testing group to a percentage of 
nonhighly compensated employees that is at least 70 percent of the 
percentage of highly compensated employees to whom these benefits are 
currently available.
    (e) Additional optional rules--(1) Overview. This paragraph (e) 
contains various alternative methods for determining employee benefit 
percentages for a testing period.
    (2) Determination of employee benefit percentages as the sum of 
separately determined rates--(i) In general. Employee benefit 
percentages may be determined as the sum of separately determined

[[Page 564]]

employee benefit percentages for each of the plans in the testing group 
that are aggregated under paragraphs (d)(5) (i) or (ii) of this section, 
provided that these employee benefit percentages are determined on a 
consistent basis for all of these plans pursuant to paragraph 
(d)(5)(iii) of this section.
    (ii) Exception from consistency requirement. The consistency 
requirement of paragraph (e)(2)(i) of this section is not violated 
merely because employee benefit percentages are not determined in a 
consistent manner for all of the plans in the testing group and the 
inconsistencies in determination of rates among plans are described in 
paragraph (e)(2)(iii) of this section. The exception in this paragraph 
(e)(2)(ii) applies only if it is reasonable to believe that the 
inconsistencies do not result in an average benefit percentage that is 
significantly higher than the average benefit percentage that would be 
determined had employee benefit percentages been determined on a 
consistent basis pursuant to paragraph (d)(5)(iii) of this section.
    (iii) Permitted inconsistencies. The following inconsistencies 
between plans are permitted under this paragraph (e)(2)--
    (A) Use of different underlying definitions of section 414(s) 
compensation in the determination of rates;
    (B) Use of different definitions of average annual compensation;
    (C) Use of different testing ages;
    (D) Use of different fresh-start dates;
    (E) Use of different actuarial assumptions for normalization; or
    (F) Disregard of actuarial increases after normal retirement age and 
QPSA charges without regard to any requirement for uniformity in the 
actuarial increases or QPSA charges.
    (3) Determination of employee benefit percentages without regard to 
plans of another type--(i) General rule. Employee benefit percentages 
may be determined under plans of one type (i.e., defined benefit plans 
or defined contribution plans) by treating all plans of the other type 
(i.e., defined contribution plans or defined benefit plans, 
respectively) as if they were not part of the testing group, using the 
method provided in this paragraph (e)(3). If this method is used to 
determine whether a defined contribution plan satisfies the average 
benefit percentage test, employee benefit percentages under all defined 
contribution plans in the testing group must be determined on a 
contributions basis, and benefits under any defined benefit plans may 
not be included in the employee benefit percentage. Similarly, if this 
method is used to determine whether a defined benefit plan satisfies the 
average benefit percentage test, employee benefit percentages under all 
defined benefit plans in the testing group must be determined on a 
benefits basis, and allocations under any defined contribution plans may 
not be included in the employee benefit percentage.
    (ii) Restriction on use of separate testing group determination 
method. A plan does not satisfy the average benefit percentage test 
using the method provided in this paragraph (e)(3) unless each of the 
plans in the testing group of the other type (i.e., defined benefit plan 
or defined contribution plan) than the plan being tested satisfies the 
average benefit test of Sec. 1.410(b)-2(b)(3) using the method in this 
paragraph (e)(3) or satisfies the ratio percentage test of Sec. 
1.410(b)-2(b)(2).
    (iii) Treatment of permitted disparity. Although under the general 
rule of this paragraph (e)(3) plans of another type are disregarded in 
determining employee benefit percentages, the permitted disparity used 
by those plans (including any permitted disparity that is used by those 
plans to satisfy Sec. 1.401(a)(4)-1(b)(2)) is nonetheless taken into 
account in determining the extent to which permitted disparity may be 
used in determining employee benefit percentages.
    (iv) Example. The following example illustrates the rules of this 
paragraph (e)(3):

    Example. Employer A maintains two defined benefit plans, neither of 
which covers a group of employees that satisfies the ratio percentage 
test of Sec. 1.410(b)-2(b)(2), and a profit-sharing plan and a section 
401(k) plan, each of which benefits a group of employees that satisfies 
the ratio percentage test of Sec. 1.410(b)-2(b)(2). The defined benefit 
plans will satisfy the average benefit percentage test if the actual 
benefit percentage of all nonexcludable nonhighly compensated employees, 
computed on a benefits basis without regard to contributions under the 
profit-

[[Page 565]]

sharing plan or the section 401(k) plan, is at least 70 percent of the 
actual benefit percentage of all nonexcludable highly compensated 
employees, computed on a benefits basis without regard to contributions 
under the profit-sharing plan or the section 401(k) plan.

    (4) Simplified method for determining employee benefit percentages 
for certain defined benefit plans--(i) In general. An employee's 
employee benefit percentage with respect to a plan may be determined 
under the simplified method of paragraph (e)(4)(ii) of this section, 
provided the following conditions are satisfied:
    (A) The only plans included in the testing group are defined benefit 
plans, and employee benefit percentages under these plans are determined 
on a benefits basis.
    (B) Employee benefit percentages under the plans in the testing 
group are not required to be determined by taking into account early 
retirement benefits under paragraph (d)(7) of this section.
    (C) The plan is a safe harbor defined benefit plan described in 
Sec. 1.401(a)(4)-3(b).
    (ii) Simplified method--(A) Section 401(l) plans. Under the 
simplified method of this paragraph (e)(4)(ii), an employee's employee 
benefit percentage with respect to a section 401(l) plan described in 
Sec. 1.401(a)(4)-3(b)(3) (i.e., a unit credit plan) may be deemed equal 
to the employee's excess benefit percentage or gross benefit percentage 
(as defined in Sec. 1.401(l)-1(c) (14) or (18), respectively), 
whichever is applicable under the plan's benefit formula in the plan 
year. In the case of a section 401(l) plan described in Sec. 
1.401(a)(4)-3(b)(4) (i.e., a fractional accrual plan), an employee's 
employee benefit percentage with respect to that plan may be deemed 
equal to the rate at which the excess or gross benefit, whichever is 
applicable, accrues for the employee in the plan year, taking into 
account the plan's benefit formula and the employee's projected service 
at normal retirement age. The use of this simplified method will be 
treated as an imputation of permitted disparity. See paragraph (d)(6) of 
this section for a restriction on multiple use of permitted disparity.
    (B) Other plans. Under the simplified method of this paragraph 
(e)(4)(ii), an employee's employee benefit percentage with respect to a 
plan described in Sec. 1.401(a)(4)-3(b)(3) that is not a section 401(l) 
plan and that is not imputing permitted disparity may be deemed equal to 
the employee's benefit rate in the plan year under the plan's benefit 
formula. In the case of a plan described in Sec. 1.401(a)(4)-3(b)(4) 
that is not a section 401(l) plan and that is not imputing permitted 
disparity, an employee's employee benefit percentage with respect to 
that plan may be deemed equal to the rate at which the benefit accrues 
for the employee in the plan year, taking into account the plan's 
benefit formula and an employee's projected service at normal retirement 
age.
    (5) Three-year averaging period. An employee's employee benefit 
percentage may be determined for a testing period as the average of the 
employee's employee benefit percentages determined separately for the 
testing period and for the immediately preceding one or two testing 
periods (referred to in this section as an averaging period). Employee 
benefit percentages of a particular employee that are averaged together 
within an averaging period must be determined on a consistent basis for 
all testing periods within the averaging period.
    (6) Alternative methods of determining compensation. Employee 
benefit percentages may be determined on the basis of any definition of 
compensation that satisfies Sec. 1.414(s)-1(d) (without regard to 
whether the definition satisfies Sec. 1.414(s)-1(d)(3)), provided that 
the same definition is used for all employees and it is reasonable to 
believe that the definition does not result in an average benefit 
percentage that is significantly higher than the average benefit 
percentage that would be determined had employee benefit percentages 
been determined using a definition of compensation that also satisfies 
Sec. 1.414(s)-1(d)(3).
    (f) Special rule for certain collectively bargained plans. A plan 
(as determined without regard to the mandatory disaggregation rule of 
Sec. 1.410(b)-7(c)(5)) that benefits both collectively bargained 
employees and noncollectively

[[Page 566]]

bargained employees is deemed to satisfy the average benefit percentage 
test of this section if--
    (1) The provisions of the plan applicable to each employee in the 
plan are identical to the provisions of the plan applicable to every 
other employee in the plan, including the plan benefit or allocation 
formula, any optional forms of benefit, any ancillary benefit, and any 
other right or feature under the plan, and
    (2) The plan would satisfy the ratio percentage test of Sec. 
1.410(b)-2(b)(2), if Sec. Sec. 1.410(b)-6(d) and 1.410(b)-7(c)(5) (the 
excludable employee and mandatory disaggregation rules for collectively 
bargained and noncollectively bargained employees) did not apply.

[T.D. 8363, 56 FR 47646, Sept. 19, 1991; 57 FR 10817, 10954, Mar. 31, 
1992, as amended by T.D. 8487, 58 FR 46840, Sept. 3, 1993]