Nondiscrimination Relief for Closed Defined Benefit Pension Plans and Additional Changes to the Retirement Plan Nondiscrimination Requirements, 4976-4986 [2016-01675]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 81, Number 19 (Friday, January 29, 2016)]
[Proposed Rules]
[Pages 4976-4986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01675]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 81, No. 19 / Friday, January 29, 2016 / 
Proposed Rules

[[Page 4976]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-125761-14]
RIN 1545-BM58


Nondiscrimination Relief for Closed Defined Benefit Pension Plans 
and Additional Changes to the Retirement Plan Nondiscrimination 
Requirements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that modify the 
nondiscrimination requirements applicable to certain retirement plans 
that provide additional benefits to a grandfathered group of employees 
following certain changes in the coverage of a defined benefit plan or 
a defined benefit plan formula. The proposed regulations also make 
certain other changes to the nondiscrimination rules that are not 
limited to these plans. These regulations would affect participants in, 
beneficiaries of, employers maintaining, and administrators of tax-
qualified retirement plans.

DATES: Written or electronic comments and must be received by April 28, 
2016. Outlines of topics to be discussed at the public hearing 
scheduled for May 19, 2016 at 10 a.m., must be received by April 28, 
2016.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-125761-14), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
125761-14), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-125761-14).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Kelly C. 
Scanlon and Linda S. F. Marshall at (202) 317-6700; concerning 
submissions of comments, the hearing, and/or being placed on the 
building access list to attend the hearing, Oluwafunmilayo (Funmi) 
Taylor at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 401(a)(4) provides generally that a plan is a qualified 
plan only if the contributions or benefits provided under the plan do 
not discriminate in favor of highly compensated employees. In 1991, the 
Treasury Department and the IRS issued comprehensive regulations under 
section 401(a)(4) (TD 8360, 56 FR 47524) setting forth several 
alternative methods for testing compliance with this statutory 
requirement. In 1993, the Treasury Department and the IRS made 
significant amendments to those regulations (TD 8485, 58 FR 46773).
    Under the section 401(a)(4) regulations, a plan is permitted to 
demonstrate that either the contributions or the benefits provided 
under the plan are nondiscriminatory in amount, regardless of whether 
the plan is a defined benefit or defined contribution plan. See Sec.  
1.401(a)(4)-1(b)(2). In order to test a defined contribution plan on 
the basis of benefits, the amounts allocated to employees under the 
plan must be converted to equivalent benefits. This conversion is done 
using an interest rate between 7.5% and 8.5%.\1\ In addition, for 
purposes of section 401(a)(4), a defined benefit plan and a defined 
contribution plan are permitted to be aggregated and treated as a 
single plan pursuant to Sec.  1.401(a)(4)-9, which refers to such an 
aggregated plan as a DB/DC plan.
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    \1\ See Sec.  1.401(a)(4)-8(c)(2)(ii) and Sec.  1.401(a)(4)-12 
(definition of standard interest rate). This standard interest rate 
is used to determine assumed growth of a defined contribution plan 
account and to convert the projected account balance to an annuity 
at normal retirement age.
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    After issuance of the final regulations, a new type of plan design 
developed. This type of plan is often referred to as a ``new 
comparability'' plan and is typically a defined contribution plan that 
provides higher allocation rates to an older and more highly 
compensated group of employees. This type of plan nonetheless satisfies 
the nondiscrimination requirements by testing the contributions on the 
basis of equivalent benefits because the conversion to equivalent 
benefits reflects assumed growth to normal retirement age and therefore 
results in relatively lower equivalent benefits for the highly 
compensated employees who are closer to normal retirement age. The 
Treasury Department and the IRS concluded that this type of plan was 
inconsistent with the intent behind the nondiscrimination regulations. 
Consequently, the Treasury Department and the IRS amended the section 
401(a)(4) regulations in 2001 to require that a new comparability plan 
provide a higher minimum contribution to nonhighly compensated 
employees \2\ in order for the plan to be eligible to demonstrate 
compliance with the nondiscrimination requirements of section 401(a)(4) 
on the basis of equivalent benefits (TD 8954, 66 FR 34535) (the ``2001 
amendments'').
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    \2\ This higher minimum contribution rate is required under 
Sec.  1.401(a)(4)-8(b)(1)(i)(B)(3) and (b)(1)(vi).
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    This higher minimum contribution requirement was directed at the 
new comparability plans. Other defined contribution plans that provide 
``broadly available allocation rates'' or allocation rates that are 
``based on a gradual age or service schedule'' are not subject to the 
higher minimum contribution requirement even if they demonstrate 
compliance with the nondiscrimination requirements of section 401(a)(4) 
on the basis of equivalent benefits.\3\ In addition, under the 2001 
amendments, defined benefit replacement allocations (``DBRAs'') may be 
disregarded when determining whether a defined contribution plan has 
broadly available allocation rates. The 2001 amendments also prescribe 
rules regarding DB/DC plans that provide for benefits in a manner 
similar to new comparability plans. Under these rules (contained in 
Sec.  1.401(a)(4)-9(b)(2)(v)), in order for a DB/DC plan to be eligible 
to demonstrate compliance with the section 401(a)(4) nondiscrimination 
requirements on the basis of equivalent benefits, it must satisfy a 
minimum

[[Page 4977]]

aggregate allocation gateway unless the DB/DC plan either fits within 
the definition of ``primarily defined benefit in character'' or 
consists of ``broadly available separate plans.'' This minimum 
aggregate allocation gateway requires a minimum allocation rate (or 
equivalent allocation rate) for each nonhighly compensated employee.
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    \3\ See Sec.  1.401(a)(4)-8(b)(1)(i)(B)(1) and (2), (b)(1)(iii), 
and (b)(1)(iv).
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    Since 2001, a number of employers have moved away from providing 
retirement benefits through traditional defined benefit plans. In many 
of these cases, employers have either significantly changed the type of 
benefit formula provided under the plan (such as in the case of a 
conversion to a cash balance plan), or have prohibited new employees 
from entering the plan entirely. The employers may then have allowed 
employees who had already begun participation in the defined benefit 
plan (or who are older or have been credited with longer service under 
the plan) to continue to earn pension benefits under the defined 
benefit plan while closing the plan or formula to all other employees. 
These defined benefit plans are sometimes referred to as ``closed 
plans,'' and the employees who continue to earn pension benefits under 
the closed plan are often known as a ``grandfathered group of 
employees.'' In situations in which new employees continue to earn 
benefits under the defined benefit plan, but are under a new formula, 
any formula that continues to apply to a grandfathered group of 
employees is sometimes referred to as a ``closed formula.''
    Closed plans are required to meet the coverage rules under section 
410(b) and the nondiscrimination rules under section 401(a)(4) 
(including a nondiscrimination requirement regarding the availability 
of benefits, rights, and features). Many closed plans, however, may 
eventually find it difficult to meet these requirements because the 
proportion of the grandfathered group of employees who are highly 
compensated employees compared to the employer's total workforce 
increases over time. This occurs because members of the grandfathered 
group of employees usually continue to receive pay raises (and so may 
become highly compensated employees), and new employees (who are 
generally nonhighly compensated employees) are not covered by the 
closed plan.
    When a closed defined benefit plan can no longer meet the 
nondiscrimination requirements on a stand-alone basis because of the 
demographic changes previously described, it can demonstrate compliance 
with section 401(a)(4) by aggregating with the employer's defined 
contribution plan. In general, it is easier to meet the 
nondiscrimination requirements if the resulting DB/DC plan demonstrates 
compliance with section 401(a)(4) based on the benefits or equivalent 
benefits provided to the employees (rather than based on 
contributions).
    On January 6, 2014, the Treasury Department and the IRS published 
Notice 2014-5, 2014-2 I.R.B. 276. Notice 2014-5 provided temporary 
nondiscrimination relief for certain closed plans. Specifically, under 
Notice 2014-5, if certain criteria are satisfied,\4\ a plan sponsor is 
permitted to test a DB/DC plan that includes a closed plan that was 
closed before December 13, 2013, on a benefits basis for plan years 
beginning before January 1, 2016, without complying with the minimum 
aggregate allocation gateway, even if that would otherwise be required 
under the current regulations. Notice 2015-28, 2015-14 I.R.B. 848, 
extended that relief for an additional year by applying it to plan 
years beginning before 2017 provided that the conditions of Notice 
2014-5 are satisfied.
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    \4\ Generally, in order to be eligible for the relief provided 
by Notice 2014-5, each defined benefit plan that is part of an 
aggregated DB/DC plan must have satisfied the requirements of 
section 401(a)(4) without using the minimum aggregate allocation 
gateway under Sec.  1.401(a)(4)-9(b)(2)(v)(D). Thus, the defined 
benefit plan must have either been primarily defined benefit in 
character (within the meaning of Sec.  1.401(a)(4)-9(b)(2)(v)(B)), 
consisted of broadly available separate plans (within the meaning of 
Sec.  1.401(a)(4)-9(b)(2)(v)(C)), or satisfied the applicable 
nondiscrimination rules without being aggregated with a DC plan.
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    Notice 2014-5 also requested comments on whether the section 
401(a)(4) regulations should be amended to provide additional 
alternatives that would allow a DB/DC plan to satisfy the 
nondiscrimination in amount requirements on the basis of equivalent 
benefits, and whether certain other permanent changes should be made to 
the nondiscrimination regulations, such as modifications to the rules 
regarding nondiscriminatory benefits, rights, and features.\5\ The 
comments received in response to Notice 2014-5 generally supported 
these types of changes. In addition, all of the commenters requested 
permanent changes to the nondiscrimination requirements in order to 
make it easier for closed plans to continue to satisfy the 
nondiscrimination requirements.
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    \5\ Section 1.401(a)(4)-4 provides rules for determining whether 
the benefits, right, and features provided under a plan are made 
available in a nondiscriminatory manner. Under these rules, each 
benefit, right, or feature must satisfy the current availability 
requirement of Sec.  1.401(a)(4)-4(b) (which requires testing of the 
group to which the benefit, right, or feature is currently 
available) and the effective availability requirement of Sec.  
1.401(a)(4)-4(c) (which requires that the group of employees to whom 
the benefit, right, or feature is effectively available must not 
substantially favor highly compensated employees).
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    The Treasury Department and the IRS agree that permanent changes to 
the nondiscrimination rules should be made in order to help employers 
and plan sponsors preserve the retirement expectations of certain 
grandfathered groups of employees. These changes are meant to apply to 
situations in which the proportion of the grandfathered group of 
employees who are highly compensated employees compared to the 
employer's total workforce has increased due to ordinary demographic 
changes, as previously described in this preamble.

Explanation of Provisions

I. Overview

    The proposed regulations modify a number of provisions in the 
existing regulations under section 401(a)(4) to address situations and 
plan designs, including closed plans and formulas, that were not 
contemplated in the development of the regulations and the 2001 
amendments. While many of the changes in the proposed regulations 
provide nondiscrimination relief for certain closed plans and formulas, 
the proposed regulations also include other changes that are not 
limited to closed plans and formulas.

II. Rules Related to Closed Plans and Similar Arrangements

    The proposed regulations set forth special rules that allow closed 
plans and similar arrangements to satisfy the nondiscrimination rules 
in additional situations. These special rules are based on the existing 
rules for DBRAs, as modified to respond to concerns raised by 
stakeholders with respect to those existing rules.
    Under the proposed regulations, the eligibility conditions set 
forth in the modified DBRA rules (described in section II.A of this 
portion of the preamble) provide a framework for the eligibility 
conditions for the snapshot rule related to closed plans in a DB/DC 
plan (described in section II.B of this portion of the preamble). The 
modified DBRA rules are also used as a basis for the special testing 
rule for benefits, rights, and features provided to a grandfathered 
group of employees (described in section II.C of this portion of the 
preamble). For example, the special testing rule for a benefit, right, 
or feature provided to a grandfathered group of employees under a 
defined contribution plan establishes nondiscrimination relief for 
matching contributions provided to a

[[Page 4978]]

grandfathered group of employees who formerly participated in a defined 
benefit plan that is intended to be consistent with the 
nondiscrimination relief provided by the modified DBRA rules for 
nonelective contributions provided to such a grandfathered group of 
employees.

A. Modifications to the DBRA Rules Under Sec.  1.401(a)(4)-8

    The proposed regulations modify the rules applicable to DBRAs under 
Sec.  1.401(a)(4)-8, which allow certain defined contribution plan 
allocations to be disregarded when determining whether a defined 
contribution plan has broadly available allocation rates. The rules 
applicable to DBRAs allow employers to provide, in a nondiscriminatory 
manner, certain allocations to replace defined benefit plan retirement 
benefits without having to satisfy the minimum aggregate allocation 
gateway. The modifications in the proposed regulations are intended to 
allow more allocations to fit within the DBRA rules. For example, under 
the existing regulations a DBRA must be reasonably designed to replace 
the benefits that would have been provided under the closed defined 
benefit plan. The proposed regulations provide greater flexibility in 
this respect and allow the allocations to be reasonably designed to 
replace some or all of the benefits that would have been provided under 
the closed plan, subject to a requirement that the allocations be 
provided in a consistent manner to all similarly situated employees.
    The proposed regulations incorporate a modified version of the 
conditions for an allocation to be a DBRA that were reflected in Rev. 
Rul. 2001-30, 2001-2 C.B. 46. For example, under one of the conditions 
set forth in Rev. Rul. 2001-30, in order for an allocation to be a 
DBRA, the defined benefit plan's benefit formula for the group of 
employees who formerly benefitted under that plan must have generated 
equivalent normal allocation rates that increased from year to year as 
employees attained higher ages. The proposed regulations ease this 
restriction on the types of defined benefit plans with respect to which 
a DBRA can be provided by allowing a DBRA also to replace the benefit 
provided under a defined benefit plan with a benefit formula that 
generated equivalent normal allocation rates that increased from year 
to year as employees were credited with additional years of service 
(rather than only as the employees attained higher ages).
    The existing regulation also requires that the group of employees 
who receive a DBRA must be a nondiscriminatory group of employees, and 
Rev. Rul. 2001-30 interprets this rule as requiring that the group of 
employees satisfy the minimum coverage requirements of section 410(b) 
(determined without regard to the average benefit percentage test). The 
proposed regulations incorporate this interpretation, but limit its 
application so that the rule only applies for the first 5 years after 
the closure date. In addition, the proposed regulations incorporate the 
interpretation in Rev. Rul. 2001-30 regarding whether the defined 
benefit plan was an established nondiscriminatory defined benefit plan 
by requiring that the closed plan be in effect for 5 years before the 
closure date (with one year substituted for 5 years, as provided by 
Rev. Rul. 2001-30, in the case of a defined benefit plan maintained by 
a former employer) with no substantial change to the closed plan during 
that time (except for certain permitted amendments allowed by the 
proposed regulations).
    In addition, the proposed regulations expand the list of permitted 
amendments to a closed plan that do not prevent allocations under a 
plan from being DBRAs. For example, the proposed regulations permit an 
amendment to a closed plan during the 5-year period before it was 
closed, provided that the amendment does not increase the accrued 
benefit or future accruals for any employee, does not expand coverage, 
and does not reduce the ratio-percentage under any applicable 
nondiscrimination test. In addition, under the proposed regulations, an 
amendment during this period could extend coverage to an acquired group 
of employees provided that all similarly situated employees within that 
group are treated in a consistent manner.
    As under the existing regulations, the proposed regulations contain 
a general restriction on plan amendments relating to a DBRA; however, 
the proposed regulations expand the list of plan amendments that are 
excepted from this rule. The proposed regulations retain the exception 
from this restriction on plan amendments for an amendment that makes de 
minimis changes in the calculation of a DBRA and for an amendment that 
adds or removes a ``greater-of'' plan provision (under which a 
participant receives the greater of the otherwise applicable allocation 
and the DBRA). In addition, the proposed regulations provide an 
exception from this restriction for any plan amendment modifying a DBRA 
that does not reduce the ratio percentage under any applicable 
nondiscrimination test.

B. Closed Plan Rule Added to the Plan Aggregation and Restructuring 
Rules Under Sec.  1.401(a)(4)-9

    The proposed regulations add a new exception to the requirement 
that a DB/DC plan must satisfy the minimum aggregate allocation gateway 
once the other conditions under Sec.  1.401(a)(4)-9 are not met (the 
``closed plan rule''). This closed plan rule, which applies to a DB/DC 
plan that includes a closed plan, provides an exception to the minimum 
aggregate allocation gateway that would otherwise apply, but only if 
the closed plan was in effect for 5 years before the closure date and 
no significant change was made to the closed plan during or since that 
time (except for certain permitted amendments).
    The DB/DC plan may use this closed plan rule for a plan year that 
begins on or after the fifth anniversary of the closure date. To be 
eligible for the closed plan rule, during the 5-year period following 
the closure date, either the DB/DC plan must satisfy the 
nondiscrimination in amount requirement of section 401(a)(4) without 
using the minimum aggregate allocation gateway, or the closed plan must 
satisfy that requirement without aggregation with any defined 
contribution plan. This requirement is comparable to the requirement 
that the group of employees who receive DBRAs must be a group of 
employees who satisfy the minimum coverage requirements of section 
410(b).
    Under the proposed regulations, certain amendments to a closed 
defined benefit plan do not prevent the plan from using the closed plan 
rule. These plan amendments are intended to allow a plan sponsor of a 
closed plan to address changed circumstances. For example, under the 
proposed regulations, a plan amendment during the 5-year period ending 
on the closure date does not prevent the plan from later using the 
closed plan rule, provided that the plan amendment does not increase 
the accrued benefit or future accruals for any employee, does not 
expand coverage, and does not reduce the ratio percentage under any 
applicable nondiscrimination test. Similarly, an amendment to the 
closed plan is permitted after the closure date, provided that the 
amendment does not reduce the ratio percentage under any applicable 
nondiscrimination test. Thus, for example, under the proposed 
regulations, a plan sponsor may add nonhighly compensated employees to 
a coverage group after it is closed in order to satisfy the 
nondiscrimination rules.

[[Page 4979]]

De minimis changes to the closed plan's benefit formula are also 
permitted under the proposed regulations.

C. Special Testing Rule for the Nondiscriminatory Availability of a 
Benefit, Right, or Feature Provided to a Grandfathered Group of 
Employees Under Sec.  1.401(a)(4)-4

    The proposed regulations establish a special nondiscrimination 
testing rule under Sec.  1.401(a)(4)-4 that applies if a benefit, 
right, or feature is made available only to a grandfathered group of 
employees with respect to a closed plan. This special rule provides 
relief in certain circumstances from certain nondiscrimination testing 
for a benefit, right, or feature provided under the closed plan, or for 
a rate of matching contributions provided to a grandfathered group 
under a defined contribution plan.
    If the eligibility conditions are satisfied, the special testing 
rule treats a benefit, right, or feature that is provided only to a 
grandfathered group of employees as satisfying the current and 
effective availability tests of Sec.  1.401(a)(4)-4(b) and (c). The 
special testing rule applies to plan years beginning on or after the 
fifth anniversary of the closure date and applies on a plan-year by 
plan-year basis. To be eligible for the special testing rule, the 
benefit, right or feature must be currently available to a group of 
employees that satisfies the minimum coverage requirements of section 
410(b) for the plan years that begin within 5 years after the closure 
date. Once the special testing rule applies to a benefit, right, or 
feature, the special testing rule continues to apply for purposes of 
that benefit, right, or feature indefinitely (unless a later amendment 
changes the eligibility for the benefit, right, or feature). If a plan 
amendment changes the eligibility for the benefit, right, or feature 
after the closure date, then the special testing rule will cease to 
apply (subject to certain specified exceptions).
    If the benefit, right, or feature that is available solely to a 
grandfathered group of employees is provided under a defined benefit 
plan, then it must be provided under the closed plan (rather than a 
different defined benefit plan). This is because the purpose of the 
special rule is to accommodate a plan amendment under which the benefit 
formula has been changed, but the prior benefit formula has been 
preserved for a grandfathered group of employees and the benefit, 
right, or feature is made available only to the grandfathered group of 
employees who continue to accrue benefits under the prior benefit 
formula.\6\ Accordingly, the special testing rule is available only if 
the amendment restricting the availability of the benefit, right, or 
feature also resulted in a significant change in the type of the 
defined benefit plan's formula. For example, a conversion to a cash 
balance plan would be a significant change in the type of benefit 
formula, so that the special testing rule would apply to facilitate 
preservation of any subsidized early retirement factors for the 
employees who continue to benefit under the prior benefit formula. By 
contrast, in the case of a benefit formula that determines benefits as 
a percentage of compensation, a change in that formula to reduce that 
percentage would not be considered a significant change in the type of 
benefit formula, even if the reduction is large.
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    \6\ The existing regulations provide a special rule for current 
availability testing for a benefit, right, or feature that applies 
solely to benefits accrued before the amendment date. See Sec.  
1.401(a)(4)-4(d)(2).
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    The special testing rule for a benefit, right, or feature provided 
under the closed plan also requires that the benefit, right, or feature 
has been in effect without being amended for a 5-year period before the 
closure date (subject to a limited exception for acquired employees). 
This rule is designed to ensure that the special treatment is available 
only for a long-standing provision and cannot be used for a benefit, 
right, or feature that has not been provided long enough for 
participants to have established a reasonable expectation that it will 
continue. In addition, this rule prevents a plan sponsor from obtaining 
special treatment for a benefit, right, or feature added shortly before 
and in anticipation of the closure of the plan. The proposed 
regulations set forth a list of permitted plan amendments that do not 
result in the loss of this special testing rule that are generally 
comparable to the list of permitted amendments for other closed plan 
arrangements.
    The special testing rule also applies to a rate of matching 
contributions under a defined contribution plan that meets certain 
requirements. In order to be eligible for this testing rule, the rate 
of matching contributions must be reasonably designed so that the 
matching contributions will replace some or all of the value of the 
benefit accruals that each employee in the grandfathered group of 
employees would have been provided under the closed plan in the absence 
of a closure amendment. In addition, the rate of matching contributions 
for the grandfathered group of employees must be provided in a 
consistent manner to all similarly situated employees.

III. Modification of Testing Options Under Sec.  1.401(a)(4)-9 for DB/
DC Plans, Including DB/DC Plans That Do Not Include a Closed Plan

    In addition to providing a special rule for closed plans and 
similar arrangements, the proposed regulations generally ease the rules 
under which any DB/DC plan can satisfy the nondiscrimination in amount 
requirement on the basis of benefits. These changes are intended to 
facilitate the ongoing maintenance of a defined benefit plan that 
provides coverage to a group of employees that is determined using a 
reasonable business classification.
    The proposed regulations expand the ability to use the average of 
the equivalent allocation rates under the defined benefit plan for 
purposes of satisfying the minimum aggregate allocation gateway by 
permitting the averaging of allocation rates for nonhighly compensated 
employees under the defined contribution plan for this purpose. This 
modification is intended to better accommodate plan sponsors that have 
a defined contribution plan with service- or age-based allocation 
formulas. The Treasury Department and the IRS have determined that it 
is appropriate, in this context, to allow shorter-service nonhighly 
compensated employees to be provided less than the minimum aggregate 
allocation gateway rate, as long as longer-service nonhighly 
compensated employees are provided allocation rates that are 
sufficiently higher than the minimum aggregate allocation gateway rate. 
The Treasury Department and the IRS are considering whether any 
restrictions on this rule are appropriate so that the rule serves its 
intended purpose of facilitating formulas that provide higher 
allocation rates to longer-service nonhighly compensated employees, and 
invite comments on ways to permit appropriate flexibility while 
ensuring the provision is not used to circumvent the purpose of the 
nondiscrimination rules.
    The proposed regulations also include a limitation on the averaging 
of rates that applies to both defined contribution and defined benefit 
plans in order to minimize the impact of outliers. In general, this 
special rule applies a cap under which any equivalent normal allocation 
rate or allocation rate in excess of 15% is treated as equal to 15%. 
However, this cap is raised to 25% for any allocation rate or 
equivalent normal allocation rate that results solely

[[Page 4980]]

from a plan design providing allocation rates or generating equivalent 
normal allocation rates that are a function of age or service under 
which higher rates are provided to older or longer-service employees.
    In addition, under the proposed regulations, the average of the 
matching contributions actually made for nonhighly compensated 
employees may be used to a limited extent (up to 3 percent of 
compensation) for purposes of determining whether each nonhighly 
compensated employee satisfies the minimum aggregate allocation gateway 
test. Thus, for example, if the minimum aggregate allocation gateway is 
7% and the average of the matching contributions actually made for 
nonhighly compensated employees is 3%, then a non-elective contribution 
of 4% for each individual would be needed in order to satisfy the 
minimum aggregate allocation gateway under the proposed regulations. 
The regulations use the average matching contributions, rather than 
matching contributions allocated for each employee, in order to avoid 
diluting the incentive effect of an employer match.
    The proposed regulations also provide a new alternative to the 
minimum aggregate allocation gateway. Under this alternative, a DB/DC 
plan is not required to satisfy the minimum aggregate allocation 
gateway if it can satisfy the nondiscrimination in amount requirement 
on the basis of equivalent benefits using an interest rate of 6%, 
rather than the current standard interest rate of between 7.5% and 
8.5%.

IV. Benefit Formulas for Individual Employees or Groups Without a 
Reasonable Business Purpose; Modifications to the Amounts Testing Rules 
Under Sec.  1.401(a)(4)-2 and Sec.  1.401(a)(4)-3

    The proposed regulations also include changes to address certain 
arrangements that take advantage of the flexibility in the existing 
nondiscrimination rules \7\ to provide a special benefit formula for 
selected employees without extending that formula to a classification 
of employees that is reasonable and is established under objective 
business criteria. A plan satisfies the minimum coverage requirements 
of section 410(b) if the plan's ratio percentage is 70% or higher or 
the plan satisfies the average benefit test. To satisfy the average 
benefit test, pursuant to Sec.  1.410(b)-4, the group of employees must 
be determined using a classification that is reasonable and that is 
established under objective business criteria pursuant to Sec.  
1.410(b)-4(b) and must have a ratio percentage that is described in 
Sec.  1.410(b)-4(c) (which includes safe harbor and unsafe harbor 
percentages). A classification of employees that is reasonable and is 
established under objective business criteria is referred to in this 
preamble as a ``reasonable business classification.'' To the extent 
that a plan provides a special benefit formula and can still pass the 
nondiscrimination requirements, the plan sponsor can use a qualified 
retirement plan to provide benefits that would otherwise be provided 
under a nonqualified plan. These arrangements are sometimes referred to 
as qualified supplemental executive retirement plans (or QSERPs).
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    \7\ Under the existing regulations, the nondiscrimination 
requirements of section 401(a)(4) and the coverage rules of section 
410(b) are coordinated. The general test under the section 401(a)(4) 
regulations is applied by determining whether each rate group under 
the plan (that is, for each highly compensated employee, the group 
of employees with a benefit or contribution rate that is greater 
than or equal to the benefit or contribution rate for the highly 
compensated employee) satisfies section 410(b) as if it were a plan.
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    Under the general test in the existing regulations, if a plan 
satisfies the minimum coverage requirements of section 410(b) using the 
average benefit percentage test, then the rate group for each highly 
compensated employee is treated as satisfying the minimum coverage 
requirements if the ratio percentage for the rate group is equal to the 
midpoint between the safe harbor and the unsafe harbor percentages (or 
the ratio percentage for the plan as a whole, if less). This rule 
recognizes that the composition of a rate group may be unpredictable 
and so the rate group should not be subject to a reasonable business 
classification standard. However, that same consideration is not 
relevant if the group of employees to whom the allocation formula under 
a defined contribution plan (or benefit formula under a defined benefit 
plan) applies is not a reasonable business classification.
    Accordingly, the proposed regulations limit the existing rule under 
which a rate group with respect to a highly compensated employee is 
treated as satisfying the average benefit percentage test to those 
situations in which the allocation formula (or benefit formula) that 
applies to the highly compensated employee also applies to a reasonable 
business classification. For example, if a benefit formula applies 
solely to a highly compensated employee who is identified by name, it 
does not apply to a reasonable business classification. See Sec.  
1.410(b)-4(b). In such a case, the proposed regulations would require 
that the rate group with respect to that individual satisfy the ratio 
percentage test.

Proposed Applicability Date

    Except as described below, these regulations are proposed to be 
applicable to plan years beginning on or after the date of publication 
of the Treasury decision adopting these rules as final regulations in 
the Federal Register. Taxpayers are permitted to apply the provisions 
of these proposed regulations except for those described in section III 
of the Explanation of Provisions portion of the preamble for plan years 
beginning before this proposed applicability date, but not for plan 
years earlier than those beginning on or after January 1, 2014. 
Accordingly, the ability to rely on a provision of these proposed 
regulations for periods prior to the proposed applicability date for 
these regulations applies to the disregard of certain defined benefit 
replacement allocations in cross-testing; the exception from the 
minimum aggregate allocation gateway with respect to certain closed 
plans; the special testing rule for benefits, rights, and features with 
respect to certain closed plans; and the rule applying the ratio 
percentage test to a rate group in the case of a benefit formula that 
does not apply to a reasonable business classification. Taxpayers may 
rely on these provisions (that is, the provisions that the proposed 
regulations would permit a taxpayer to apply before the proposed 
applicability date for these regulations) in order to satisfy the 
nondiscrimination requirements of section 401(a)(4) for plan years 
beginning on or after January 1, 2014, and until the corresponding 
final regulations become applicable.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It also has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and because the regulation does not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Internal Revenue Code, these regulations have been submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

[[Page 4981]]

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
Treasury and the IRS request comments on all aspects of the proposed 
rules, including the proposed applicability date. Treasury and the IRS 
also request comments on the following issues:
     Whether guidance needs to be developed for a plan that has 
more than one closure or closure amendment?
     Whether the rules regarding transition allocations and 
successor employers are still needed in light of the modifications to 
the DBRA rules?
    All comments will be available for public inspection and copying at 
www.regulations.gov or upon request.
    A public hearing has been scheduled for May 19, 2016, beginning at 
10 a.m. in the Auditorium, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Because of building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Due to access restrictions, visitors will not be admitted beyond the 
immediate entrance area more than 30 minutes before the hearing starts. 
For information about having your name placed on the building access 
list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT 
section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by April 28, 2016 and an outline of the topics to 
be discussed and the time to be devoted to each topic by April 28, 
2016. A signed paper or electronic copy of the outline should be 
submitted as prescribed in this preamble under the ADDRESSES heading. A 
period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Statement of Availability for IRS Documents

    For copies of recently issued Revenue Procedures, Revenue Rulings, 
notices, and other guidance published in the Internal Revenue Bulletin, 
please visit the IRS Web site at https://irs.gov.

Drafting Information

    The principal authors of these proposed regulations are Kelly C. 
Scanlon and Linda S. F. Marshall, IRS Office of Associate Chief Counsel 
(Tax Exempt and Government Entities). However, other personnel from the 
IRS and the Department of Treasury participated in the development of 
the proposed regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.401(a)(4)-0 is amended by:
0
1. Adding paragraph (c)(5) to the entry for Sec.  1.401(a)(4)-2.
0
2. Adding paragraph (d)(8) to the entry for Sec.  1.401(a)(4)-4.
0
3. Adding paragraph (a)(4) to the entry for Sec.  1.401(a)(4)-13.
    The additions read as follows:


Sec.  1.401(a)(4)-0  Table of contents.

* * * * *


Sec.  1.401(a)(4)-2  Nondiscrimination in amount of employer 
contributions under a defined contribution plan.

* * * * *
    (c) * * *
    (5) Effective/applicability date.
* * * * *


Sec.  1.401(a)(4)-4  Nondiscriminatory availability of benefits, 
rights, and features

* * * * *
    (d) * * *
    (8) Special testing rule for grandfathered group of employees.
* * * * *


Sec.  1.401(a)(4)-13  Effective dates and fresh-start rules.

    (a) * * *
    (4) Effective/applicability date.
* * * * *
0
Par. 3. Section 1.401(a)(4)-2 is amended by:
0
1. Revising paragraph (c)(3)(ii).
0
2. Revising Examples 4 and 5 in paragraph (c)(4).
0
3. Adding Examples 6 and 7 to paragraph (c)(4).
0
4. Adding paragraph (c)(5).
    The revisions and additions read as follows:


Sec.  1.401(a)(4)-2  Nondiscrimination in amount of employer 
contributions under a defined contribution plan.

* * * * *
    (c) * * *
    (3) * * *
    (ii) Application of nondiscriminatory classification test. A rate 
group satisfies the nondiscriminatory classification test of Sec.  
1.410(b)-4 if and only if--
    (A) The formula that is used to determine the allocation for the 
HCE with respect to whom the rate group is established applies to a 
group of employees that satisfies the reasonable classification 
requirement of Sec.  1.410(b)-4(b); and
    (B) The ratio percentage of the rate group is greater than or equal 
to the midpoint between the safe and unsafe harbor percentages 
applicable to the plan (or the ratio percentage of the plan, if that 
percentage is less).
* * * * *
    (4) * * *

    Example 4. (a) The facts are the same as in Example 3, except 
that N4 has an allocation rate of 8.0 percent. In addition, the 
formula that is used to determine the allocation for H2 is the same 
formula that is used to determine the allocation for all other 
employees in Plan D.
    (b) There are two rate groups in Plan D. Rate group 1 consists 
of H1 and all those employees who have an allocation rate greater 
than or equal to H1's allocation rate (5.0 percent). Thus, rate 
group 1 consists of H1, H2 and N1 through N4. Rate group 2 consists 
of H2, and all those employees who have an allocation rate greater 
than or equal to H2's allocation rate (7.5 percent). Thus, rate 
group 2 consists of H2 and N4.
    (c) Rate group 1 satisfies the ratio percentage test under Sec.  
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 
100 percent--that is, 100 percent (the percentage of all nonhighly 
compensated nonexcludable employees who are in the rate group) 
divided by 100 percent (the percentage of all highly compensated 
nonexcludable employees who are in the rate group).
    (d) Rate group 2 does not satisfy the ratio percentage test of 
Sec.  1.410(b)-2(b)(2) because the ratio percentage of the rate 
group is 50 percent--that is, 25 percent (the percentage of all 
nonhighly compensated nonexcludable employees who are in the rate 
group) divided by 50 percent (the percentage of all highly 
compensated nonexcludable employees who are in the rate group).
    (e) However, under paragraph (c)(3)(ii) of this section rate 
group 2 satisfies the nondiscriminatory classification test of Sec.  
1.410(b)-4 because (i) the formula that is used to determine the 
allocation for H2 applies to a group of employees that satisfies the 
reasonable classification requirement of Sec.  1.410(b)-4(b) (in 
this case, because it applies to all the employees) and (ii) the 
ratio percentage of the rate group (50 percent) is greater than the 
midpoint between the safe harbor and unsafe harbor percentages

[[Page 4982]]

applicable to the plan under Sec.  1.410(b)-4(c)(4) (40.5 percent).
    (f) Under paragraph (c)(3)(iii) of this section, rate group 2 
satisfies the average benefit percentage test if Plan D satisfies 
the average benefit percentage test. (The requirement that Plan D 
satisfy the average benefit percentage test applies even though Plan 
D satisfies the ratio percentage test and would ordinarily not need 
to run the average benefit percentage test.) If Plan D satisfies the 
average benefit percentage test, then rate group 2 satisfies section 
410(b); thus, Plan D satisfies the general test in paragraph (c)(1) 
of this section because each rate group under the plan satisfies 
section 410(b).
    Example 5. (a) Plan E satisfies section 410(b) by satisfying the 
nondiscriminatory classification test of Sec.  1.410(b)-4 and the 
average benefit percentage test of Sec.  1.410(b)-5 (without regard 
to Sec.  1.410(b)-5(f)). See Sec.  1.410(b)-2(b)(3). Plan E uses the 
facts-and-circumstances requirements of Sec.  1.410(b)-4(c)(3) to 
satisfy the nondiscriminatory classification test of Sec.  1.410(b)-
4. The safe and unsafe harbor percentages applicable to the plan 
under Sec.  1.410(b)-4(c)(4) are 29 and 20 percent, respectively. 
Plan E has a ratio percentage of 22 percent. Rate group 1 under Plan 
E has a ratio percentage of 23 percent. The formula that is used to 
determine the allocation for the HCE with respect to whom rate group 
1 was formed applies to all other employees.
    (b) Under paragraph (c)(3)(ii) of this section, rate group 1 
satisfies the nondiscriminatory classification requirement of Sec.  
1.410(b)-4, because (i) the formula that is used to determine the 
allocation for the HCE with respect to whom the rate group was 
formed applies to a group of employees that satisfies the reasonable 
classification requirement of Sec.  1.410(b)-4(b) (in this case, 
because it applies to all the employees) and (ii) the ratio 
percentage of the rate group (23 percent) is greater than the lesser 
of--
    (1) The ratio percentage for the plan as a whole (22 percent); 
and
    (2) The midpoint between the safe and unsafe harbor percentages 
(24.5 percent).
    (c) Under paragraph (c)(3)(iii) of this section, the rate group 
satisfies section 410(b) because the plan satisfies the average 
benefit percentage test of Sec.  1.410(b)-5.
    Example 6. (a) Employer Z maintains a defined contribution plan, 
Plan F. Employer Z has six nonexcludable employees, all of whom 
benefit under Plan F. There is one HCE (H1) and five NHCEs (N1 
through N5). There is one rate group under Plan F. The formula that 
is used to determine the allocation for H1 is the greater of $20,000 
or 10% of compensation for the year. The formula that applies to 
determine the allocation for N1 through N5 is 10% of compensation.
    (b) Under paragraph (c)(3)(ii) of this section, the rate group 
with respect to H1 does not satisfy the nondiscriminatory 
classification test under Sec.  1.410(b)-4 because the formula that 
is used to determine the allocation for H1 (with respect to whom the 
rate group is established) only applies to H1. Therefore, the rate 
group will satisfy paragraph (c)(3) of this section only if the 
ratio percentage of the rate group is greater than or equal to 70 
percent. This ratio percentage test applies even if H1's 
compensation is greater than $200,000. In such a case, the rate 
group will pass the ratio percentage test (and accordingly the plan 
will satisfy the general test of this paragraph (c)) because each 
employee receives an allocation of 10% of compensation and therefore 
the ratio percentage for the rate group is equal to 100%.
    Example 7. The facts are the same as in Example 6, except that 
the classification of employees who are entitled to benefit under 
the formula that applies to H1 includes N1 and N2, who are 
identified by name. Under paragraph (c)(3)(ii) of this section, the 
rate group with respect to H1 does not satisfy the nondiscriminatory 
classification test under Sec.  1.410(b)-4 because the 
classification of H1, N1 and N2 by name does not satisfy the 
reasonable classification requirement of Sec.  1.410(b)-4(b). 
Therefore, the rate group with respect to H1 will satisfy paragraph 
(c)(3) of this section only if the ratio percentage of the rate 
group is greater than or equal to 70 percent.

    (5) Effective/applicability date. See Sec.  1.401(a)(4)-13(a)(4) 
for rules on the effective/applicability date of this paragraph (c).
0
Par. 4. In Sec.  1.401(a)(4)-3, paragraph (c)(2) is revised to read as 
follows:


Sec.  1.401(a)(4)-3  Nondiscrimination in amount of employer-provided 
benefits under a defined benefit plan.

* * * * *
    (c) * * *
    (2) Satisfaction of section 410(b) by a rate group. For purposes of 
determining whether a rate group satisfies section 410(b), the rules of 
Sec.  1.401(a)(4)-2(c)(3) apply except that Sec.  1.401(a)(4)-
2(c)(3)(ii)(A) is applied by substituting ``benefit formula'' for 
``formula that is used to determine the allocation.'' See paragraph 
(c)(4) of this section and Sec.  1.401(a)(4)-2(c)(4), Example 3 through 
Example 6, for examples of this rule. See Sec.  1.401(a)(4)-13(a)(4) 
for rules on the effective/applicability date of this paragraph (c)(2).
* * * * *
0
Par. 5. In Sec.  1.401(a)(4)-4, paragraph (d)(8) is added to read as 
follows:


Sec.  1.401(a)(4)-4  Nondiscriminatory availability of benefits, 
rights, and features.

* * * * *
    (d) * * *
    (8) Special testing rule for grandfathered group of employees--(i) 
General rule. For a plan year that begins on or after the fifth 
anniversary of the closure date with respect to a closed defined 
benefit plan, a benefit, right, or feature under a defined benefit or 
defined contribution plan that is available only to a grandfathered 
group of employees with respect to the closed defined benefit plan is 
treated as satisfying paragraphs (b) and (c) of this section for the 
plan year, provided that--
    (A) No plan amendment that affects the availability of the benefit, 
right, or feature (other than the closure amendment) has an applicable 
amendment date (within the meaning of Sec.  1.411(d)-3(g)(4)) that is 
within the period that begins on the closure date and ends on the last 
day of the plan year; and
    (B) The additional requirements of paragraph (d)(8)(ii) or (iii) of 
this section, whichever is applicable, are satisfied.
    (ii) Additional requirements in the case of a benefit, right, or 
feature provided under a defined benefit plan. If the benefit, right, 
or feature is provided under a defined benefit plan, then the following 
additional requirements apply--
    (A) The defined benefit plan under which the benefit, right, or 
feature is provided is the closed defined benefit plan;
    (B) No plan amendment that affects the availability of the benefit, 
right, or feature (other than the closure amendment) has an applicable 
amendment date that is within the 5-year period ending on the closure 
date; and
    (C) The closure amendment that restricted the availability of the 
benefit, right, or feature, making it available only to the 
grandfathered group of employees, must also have provided for a 
significant change in the type of benefit formula under the plan (such 
as a change from a benefit formula that is not a statutory hybrid 
benefit formula to a lump sum-based benefit formula).
    (iii) Additional requirements in the case of a benefit, right, or 
feature provided under a defined contribution plan. If the benefit, 
right, or feature is provided under a defined contribution plan, then 
the following additional requirements apply--
    (A) The benefit, right, or feature must be a right to a rate of 
matching contributions provided under the defined contribution plan;
    (B) The rate of matching contributions must be reasonably designed 
so that the matching contributions will replace some or all of the 
value of the benefit accruals that each employee in the grandfathered 
group of employees would have been provided under the closed defined 
benefit plan in the absence of a closure amendment (based on the terms 
of that plan and the section 415(b)(1)(A) dollar limit in effect 
immediately prior to the closure date);

[[Page 4983]]

    (C) The closed defined benefit plan must satisfy the conditions set 
forth in Sec.  1.401(a)(4)-8(b)(1)(iii)(D)(3); and
    (D) The rate of matching contributions must be provided in a 
consistent manner to all similarly situated employees.
    (iv) Certain amendments not taken into account. For purposes of 
applying the rules under this paragraph (d)(8), the following plan 
amendments are not taken into account (and, in the case of an amendment 
described in paragraph (d)(8)(iv)(C) or (D) of this section, the rules 
of this paragraph (d)(8) are applied as if the benefit, right, or 
feature provided after the amendment were the benefit, right, or 
feature provided before the amendment):
    (A) An amendment adopted during the 5-year period ending on the 
closure date that extends eligibility for the benefit, right, or 
feature to an acquired group of employees provided that all similarly 
situated employees within that group are treated in a consistent 
manner.
    (B) An amendment adopted after the closure date that expands or 
restricts the eligibility for the benefit, right, or feature, provided 
that, as of the applicable amendment date, the ratio percentage of the 
group of employees eligible for the benefit, right, or feature (taking 
into account the plan amendment) is not less than the ratio percentage 
of the group of employees eligible for the benefit, right, or feature 
provided before the amendment.
    (C) An amendment adopted after the closure date that results in a 
replacement of the benefit, right, or feature with another benefit, 
right, or feature that is available to the same group of employees as 
the original benefit, right, or feature, provided that the original 
benefit, right, or feature is of inherently equal or greater value 
(within the meaning of paragraph (d)(4)(i)(A) of this section) than the 
benefit, right, or feature that replaces it.
    (D) An amendment adopted after the closure date that results in a 
replacement of the benefit, right, or feature with another benefit, 
right, or feature that is available to the same group of employees as 
the original benefit, right, or feature, provided that there is only a 
de minimis difference between the amount payable under the original 
benefit, right, or feature and the amount payable under the benefit, 
right, or feature that replaces it.
    (E) An amendment that is permitted by guidance published by the 
Commissioner in the Internal Revenue Bulletin.
    (v) Examples. The following examples illustrate the rules in this 
paragraph (d)(8):
    Example 1--(i) Pre-amendment defined benefit plan.  Employer A 
maintains Plan P, a defined benefit plan that provides for an annual 
benefit equal to 2% of an employee's average annual compensation 
multiplied by the employee's years of service. Plan P also provides 
for a subsidized early retirement benefit available to employees who 
retire between the ages of 55 and 65 with 20 years of service. Plan 
P was established in 2003. The plan year is a calendar year. For the 
2015 plan year, Plan P satisfied the nondiscrimination requirements 
under sections 410(b) and 401(a)(4) without regard to the special 
rules under section 410(b)(6)(C) and without aggregation with any 
other plan.
    (ii) Plan conversion amendment. On November 1, 2015, Employer A 
amends Plan P to cease future accruals under its benefit formula 
effective as of the close of the plan year ending December 31, 2015 
and to provide future benefit accruals under a cash balance formula. 
The cash balance formula provides for pay credits equal to 5% of 
compensation and annual interest credits at an interest crediting 
rate of 6%. Early retirement benefits payable with respect to 
benefits accrued under the cash balance formula are determined as 
the actuarial equivalent of the hypothetical account balance, 
determined using reasonable actuarial assumptions that are specified 
in Plan P. Under the terms of the conversion amendment, an 
employee's benefit is equal to the employee's benefit under the 
prior benefit formula as of the close of the plan year ending 
December 31, 2015, plus the amount determined under the cash balance 
formula. However, any employee who had attained the age of 50 and 
had completed 15 years of service on or before December 31, 2015 is 
entitled to a plan benefit that is the greater of the benefit 
determined under the pre-amendment formula, or the benefit described 
in the prior sentence. Except for the closure amendment, there is no 
other plan amendment that affects the availability of Plan P's early 
retirement subsidy. No other significant change to Plan P's coverage 
or benefit formula is made with an applicable amendment date that is 
during the period beginning on January 1, 2011 and ending on 
December 31, 2015 (the 5-year period ending on the closure date).
    (iii) Applicability of special testing rule. The plan conversion 
amendment is a closure amendment with a closure date of December 31, 
2015. Plan P's subsidized early retirement benefit available solely 
to the grandfathered group of employees is a separate benefit, 
right, or feature that must be tested for current and effective 
availability under paragraphs (b) and (c) of this section. For a 
plan year that begins on or after January 1, 2021, Plan P's 
subsidized early retirement benefit is eligible for the relief 
provided by the special testing rule of this paragraph (d)(8) 
because all of the applicable requirements are satisfied. The 
requirement under paragraph (d)(8)(i)(A) of this section is 
satisfied because no other plan amendment that affects the 
availability of the subsidized early retirement benefit has an 
applicable amendment date that is on or after December 31, 2015. The 
additional requirements pertaining to a benefit, right, or feature 
provided under a defined benefit plan are also satisfied: The 
subsidized early retirement benefit is provided under a closed 
defined benefit plan as required by paragraph (d)(8)(ii)(A) of this 
section; no amendment that affected the availability of the 
subsidized early retirement benefit was made with an applicable 
amendment date during the 5-year period ending on the closure date 
as required by paragraph (d)(8)(ii)(B) of this section; and Plan P 
has undergone a significant change in benefit formula in connection 
with the closure amendment that resulted in a restriction on the 
availability of the subsidized early retirement benefit as required 
by paragraph (d)(8)(ii)(C) of this section.
    Example 2--(i) Closure of defined benefit plan.  The facts are 
the same as in Example 1 of this paragraph (d)(8)(v), except that, 
instead of adopting a plan conversion amendment, Employer A amends 
Plan P to cease future accruals under the original benefit formula 
for all employees.
    (ii) Plan amendment to profit-sharing plan that provides 
enhanced rate of matching contributions. Employer A has a profit-
sharing plan that includes a qualified cash or deferred arrangement 
and matching contributions with respect to elective deferrals of up 
to 3% of compensation. On November 1, 2015, Employer A amends the 
plan to provide, effective January 1, 2016, for additional matching 
contributions of up to an additional 4% of compensation solely for 
employees who (1) were previously covered under the defined benefit 
plan, and (2) had attained the age of 50 and had 15 years of service 
on or before December 31, 2015. This enhanced rate of matching 
contributions is reasonably designed so that the matching 
contributions will replace some or all of the value of the benefit 
accruals that would have otherwise been provided to this 
grandfathered group of employees under Plan P. Employer A makes no 
other change to this enhanced rate of matching contribution after 
the enhanced rate is established.
    (iii) Applicability of special testing rule. The plan amendment 
is a closure amendment with a closure date of December 31, 2015. The 
enhanced rate of matching contribution that is available solely to 
the grandfathered group of employees is a separate benefit, right, 
or feature that must be tested for current and effective 
availability under paragraphs (b) and (c) of this section. For a 
plan year that begins on or after January 1, 2021, Plan P's enhanced 
rate of matching contribution is eligible for the relief provided by 
the special testing rule of this paragraph (d)(8) because all 
applicable requirements are satisfied. The requirement under 
paragraph (d)(8)(i)(A) of this section is satisfied because no 
change was made to the enhanced rate of match with an applicable 
amendment date that is on or after December 31, 2015. The following 
applicable additional requirements are also satisfied: The benefit, 
right, or feature provided under the defined contribution plan is a 
rate of matching contribution as required by paragraph 
(d)(8)(iii)(A) of this section; the enhanced

[[Page 4984]]

rate of matching contribution is reasonably designed so that the 
matching contributions will replace some of the value of the benefit 
accruals that each employee in the grandfathered group of employees 
would have otherwise been provided under Plan P immediately prior to 
the closure date as required by paragraph (d)(8)(iii)(B) of this 
section; and the rate of matching contributions is provided in a 
consistent manner to all similarly situated employees as required by 
paragraph (d)(8)(iii)(D) of this section.
    (iv) Applicability of Sec.  1.401(a)(4)-8(b)(1)(iii)(D)(3). In 
addition to the requirements described in paragraph (iii) of this 
Example 2, Plan P meets the conditions for a closed defined benefit 
plan specified in Sec.  1.401(a)(4)-8(b)(1)(iii)(D)(3) as required 
by paragraph (d)(8)(iii)(C) of this section because Plan P's prior 
benefit formula generated equivalent normal allocation rates that 
increased as employees attained higher ages; Plan P satisfied the 
minimum coverage and nondiscrimination requirements under sections 
410(b) and 401(a)(4) without regard to the special rules under 
section 410(b)(6)(C) and without aggregating with any other plan for 
the plan year preceding the closure date; and Plan P was in effect 
for the five-year period ending on the closure date and neither the 
benefit formula nor the coverage of the plan was significantly 
changed during this period.

    (vi) Effective/applicability dates. The rules of this paragraph 
(d)(8) apply to plan years beginning on or after the date of 
publication of the Treasury decision adopting these rules as final in 
the Federal Register. Taxpayers may apply the rules of this paragraph 
(d)(8) for plan years beginning on or after January 1, 2014.
* * * * *
0
Par. 6. Section 1.401(a)(4)-8 is amended by:
0
1. Revising paragraphs (b)(1)(iii)(B) through (E).
0
2. Removing paragraph (b)(1)(iii)(F).
0
3. Adding paragraph (b)(1)(iv)(E).
    The revisions and additions read as follows:


Sec.  1.401(a)(4)-8  Cross-testing.

* * * * *
    (b) * * *
    (1) * * *
    (iii) * * *
    (B) Defined benefit replacement allocations disregarded. In 
determining whether a plan has broadly available allocation rates for 
the plan year within the meaning of paragraph (b)(1)(iii)(A) of this 
section, the following rules in paragraphs (b)(1)(iii)(B)(1) and (2) of 
this section apply:
    (1) If an employee receives a defined benefit replacement 
allocation (within the meaning of paragraph (b)(1)(iii)(D) of this 
section) for the plan year in addition to the employee's otherwise 
applicable allocation under the plan for the plan year, then the 
employee's allocation rate is determined without regard to the defined 
benefit replacement allocation.
    (2) If an employee receives an allocation for the plan year that is 
the greater of the allocation for which the employee would otherwise be 
eligible and the defined benefit replacement allocation (within the 
meaning of paragraph (b)(1)(iii)(D) of this section), then the 
allocation for which the employee would otherwise be eligible is 
considered currently available to the employee, even if the employee's 
defined benefit replacement allocation is greater. See paragraph 
(b)(1)(iii)(C)(2) of this section for additional rules relating to 
``greater-of'' plan provisions.
    (C) Plan provisions--(1) In general. Plan provisions providing for 
defined benefit replacement allocations (within the meaning of 
paragraph (b)(1)(iii)(D) of this section) for the plan year must 
specify both the group of employees who are eligible for the defined 
benefit replacement allocations and the amount of the defined benefit 
replacement allocations.
    (2) ``Greater-of'' plan provisions. An allocation does not fail to 
be a defined benefit replacement allocation within the meaning of 
paragraph (b)(1)(iii)(D) of this section merely because the plan 
provides that each employee who is eligible for a defined benefit 
replacement allocation receives the greater of that allocation and the 
allocation for which the employee would otherwise be eligible under the 
plan.
    (3) Limited plan amendments. Except as provided in paragraph 
(b)(1)(iii)(D)(5) of this section, an allocation is not a defined 
benefit replacement allocation within the meaning of paragraph 
(b)(1)(iii)(D) of this section for the plan year if the plan provisions 
relating to the allocation are amended after the date those plan 
provisions are both adopted and effective.
    (D) Defined benefit replacement allocation--(1) In general. A 
defined benefit replacement allocation is an allocation under a defined 
contribution plan provided only to a grandfathered group of employees 
with respect to a closed defined benefit plan. An allocation is treated 
as a defined benefit replacement allocation if--
    (i) The allocation satisfies the conditions to be a replacement 
allocation with respect to a closed defined benefit plan in paragraph 
(b)(1)(iii)(D)(2) of this section;
    (ii) The closed defined benefit plan satisfies the conditions in 
paragraph (b)(1)(iii)(D)(3) of this section; and
    (iii) For each plan year that begins before the fifth anniversary 
of the closure date of the closed defined benefit plan, the 
grandfathered group of employees is a nondiscriminatory group of 
employees within the meaning of paragraph (b)(1)(iii)(D)(4) of this 
section.
    (2) Replacement allocation. An allocation is a replacement 
allocation with respect to a closed defined benefit plan under this 
paragraph (b)(1)(iii)(D)(2) if--
    (i) The allocation is designed so that it is reasonably expected to 
replace some or all of the value of the benefit accruals that each 
employee in the grandfathered group of employees would have been 
provided under the closed defined benefit plan in the absence of a 
closure amendment (based on the terms of that plan and the section 
415(b)(1)(A) dollar limit in effect immediately prior to the closure 
date); and
    (ii) The allocation is provided in a consistent manner to all 
similarly situated employees.
    (3) Closed defined benefit plan. A closed defined benefit plan 
satisfies the conditions in this paragraph (b)(1)(iii)(D)(3) if--
    (i) The closed defined benefit plan's benefit formula applicable to 
the grandfathered group of employees generated equivalent normal 
allocation rates that increased from year to year as employees attained 
higher ages or were credited with additional years of service;
    (ii) The closed defined benefit plan satisfied the minimum coverage 
and nondiscrimination requirements under sections 410(b) and 401(a)(4) 
without regard to the special rules under section 410(b)(6)(C) and 
without aggregating with any other plan, for the plan year preceding 
the closure date; and
    (iii) The closed defined benefit plan was in effect for the 5-year 
period ending on the closure date and neither the benefit formula nor 
the coverage of the plan was significantly changed by plan amendment 
with an effective date during this period.
    (4) Nondiscriminatory group of employees. A group of employees is a 
nondiscriminatory group of employees for purposes of this paragraph 
(b)(1)(iii)(D)(4) if the group of employees satisfies section 410(b) 
for the plan year (without regard to Sec.  1.410(b)-5).
    (5) Certain amendments not taken into account. For purposes of 
determining whether the requirements of paragraphs (b)(1)(iii)(C)(3) 
and (b)(1)(iii)(D)(3) of this section are satisfied, the following plan 
amendments are not taken into account:

[[Page 4985]]

    (i) An amendment to the closed defined benefit plan adopted during 
the 5-year period ending on the closure date, provided that the accrued 
benefit or future accruals for any employee are not increased, coverage 
is not expanded, and the amendment is not discriminatory within the 
meaning of paragraph (b)(1)(iii)(D)(6) of this section.
    (ii) An amendment to the defined contribution plan under which the 
defined benefit replacement allocation is provided that makes de 
minimis changes in the calculation of that allocation (such as a change 
in the definition of compensation to include section 132(f) elective 
reductions).
    (iii) An amendment to the defined contribution plan under which the 
defined benefit replacement allocation is provided that adds or removes 
a ``greater-of'' provision described under paragraph (b)(1)(iii)(C)(2) 
of this section.
    (iv) An amendment to the defined contribution plan under which the 
defined benefit replacement allocation is provided that makes changes 
in the calculation of that allocation in a manner that is not 
discriminatory within the meaning of paragraph (b)(1)(iii)(D)(6) of 
this section.
    (v) An amendment that guidance published by the Commissioner in the 
Internal Revenue Bulletin provides will not be taken into account.
    (6) Nondiscriminatory amendment--(i) General rule. An amendment to 
a plan is not discriminatory if the ratio percentage of the plan is not 
decreased as a result of the amendment and, in the case of a plan that 
demonstrates compliance with the nondiscrimination in amount 
requirement of Sec.  1.401(a)(4)-1(b)(2) using a method other than a 
safe harbor test under Sec.  1.401(a)(4)-2(b), Sec.  1.401(a)(4)-3(b), 
or paragraph (b)(3) or (c)(3) of this section, the ratio percentage for 
the rate group with respect to any HCE is not decreased as a result of 
the amendment.
    (ii) Timing of nondiscrimination testing. In determining whether 
the ratio percentage of the plan or the rate group is decreased as a 
result of an amendment, an amendment that is not in effect for an 
entire plan year is treated as if it were in effect for the entire plan 
year. In the case of an amendment that has separate portions with 
separate effective dates, each portion of the amendment is treated as a 
separate amendment that must satisfy the requirements of paragraph 
(b)(1)(iii)(D)(6)(i) of this section for the plan year in which it 
takes effect.
    (7) Special rules for former employers and acquired employees. The 
following special rules apply in the case of former employers and 
acquired employees:
    (i) If the closed defined benefit plan was sponsored by a former 
employer and not by the employer, then the rules in paragraph 
(b)(1)(iii)(D)(3)(ii) of this section do not apply and one year is 
substituted for 5 years with respect to paragraph 
(b)(1)(iii)(D)(3)(iii) of this section;
    (ii) An amendment adopted during the 5-year period ending on the 
closure date that extends the coverage or benefit formula of the closed 
defined benefit plan to an acquired group of employees may be applied 
(in addition to the amendments described in paragraph (b)(1)(iii)(D)(5) 
of this section) provided that all similarly situated employees within 
that group are treated in a consistent manner; and
    (iii) If the employees of a former employer become the employees of 
the new employer as a result of a transaction that is a merger, 
acquisition, or similar event, then the transaction is treated as a 
closure amendment with respect to the former employer's plan as of the 
effective date of the acquisition.
    (E) Effective/applicability date. See Sec.  1.401(a)(4)-13(a)(4) 
for rules on the effective/applicability date of this section.
    (iv) * * *
    (E) Defined benefit replacement allocation may be disregarded. In 
determining whether a plan has a gradual age or service schedule for 
the plan year within the meaning of paragraph (b)(1)(iv)(A) of this 
section, if an employee receives a defined benefit replacement 
allocation (within the meaning of paragraph (b)(1)(iii)(D) of this 
section) for the plan year, then the plan's schedule is determined 
without regard to the defined benefit replacement allocation. For this 
purpose, the rules under paragraph (b)(1)(iii)(B) of this section 
apply. See Sec.  1.401(a)(4)-13(a)(4) for rules on the effective/
applicability date of this paragraph (b)(1)(iv)(E).
* * * * *
0
Par. 7. Section 1.401(a)(4)-9 is amended by:
0
1. Revising paragraphs (b)(2)(v)(A) and (b)(2)(v)(D)(3).
0
2. Adding paragraphs (b)(2)(v)(D)(4) and (5).
0
3. Redesignating paragraph (b)(2)(v)(F) as paragraph (b)(2)(v)(H).
0
4. Adding paragraphs (b)(2)(v)(F) and (b)(2)(v)(G).
    The revisions and additions read as follows:


Sec.  1.401(a)(4)-9  Plan aggregation and restructuring.

* * * * *
    (b) * * *
    (2) * * *
    (v) Eligibility for testing on a benefits basis--(A) General rule--
(1) In general. Unless, for the plan year, a DB/DC plan is primarily 
defined benefit in character (within the meaning of paragraph 
(b)(2)(v)(B) of this section) or consists of broadly available separate 
plans (within the meaning of paragraph (b)(2)(v)(C) of this section), 
in order to be permitted to demonstrate satisfaction of the 
nondiscrimination in amount requirement of Sec.  1.401(a)(4)-1(b)(2) on 
the basis of benefits, the DB/DC plan must satisfy the minimum 
aggregate allocation gateway (as described in paragraph (b)(2)(v)(D) of 
this section) except as provided in paragraph (b)(2)(v)(A)(2) of this 
section.
    (2) Additional testing options. A DB/DC plan that is not eligible 
to demonstrate satisfaction of the nondiscrimination in amount 
requirement of Sec.  1.401(a)(4)-1(b)(2) on the basis of benefits under 
paragraph (b)(2)(v)(A)(1) of this section is permitted to demonstrate 
satisfaction of that requirement on the basis of benefits if the DB/DC 
plan satisfies either the closed plan rule of paragraph (b)(2)(v)(F) of 
this section or the lower interest rate rule of paragraph (b)(2)(v)(G) 
of this section.
    (3) Effective/applicability date. See Sec.  1.401(a)(4)-13(a)(4) 
for rules on the effective/applicability date of this paragraph 
(b)(2)(v)(A).
* * * * *
    (D) * * *
    (3) Averaging of rates for NHCEs--(i) Defined benefit plan. For 
purposes of this paragraph (b)(2)(v)(D), a plan is permitted to treat 
each NHCE who benefits under a defined benefit plan that is part of the 
DB/DC plan as having an equivalent normal allocation rate equal to the 
average of the equivalent normal allocation rates under the defined 
benefit plan for all NHCEs benefitting under that plan.
    (ii) Defined contribution plan. For purposes of this paragraph 
(b)(2)(v)(D), a plan is permitted to treat each NHCE who benefits under 
a defined contribution plan that is part of the DB/DC plan as having an 
allocation rate equal to the average of the allocation rates under the 
defined contribution plan for all NHCEs benefitting under that plan.
    (iii) Limitations on the averaging of rates. For purposes of 
applying paragraphs (b)(2)(v)(D)(3)(i) and (ii) of this section, any 
equivalent normal allocation rate or allocation rate in excess of 15% 
of plan year compensation is treated as being 15%. The preceding 
sentence is applied by substituting 25% for 15% each time it

[[Page 4986]]

appears, but only if any allocation rate or equivalent normal 
allocation rate higher than 15% results solely from a plan design 
providing allocation rates or generating equivalent normal allocation 
rates that are a function of age or service under which higher rates 
are provided to older or longer-service employees.
    (4) Use of matching contributions. For purposes of this paragraph 
(b)(2)(v)(D), if an NHCE is eligible for a matching contribution under 
a defined contribution plan that is part of the DB/DC plan, then the 
lesser of 3% and the average matching contribution percentage for the 
group of eligible NHCEs in that plan is permitted to be added to the 
allocation rate for that NHCE. For this purpose, the average matching 
contribution percentage for the group of eligible NHCEs in a plan is 
the actual contribution percentage (within the meaning of Sec.  
1.401(m)-5) for that group, determined without taking into account any 
employee contributions.
    (5) Effective/applicability date. See Sec.  1.401(a)(4)-13(a)(4) 
for rules on the effective/applicability date of this paragraph 
(b)(2)(v)(D).
* * * * *
    (F) Closed plan rule--(1) In general. For a plan year that begins 
on or after the fifth anniversary of the closure date with respect to a 
closed defined benefit plan, a DB/DC plan that includes a closed 
defined benefit plan satisfies the closed plan rule of this paragraph 
(b)(2)(v)(F) for the plan year if--
    (i) The closed defined benefit plan was in effect for the 5-year 
period ending on the closure date and neither the benefit formula nor 
the coverage of the plan was significantly changed by plan amendment 
(other than the closure amendment) with an effective date during the 
period that begins five years before the closure date and ends on the 
last day of the plan year; and
    (ii) For each plan year that begins on or after the closure date 
and before the fifth anniversary of the closure date, one of the 
requirements in paragraph (b)(2)(v)(F)(2) of this section is satisfied.
    (2) Testing for 5 years post-closure. A DB/DC plan meets the 
requirements of this paragraph (b)(2)(v)(F)(2) if--
    (i) Each defined benefit plan that is part of the DB/DC plan 
satisfies the nondiscrimination in amount requirement of Sec.  
1.401(a)(4)-1(b)(2) on the basis of benefits without aggregation with 
any defined contribution plan;
    (ii) The DB/DC plan satisfies the nondiscrimination in amount 
requirement of Sec.  1.401(a)(4)-1(b)(2) on the basis of contributions; 
or
    (iii) The DB/DC plan satisfies the primarily defined benefit in 
character requirement of paragraph (b)(2)(v)(B) of this section, or the 
broadly available separate plans requirement of paragraph (b)(2)(v)(C) 
of this section.
    (3) Certain amendments not taken into account. For purposes of this 
paragraph (b)(2)(v)(F), the following plan amendments are not taken 
into account:
    (i) An amendment to the closed defined benefit plan adopted during 
the 5-year period ending on the closure date, provided that the accrued 
benefit or future accruals for any employee are not increased, coverage 
is not expanded, and the amendment is not discriminatory within the 
meaning of Sec.  1.401(a)(4)-8(b)(1)(iii)(D)(6).
    (ii) An amendment adopted during the 5-year period ending on the 
closure date that extends the benefit formula with respect to the 
closed defined benefit plan to an acquired group of employees provided 
that all similarly situated employees within that group are treated in 
a consistent manner.
    (iii) An amendment to the closed defined benefit plan that is 
adopted after the closure date that is not discriminatory within the 
meaning of Sec.  1.401(a)(4)-8(b)(1)(iii)(D)(6).
    (iv) An amendment to the closed defined benefit plan that makes de 
minimis changes in the benefit formula
    (v) An amendment that guidance published by the Commissioner in the 
Internal Revenue Bulletin provides will not be taken into account.
    (G) Lower interest rate rule. A DB/DC plan satisfies the lower 
interest rate rule of this paragraph (b)(2)(v)(G) if the plan can 
demonstrate satisfaction of the nondiscrimination in amount requirement 
of Sec.  1.401(a)(4)-1(b)(2) on the basis of benefits, provided that 
benefits are normalized using an interest rate of 6% rather than a 
standard interest rate.
* * * * *
0
Par. 8. In Sec.  1.401(a)(4)-12, add definitions for Closed defined 
benefit plan, Closure amendment, Closure date, and Grandfathered group 
of employees in alphabetical order to read as follows:


Sec.  1.401(a)(4)-12  Definitions.

* * * * *
    Closed defined benefit plan. Closed defined benefit plan means a 
defined benefit plan that has been amended to--
    (1) Cease accruals under a benefit formula provided by the defined 
benefit plan for some or all employees whose benefits were previously 
determined under that benefit formula; or
    (2) Limit participation in the defined benefit plan to a group of 
employees that consists of some or all of the plan participants who 
participated in the plan as of the closure date.
    Closure amendment. A closure amendment is a plan amendment that 
results in a closed defined benefit plan.
    Closure date. A closure date is the last day before accruals cease 
or participation is limited pursuant to the closure amendment.
* * * * *
    Grandfathered group of employees. A grandfathered group of 
employees with respect to a closure amendment means the group of 
employees who, after the closure date, either continue accruals under 
the closed defined benefit plan's benefit formula or are entitled to an 
allocation formula under a defined contribution plan because those 
employees previously participated in the closed defined benefit plan.
* * * * *
0
Par. 9. In Sec.  1.401(a)(4)-13, paragraph (a)(4) is added to read as 
follows:


Sec.  1.401(a)(4)-13  Effective dates and fresh-start rules.

    (a) * * *
    (4) Effective/applicability date--(i) In general. Except as 
otherwise provided in this paragraph (a)(4), the rules of Sec.  
1.401(a)(4)-2(c), Sec.  1.401(a)(4)-3(c)(2), Sec.  1.401(a)(4)-8(b), 
and Sec.  1.401(a)(4)-9(b)(2)(v)(A) and (D) apply to plan years 
beginning on or after the date of publication of the Treasury decision 
adopting these rules as final in the Federal Register.
    (ii) Application for earlier plan years. Except as provided in 
paragraph (a)(4)(iii) of this section, taxpayers may apply Sec.  
1.401(a)(4)-2(c), Sec.  1.401(a)(4)-3(c)(2), Sec.  1.401(a)(4)-8(b), or 
Sec.  1.401(a)(4)-9(b)(2)(v)(A) and (D) for plan years beginning on or 
after January 1, 2014 and before the effective/applicability date 
specified under paragraph (a)(4)(i) of this section. Alternatively, for 
these plan years, taxpayers may apply Sec.  1.401(a)(4)-2(c), Sec.  
1.401(a)(4)-3(c)(2), Sec.  1.401(a)(4)-8(b), or Sec.  1.401(a)(4)-
9(b)(2)(v)(A) and (D) as contained in 26 CFR part 1 revised April 1, 
2015.
    (iii) Certain rules not applicable until finalized. The rules of 
Sec.  1.401(a)(4)-9(b)(2)(v)(D)(3)(ii), (b)(2)(v)(D)(4), and 
(b)(2)(v)(G) are not permitted to be applied for plan years before the 
effective/applicability date specified in paragraph (a)(4)(i) of this 
section.
* * * * *

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-01675 Filed 1-28-16; 8:45 am]
 BILLING CODE 4830-01-P