Limitations on Benefits and Contributions Under Qualified Plans, 16878-16931 [E7-5750]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 65 (Thursday, April 5, 2007)]
[Rules and Regulations]
[Pages 16878-16931]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-5750]



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Part II





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1 and 11



Limitations on Benefits and Contributions Under Qualified Plans; Final 
Rule

Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules 
and Regulations

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 11

[TD 9319]
RIN 1545-BD52


Limitations on Benefits and Contributions Under Qualified Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations under section 415 of 
the Internal Revenue Code (Code) regarding the limitations of section 
415, including updates to the regulations for numerous statutory 
changes since comprehensive final regulations were last published under 
section 415. The final regulations also make conforming changes to 
regulations under sections 401(a), 401(a)(9), 401(k), 402, 416, and 
457, and make other minor corrective changes to regulations under 
sections 401(a)(4), 414(s), 457, and 924. These regulations affect 
administrators of, participants in, and beneficiaries of qualified 
employer plans and certain other retirement plans.

DATES: Effective Date: These regulations are effective April 5, 2007.
    Applicability Dates: These regulations generally apply for 
limitation years beginning on or after July 1, 2007. See Sec. Sec.  
1.401(k)-1(e)(8), 1.415(a)-1(g), 1.457-6(c)(2)(i), and 1.457-12 
regarding the applicability dates of these regulations.

FOR FURTHER INFORMATION CONTACT: Vernon S. Carter at (202) 622-6060 or 
Linda S.F. Marshall at (202) 622-6090 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR Parts 1 and 11) under section 415 of the Code relating to 
limitations on benefits and contributions under qualified plans. In 
addition, this document contains conforming amendments to the Income 
Tax Regulations under sections 401(a) (including section 401(a)(9)), 
401(k), 402, 416, and 457, as well as minor corrective changes to the 
regulations under section 457 and changes to other regulations under 
sections 401(a) (including section 401(a)(4)), 414(s), and 924 to 
update cross-references to the final regulations under section 415.
    Section 415 was added to the Code by the Employee Retirement Income 
Security Act of 1974 (88 Stat. 829), Public Law 93-406 (ERISA), and has 
been amended many times since. Section 415 provides a series of limits 
on benefits under qualified defined benefit plans and on contributions 
and other additions under qualified defined contribution plans. See 
also section 401(a)(16). Pursuant to section 415(a)(2), the limitations 
of section 415 also apply to section 403(b) annuity contracts and to 
simplified employee pensions described in section 408(k) (SEPs). In 
addition, the limitations of section 415 for defined contribution plans 
apply to contributions allocated to any individual medical account that 
is part of a pension or annuity plan established pursuant to section 
401(h) and to amounts attributable to medical benefits allocated to an 
account under a welfare benefit fund established for a key employee 
pursuant to section 419A(d)(1).
    Section 404(j) provides generally that, in computing the amount of 
any deduction for contributions under a qualified plan, benefits and 
annual additions in excess of the applicable limitations under section 
415 are not taken into account. In addition, in computing the 
applicable limits on deductions for contributions to a defined benefit 
plan, and in computing the full funding limitation, an adjustment under 
section 415(d)(1) is not taken into account for any year before the 
year for which that adjustment first takes effect.
    The definition of compensation that is used for purposes of section 
415 is also used for a number of other purposes under the Code. Under 
section 219(b)(3), contributions on behalf of an employee to a plan 
described in section 501(c)(18) are limited to 25 percent of 
compensation as defined in section 415(c)(3). Section 404(a)(12) 
provides that, for various specified purposes in determining deductible 
limits under section 404, the term compensation includes amounts 
treated as participant's compensation under section 415(c)(3)(C) or 
(D). Pursuant to section 409(b)(3), for purposes of determining whether 
employer securities are allocated proportionately to compensation in 
accordance with the rules of section 409(b)(1), the amount of 
compensation paid to a participant for any period is the amount of such 
participant's compensation (within the meaning of section 415(c)(3)) 
for such period. Under section 414(q)(4), for purposes of determining 
whether an employee is a highly compensated employee within the meaning 
of section 414(q), the term compensation has the meaning given such 
term by section 415(c)(3). Section 414(s), which defines the term 
compensation for purposes of certain qualification requirements, 
generally provides that the term compensation has the meaning given 
such term by section 415(c)(3). Under section 416(c)(2), allocations to 
participants who are non-key employees under a top-heavy plan that is a 
defined contribution plan are required to be at least 3 percent of the 
participant's compensation (within the meaning of section 415(c)(3)). 
Pursuant to section 457(e)(5), the term includible compensation, which 
is used in limiting the amount that can be deferred for a participant 
under an eligible deferred compensation plan as defined in section 
457(b), has the same meaning as the term participant's compensation 
under section 415(c)(3).
    Comprehensive regulations regarding section 415 were last issued in 
1981. See TD 7748, published in the Federal Register on January 7, 1981 
(46 FR 1687). Since then, changes to section 415 have been made in the 
Economic Recovery Tax Act of 1981, Public Law 97-34 (95 Stat. 320) 
(ERTA), the Tax Equity and Fiscal Responsibility Act of 1982, Public 
Law 97-248 (96 Stat. 623) (TEFRA), the Deficit Reduction Act of 1984, 
Public Law 98-369 (98 Stat. 494) (DEFRA), the Tax Reform Act of 1986, 
Public Law 99-514 (100 Stat. 2481) (TRA '86), the Technical and 
Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342) 
(TAMRA), the Uruguay Round Agreements Act of 1994, Public Law 103-465 
(108 Stat. 4809) (GATT), the Small Business Job Protection Act of 1996, 
Public Law 104-188 (110 Stat. 1755) (SBJPA), the Community Renewal Tax 
Relief Act of 2000, Public Law 106-554 (114 Stat. 2763) (CRA), the 
Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 
107-16 (115 Stat. 38) (EGTRRA), the Job Creation and Worker Assistance 
Act of 2002, Public Law 107-147 (116 Stat. 21) (JCWAA), the Pension 
Funding Equity Act of 2004, Public Law 108-218 (118 Stat. 596) (PFEA), 
the Working Families Tax Relief Act of 2004, Public Law 108-311 (118 
Stat. 1166) (WFTRA), the Gulf Opportunity Zone Act of 2005, Public Law 
109-135 (119 Stat. 2577) (GOZA), and the Pension Protection Act of 
2006, Public Law 109-280 (120 Stat. 780) (PPA '06).
    Although some limited changes to the regulations were made after 
1981, most of the statutory changes made since that time are not 
reflected in the regulations, but in IRS notices, revenue rulings, and 
other guidance of general applicability, as follows:
     Notice 82-13 (1982-1 CB 360) (see Sec.  601.601(d)(2)) 
provides guidance on

[[Page 16879]]

deductible employee contributions (including guidance under section 
415) to reflect the addition of provisions relating to deductible 
employee contributions in ERTA.
     Notice 83-10 (1983-1 CB 536) (see Sec.  601.601(d)(2)) 
provides guidance on the changes to section 415 made by TEFRA. The 
TEFRA changes were extensive, and included reductions of the dollar 
limits on annual benefits under a defined benefit plan and annual 
additions under a defined contribution plan, changes to the age and 
form adjustments made in the application of the limits under a defined 
benefit plan, and rules regarding the deductibility of contributions 
with respect to benefits that exceed the applicable limitations of 
section 415.
     Notice 87-21 (1987-1 CB 458) (see Sec.  601.601(d)(2)) 
provides guidance on the changes to section 415 made by TRA '86. The 
TRA '86 changes modified the rules for the indexing of the dollar limit 
on annual additions under a defined contribution plan, the treatment of 
employee contributions as annual additions, and the rules for age 
adjustments under defined benefit plans, and added a phase-in of the 
section 415(b)(1)(A) dollar limitation over 10 years of participation, 
as well as rules permitting the limitations of section 415 to be 
incorporated by reference under the terms of a plan.
     Rev. Rul. 98-1 (1998-1 CB 249) (modifying and superseding 
Rev. Rul. 95-29, 1995-1 CB 81) (see Sec.  601.601(d)(2)) provides 
guidance regarding certain form and age adjustments under a defined 
benefit plan pursuant to changes made by GATT (as modified under 
SBJPA), including transition rules relating to those adjustments.
     Notice 99-44 (1999-2 CB 326) (see Sec.  601.601(d)(2)) 
provides guidance regarding the repeal under SBJPA of the limitation on 
the combination of a defined benefit plan and a defined contribution 
plan under former section 415(e).
     Notice 2001-37 (2001-1 CB 1340) (see Sec.  601.601(d)(2)) 
provides guidance regarding the inclusion of salary reduction amounts 
for qualified transportation fringe benefits in the definition of 
compensation for purposes of section 415, as provided under CRA.
     Rev. Rul. 2001-51 (2001-2 CB 427) (see Sec.  
601.601(d)(2)) provides guidance relating to the increases in the 
limitations of section 415 for both defined benefit and defined 
contribution plans, which were enacted as part of EGTRRA.
     Rev. Rul. 2001-62 (2001-2 CB 632) (superseding Rev. Rul. 
95-6, 1995-1 CB 80) (see Sec.  601.601(d)(2)) provides mortality tables 
to be used to make certain form adjustments to benefits under a defined 
benefit plan for purposes of applying the limitations of section 415, 
pursuant to the requirement to use a specified mortality table added by 
GATT.
     Notice 2002-2 (2002-1 CB 285) (see Sec.  601.601(d)(2)) 
provides guidance regarding the treatment of reinvested employee stock 
ownership plan (ESOP) dividends under section 415(c), to reflect 
changes made by SBJPA.
     Rev. Rul. 2002-27 (2002-1 CB 925) (see Sec.  
601.601(d)(2)) provides guidance pursuant to which a definition of 
compensation can be used for purposes of applying the limitations of 
section 415 even if that definition treats certain specified amounts 
that may not be available to an employee in cash as subject to section 
125 (and therefore included in compensation).
     Rev. Rul. 2002-45 (2002-2 CB 116) (see Sec.  
601.601(d)(2)) provides guidance regarding the treatment of certain 
payments to defined contribution plans to restore losses resulting from 
actions by a fiduciary for which there is a reasonable risk of 
liability for breach of a fiduciary duty (including the treatment of 
those payments under section 415).
     Notice 2004-78 (2004-2 CB 879) (see Sec.  601.601(d)(2)) 
provides guidance regarding the actuarial assumptions that must be used 
for distributions with annuity starting dates occurring during plan 
years beginning in years 2004 and 2005 to determine whether an amount 
payable under a defined benefit plan in a form that is subject to the 
minimum present value requirements of section 417(e)(3) satisfies the 
requirements of section 415. This guidance reflects changes made in 
PFEA.
    For copies of recently issued Revenue Procedures, Revenue Rulings, 
Notices, and other guidance published in the Internal Revenue Bulletin 
or the Cumulative Bulletin, please visit the IRS Web site at https://
www.irs.gov.
    Some previously issued guidance has been superseded by subsequent 
statutory changes. For example, the simplified actuarial adjustment 
factors formerly permitted to be used to adjust certain forms of 
benefit for purposes of applying the limitations of section 415(b) 
pursuant to Rev. Rul. 80-253 (1980-2 CB 159) (see Sec.  601.601(d)(2)) 
were not permitted to be used after statutory changes imposed the use 
of specified actuarial assumptions to make these adjustments. In 
addition, the projected post-retirement adjustments to the section 
415(b)(1)(B) compensation limit that were required to be taken into 
account for purposes of sections 404 and 412 under Rev. Rul. 81-195 
(1981-2 CB 104) (see Sec.  601.601(d)(2)) were not required or 
permitted to be taken into account for those purposes following the 
addition of section 404(j) in TEFRA.
    The Treasury Department and the IRS believe that a single 
restatement of the section 415 rules serves the interests of plan 
sponsors, third-party administrators, plan participants, and plan 
beneficiaries. On May 31, 2005, a notice of proposed rulemaking (REG-
130241-04) was published in the Federal Register (70 FR 31214) to issue 
new regulations under section 415 (the proposed regulations). The 
guidance items described in this preamble were reflected in the 
proposed regulations with some modifications. In addition, the proposed 
regulations reflected other statutory changes not previously addressed 
by guidance, and included some other changes and clarifications to the 
1981 regulations. To the extent practicable, the preamble to the 
proposed regulations identified and explained substantive changes from 
the 1981 regulations or existing guidance.
    Following publication of the proposed regulations, comments were 
received and a public hearing was held on August 17, 2005. 
Subsequently, Notice 2005-87 (2005-2 CB 1097) (see Sec.  601.601(d)(2)) 
was issued to address certain concerns about the effective date 
provisions of the proposed regulations. After consideration of the 
comments received, the proposed regulations are adopted by this 
Treasury decision, subject to a number of changes that are summarized 
in the preamble.

Explanation of Provisions

Overview

    These regulations reflect the numerous statutory changes to section 
415 and related provisions that have been made since 1981. Some of the 
statutory changes reflected in the regulations are as follows:
     The current statutory limitations under sections 
415(b)(1)(A) and 415(c)(1) applicable for defined benefit and defined 
contribution plans, respectively, as most recently amended by EGTRRA.
     Changes to the rules for age adjustments to the applicable 
limitations under defined benefit plans, under which the dollar 
limitation is adjusted for commencement before age 62 or after age 65.
     Changes to the rules, including specification of 
parameters, for benefit adjustments under defined benefit plans.

[[Page 16880]]

     The phase-in of the dollar limitation under section 
415(b)(1)(A) over 10 years of participation, as added by TRA '86.
     The addition of the section 401(a)(17) limitation on 
compensation that is permitted to be taken into account in determining 
plan benefits, as added by TRA '86, and the interaction of this 
requirement with the limitations under section 415.
     Exceptions to the compensation-based limitation under 
section 415(b)(1)(B) for governmental plans and multiemployer plans.
     Changes to the aggregation rules under section 415(f) 
under which multiemployer plans are not aggregated with single-employer 
plans for purposes of applying the compensation-based limitation of 
section 415(b)(1)(B) to a single-employer plan.
     The repeal under SBJPA of the section 415(e) combined 
limitation on participation in a defined benefit plan and a defined 
contribution plan.
     The changes to section 415(c) that were made in 
conjunction with the repeal under EGTRRA of the exclusion allowance 
under section 403(b)(2).
     The current rounding and base period rules for annual 
cost-of-living adjustments pursuant to section 415(d), as most recently 
amended in EGTRRA and WFTRA.
     Changes to section 415(c) under which certain types of 
arrangements are no longer subject to the limitations of section 415(c) 
(such as individual retirement accounts other than SEPs) and other 
types of arrangements have become subject to the limitations of section 
415(c) (such as certain individual medical accounts).
     The inclusion in compensation (for purposes of section 
415) of certain salary reduction amounts not included in gross income.
     The modification for distributions with annuity starting 
dates in plan years beginning in years 2004 and 2005 made by PFEA with 
respect to the interest rate assumptions in section 415(b)(2)(E) for 
converting certain forms of benefits to an actuarially equivalent 
straight life annuity.
     The following modifications to section 415 that were made 
by PPA '06: (i) Changes to the interest rate assumptions in section 
415(b)(2)(E) that are used for converting certain forms of benefits to 
an equivalent straight life annuity (section 303 of PPA '06); (ii) 
elimination of the active participation requirement in determining a 
participant's high-3 years of service in section 415(b)(3) (section 832 
of PPA '06); (iii) exemption from the section 415(b)(1)(B) compensation 
limit for certain benefits provided under a defined benefit plan 
maintained by an organization described in section 3121(w)(3)(A) 
(section 867 of PPA '06); and (iv) expansion of the definition of 
qualified participant in section 415(b)(2)(H) to include certain 
participants in a defined benefit plan maintained by an Indian tribal 
government (section 906(b) of PPA '06).
    These regulations provide specific rules regarding when amounts 
received following severance from employment are considered 
compensation for purposes of section 415, and when such amounts are 
permitted to be deferred pursuant to section 401(k) or section 457(b). 
These regulations generally provide that amounts received following 
severance from employment are not considered to be compensation for 
purposes of section 415, but provide exceptions for certain payments 
made by the later of 2\1/2\ months following severance from employment 
or the end of the year in which the severance occurs. These regulations 
include corresponding changes to the regulations under sections 401(k) 
and 457 that provide that amounts payable following severance from 
employment can only be deferred if those amounts are within these same 
exceptions.\1\ The rule pursuant to which compensation received after 
severance from employment is not considered compensation for purposes 
of section 415 generally does not apply to payments to an individual in 
qualified military service. The rules governing amounts received 
following severance from employment are discussed in this preamble in 
more detail under the paragraph heading ``Sec.  1.415(c)-2: Definition 
of compensation.''
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    \1\ The proposed regulations also contained corresponding 
changes to regulations under section 403(b) with respect to amounts 
payable following severance from employment. These changes will be 
incorporated into regulations under section 403(b) when those 
regulations are finalized.
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Provisions of the Regulations

General Rules (Sec.  1.415(a)-1)
    Section 1.415(a)-1 of these regulations sets forth general rules 
relating to limitations under section 415 and provides an overview of 
the remaining regulations, including cross-references to special rules 
that apply to section 403(b) annuities, multiemployer plans, 
governmental plans, and plans that are not subject to the requirements 
of section 411. In addition, Sec.  1.415(a)-1 provides rules for a 
plan's incorporation by reference of the rules of section 415 pursuant 
to section 1106(h) of TRA '86 (including detailed guidelines regarding 
incorporation by reference of the annual cost-of-living adjustments to 
the statutory limits and the application of default rules), rules for 
plans maintained by more than one employer, a definition of the term 
``severance from employment,'' and rules that apply in other special 
situations. Section 1.415(a)-1 generally retains the rules set forth in 
the proposed regulations.
    The proposed regulations eliminated the rule under the 1981 
regulations under which a multiemployer plan could satisfy the 
limitations of section 415 separately with respect to benefits or 
contributions from each employer. Thus, the proposed regulations 
required the benefits or annual additions with respect to a participant 
under a multiemployer plan to satisfy the limitations of section 415 on 
an aggregate basis. Some commentators asked that the rule from the 1981 
regulations be retained. The IRS and the Treasury Department have 
determined that there is no statutory basis for permitting 
disaggregation of a multiemployer plan for this purpose. Furthermore, 
statutory changes made since the issuance of the 1981 regulations have 
made this permissive disaggregation rule from the 1981 regulations less 
needed and more conducive to significant abuses. In EGTRRA (and as made 
permanent in PPA '06), multiemployer plans were exempted from the 
limitation for defined benefit plans based on high-3 average 
compensation. This change eliminated the need for multiemployer plans 
to obtain compensation information with respect to each participant 
from multiple participating employers. In TRA '86, the phase-in period 
for the dollar limitation for defined benefit plans was changed from 10 
years of service to 10 years of plan participation. As a result of this 
change, the permissive disaggregation rule from the 1981 regulations 
allows for the multiplication of section 415 limits within a 
multiemployer plan that could not be otherwise achieved by simply 
establishing separate single employer plans. Accordingly, these final 
regulations retain the rule from the proposed regulations that does not 
allow disaggregation of a multiemployer plan. In this regard, see the 
discussion under the paragraph heading ``Sec.  1.415(c)-2: Definition 
of Compensation'' for a rule that treats all employers contributing to 
a multiemployer plan as a single employer for purposes of the 
restriction on the recognition of compensation paid after severance 
from employment with an employer.

[[Page 16881]]

    Section 1.415(a)-1(d)(3)(v) provides rules regarding a plan's 
incorporation by reference of cost-of-living increases in the 
applicable limitations pursuant to section 415(d), including default 
rules that apply in the absence of contrary plan provisions. In 
providing rules for incorporation by reference, the proposed 
regulations provided that annual increases in the applicable 
limitations pursuant to section 415(d) do not apply in limitation years 
beginning after the annuity starting date to a participant who has 
previously commenced receiving benefits unless the plan specifies that 
this annual increase applies to such a participant.
    One commentator pointed out that this provision in the proposed 
regulations modified the default treatment under the 1981 regulations 
(which provide that adjustments to the applicable limitations are not 
made after a participant's separation from service unless the plan so 
provides). In response to this comment, the final regulations retain 
the rule from the 1981 regulations under which the section 415(d) 
annual increases in the applicable limitations do not apply with 
respect to a participant for increases that become effective after the 
participant's severance from employment with the employer maintaining 
the plan (or, if earlier, after the annuity starting date in the case 
of a participant who has commenced receiving benefits) unless the plan 
specifies that this annual increase applies to such a participant. 
Thus, annual increases in the applicable limitations apply to a 
participant who has severed from employment with the employer 
maintaining the plan or who has commenced receiving benefits only if 
the plan specifies that those annual increases apply to such a 
participant.
Limitations Applicable to Defined Benefit Plans (Sec.  1.415(b)-1)
    Section 1.415(b)-1 of these regulations sets forth rules for 
applying the limitations on benefits under a defined benefit plan. 
Under these limitations, the annual benefit must not exceed the lesser 
of $160,000 (as adjusted pursuant to section 415(d)) and 100 percent of 
the participant's average compensation for the period of the 
participant's high-3 years of service. These regulations generally 
define the period of a participant's high-3 years of service as the 
period of 3 consecutive calendar years during which the employee had 
the greatest aggregate compensation from the employer. A retirement 
benefit payable in a form other than a straight life annuity is 
adjusted to an actuarially equivalent straight life annuity to 
determine the annual benefit payable under that form of distribution. 
In addition, the $160,000 dollar limitation under section 415(b)(1)(A) 
is actuarially adjusted for benefit payments that commence before age 
62 or after age 65. Section 1.415(b)-1 generally retains the rules set 
forth in the proposed regulations except as indicated below.
    The proposed regulations provided that, in addition to applying to 
benefits payable to participants and beneficiaries, the limitations of 
section 415(b) apply to accrued benefits (regardless of whether the 
benefit is vested) and benefits payable from an annuity contract 
distributed to a participant. Some commentators argued that it is 
inappropriate to apply the limitations of section 415(b) to a 
participant's accrued benefit in the case of a plan that is not subject 
to the requirements of section 411, since such a plan sometimes does 
not define an accrued benefit and benefits under such a plan can always 
be reduced if needed so that payments under the plan will satisfy the 
limitations of section 415. In response, these regulations provide that 
the rule applying section 415(b) to limit a participant's accrued 
benefit applies only to a plan that is subject to the requirements of 
section 411. However, a plan that is not subject to the requirements of 
section 411 is still subject to the requirements of section 415(b) with 
respect to the annual benefit payable to a participant at any time 
under the plan. As indicated in the preamble to the proposed 
regulations, where a participant's accrued benefit is computed pursuant 
to the fractional rule of section 411(b)(1)(C), the limitations of 
section 415(b) apply to the accrued benefit as of the end of the 
limitation year and, for ages prior to normal retirement age, are not 
required to be applied to the projected annual benefit commencing at 
normal retirement age from which the accrued benefit is computed.

A. Actuarial Assumptions Used to Convert Benefits to a Straight Life 
Annuity

    Pursuant to section 415(b)(2)(B) (which provides for benefits paid 
in a form other than a straight life annuity to be adjusted to an 
actuarially equivalent straight life annuity in accordance with 
Treasury regulations), these regulations provide rules under which a 
retirement benefit payable in any form other than a straight life 
annuity is converted to the straight life annuity that is actuarially 
equivalent to that other form to determine the annual benefit (which is 
used to demonstrate compliance with section 415) with respect to that 
form of distribution. These rules reflect statutory changes that 
specify the actuarial assumptions that are to be used for these 
equivalency calculations as well as published guidance that has been 
issued since the prior final regulations were published in 1981. The 
statutory changes reflected in these rules include, for plan years 
beginning in years 2004 and 2005, the use of a 5.5 percent interest 
rate for benefits that are subject to the present value rules of 
section 417(e)(3),\2\ as set forth in PFEA, as well as the 
modifications under section 303 of PPA '06 to the equivalency 
calculations for benefits that are subject to the present value rules 
of section 417(e)(3) (which are applicable to distributions with 
annuity starting dates in plan years beginning after December 31, 
2005). In addition to setting forth rules for adjusting forms of 
benefit other than straight life annuities, these regulations permit 
the IRS to issue published guidance setting forth simplified methods 
for making these adjustments.
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    \2\ Section 417(e)(3) provides minimum present value 
requirements for certain forms of benefit payable from a defined 
benefit plan under which payments cannot be less than the amount 
calculated using a specified interest rate and a specified mortality 
table. For forms of benefit that are subject to the minimum present 
value rules of section 417(e)(3), the limitations of section 415(b) 
apply to limit the amount of a distribution even if those 
limitations result in a lower distribution than would otherwise be 
required under the rules of section 417(e)(3). See Sec.  1.417(e)-
1(d)(1).
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    Under these regulations, the annual benefit is determined as the 
greater of the actuarially equivalent straight life annuity determined 
under the plan's actuarial assumptions or the actuarially equivalent 
straight life annuity determined under actuarial assumptions specified 
by statute. This methodology implements the policy reflected in section 
415(b)(2)(E), under which the plan's determination that a straight life 
annuity and a particular optional form of benefit are actuarially 
equivalent is overridden only when the optional form of benefit under 
the plan is more valuable than the corresponding straight life annuity 
when the two forms are compared using the statutorily specified 
actuarial assumptions.
    The rules in these regulations under which a retirement benefit 
payable in any form other than a straight life annuity is converted to 
a straight life annuity to determine the annual benefit with respect to 
that form of distribution generally follow the rules set forth in Rev. 
Rul. 98-1. However, the calculation of the actuarially equivalent 
straight life annuity determined using the plan's assumptions for 
actuarial equivalence has been simplified for a

[[Page 16882]]

form of benefit that is not subject to the minimum present value rules 
of section 417(e)(3). Under the simplified calculation, instead of 
first determining the actuarial assumptions used under the plan and 
then applying those assumptions to convert an optional form of benefit 
to an actuarially equivalent straight life annuity, the regulations use 
the straight life annuity, if any, that is payable at the same age 
under the plan. This straight life annuity is then compared to the 
straight life annuity that is the actuarial equivalent of the optional 
form of benefit (determined using the standardized assumptions), and 
the larger of the two straight life annuities is used for purposes of 
demonstrating compliance with section 415.
    This simplification has not been extended to forms of benefit that 
are subject to the minimum present value rules of section 417(e)(3), 
however, because under a plan those forms of benefit are often 
determined as the actuarial equivalent of the deferred annuity, rather 
than as the actuarial equivalent of the immediate straight life 
annuity. Instead, for a benefit paid in a form to which section 
417(e)(3) applies, pursuant to section 415(b)(2)(E), the actuarially 
equivalent straight life annuity benefit generally is determined as the 
greatest of three annual amounts. The first is the annual amount of the 
straight life annuity commencing at the annuity starting date that has 
the same actuarial present value as the particular form of benefit 
payable, computed using the interest rate and mortality table, or 
tabular factor, specified in the plan for actuarial equivalence. The 
second is the annual amount of the straight life annuity commencing at 
the annuity starting date that has the same actuarial present value as 
the particular form of benefit payable, computed using a 5.5 percent 
interest assumption and the applicable mortality table for the 
distribution under Sec.  1.417(e)-1(d)(2). The third is the annual 
amount of the straight life annuity commencing at the annuity starting 
date that has the same actuarial present value as the particular form 
of benefit payable (computed using the applicable interest rate for the 
distribution under Sec.  1.417(e)-1(d)(3) and the applicable mortality 
table for the distribution under Sec.  1.417(e)-1(d)(2)), divided by 
1.05. This rule reflects the amendment of section 415(b)(2)(E) by 
section 303 of PPA '06.
    One commentator asked whether the rules regarding adjustments for 
forms of benefit that are subject to the minimum present value 
standards of section 417(e)(3) apply to plans that are not subject to 
the requirements of section 417. Section 415(b)(2)(E) applies based on 
the form of the benefit, and not the status of the plan, and therefore 
the final regulations provide that these rules also apply to plans that 
are not subject to the requirements of section 417.
    Some commentators expressed concern that the examples illustrating 
the rules for actuarial adjustments converted optional forms of benefit 
into straight life annuities payable monthly, and they noted that had 
the conversion been to a straight life annuity payable on the first day 
of each year, the straight life annuity would have been smaller and 
therefore a greater benefit would have been permissible under section 
415(b). Under section 415(b)(2)(B), the Secretary is delegated 
authority to prescribe regulations for adjusting a benefit so that it 
is equivalent to a benefit payable annually in the form of a straight 
life annuity. These regulations provide that if a benefit is payable in 
the form of a straight life annuity, no adjustment is made to account 
for differences in the timing of payments during a year (for example, 
no adjustment is made on account of the annuity being payable in annual 
or monthly installments). Thus, if the section 415(b) dollar limit for 
a limitation year is $180,000, a plan is not permitted to provide for 
12 monthly payments of $15,583, which is actuarially equivalent to an 
annual benefit of $180,000 payable on the first day of the year. With 
respect to a benefit payable in a form other than a straight life 
annuity, the annual benefit is determined as the straight life annuity 
payable on the first day of each month that is actuarially equivalent 
to the benefit payable in such other form.
    Some commentators expressed concerns regarding the application of 
these actuarial adjustments in the case of annuity forms of benefit 
that are increased automatically each year pursuant to plan terms. 
Commentators argued that, in testing such a form of benefit for 
compliance with section 415, increases to the section 415(b) limits 
pursuant to section 415(d) should be taken into account. Thus, 
commentators asserted that a form of benefit with an automatic increase 
feature should satisfy section 415(b) so long as payments made pursuant 
to the benefit during each limitation year are less than the section 
415(b) limit in effect for the limitation year.
    In response to these comments, these final regulations provide 
that, for a form of benefit that is not subject to the requirements of 
section 417(e)(3), no adjustments are made to reflect these automatic 
increases if certain requirements are satisfied. Specifically, the form 
of benefit without regard to the automatic increase feature must 
satisfy the requirements of section 415(b), and the plan must provide 
that in no event will the amount payable to a participant under the 
form of benefit in any limitation year be greater than the section 
415(b) limit applicable at the annuity starting date, as increased in 
subsequent years pursuant to section 415(d). If these requirements are 
not satisfied, the annual benefit with respect to a benefit that is 
subject to automatic increases must reflect the value of these 
automatic increases under the rules described above.

B. Inclusion of Social Security Supplements in Annual Benefit

    As under the proposed regulations, these regulations clarify that a 
social security supplement is included in determining the annual 
benefit. Under section 415(b)(2)(B), the annual benefit does not 
include ancillary benefits that are not directly related to retirement 
benefits. However, because a social security supplement is payable upon 
retirement as a form of retirement income, it is a retirement benefit. 
Thus, a social security supplement is included in determining the 
annual benefit without regard to whether it is an ancillary benefit or 
a qualified social security supplement (QSUPP) within the meaning of 
Sec.  1.401(a)(4)-12.

C. Determination of High-3 Average Compensation

    The proposed regulations contained two new provisions that would 
have had a significant effect on the determination of a participant's 
average compensation for the participant's high-3 consecutive years. 
The first provision changed a rule in the 1981 final regulations by 
restricting the compensation used for this purpose to compensation 
earned in periods during which the participant was an active 
participant in the plan. Pursuant to the amendment of section 415(b)(3) 
made by section 832 of PPA '06 (which eliminated the active 
participation requirement for purposes of determining average 
compensation for years beginning after December 31, 2005), this change 
has not been incorporated into the final regulations.
    The second provision in the proposed regulations clarified the 
interaction of the requirements of section 401(a)(17) and the 
definition of compensation that must be used for purposes of 
determining a participant's average compensation for the participant's 
high-3 consecutive years. Because a plan is not permitted to base 
benefits on compensation in excess of the limitation

[[Page 16883]]

under section 401(a)(17), a plan's definition of compensation used for 
purposes of applying the limitations of section 415 is not permitted to 
reflect compensation in excess of the limitation under section 
401(a)(17). Thus, for example, where a participant commences receiving 
benefits in 2006 at age 75 (so that the age-adjusted dollar limitation 
could be as high as $390,953, depending on plan provisions), and the 
participant had compensation in excess of the applicable section 
401(a)(17) limit for years 2003, 2004, and 2005, the participant's 
benefit under the plan is limited by the average compensation for his 
highest three years as limited by section 401(a)(17), which is $205,000 
(the average of $200,000, $205,000, and $210,000).
    Commentators objected to this second provision. These regulations 
retain this provision from the proposed regulations because the IRS and 
the Treasury Department believe that this interpretation is based on 
the best reading of applicable statutory requirements. However, these 
regulations include a grandfather provision under which a defined 
benefit plan is considered to satisfy the limitations of section 415(b) 
for a participant with respect to benefits accrued or payable under the 
plan as of the end of the limitation year that is immediately prior to 
the effective date of these final regulations for the plan pursuant to 
plan provisions (including plan provisions relating to the plan's 
limitation year) that were both adopted and in effect before April 5, 
2007, but only if such plan provisions meet the requirements of 
statutory provisions, regulations, and other published guidance 
relating to section 415 in effect immediately before the effective date 
of these final regulations. In determining whether plan provisions meet 
the requirements of statutory provisions, regulations, and other 
published guidance relating to section 415 in effect immediately before 
the effective date of these final regulations, plan provisions are 
permitted to reflect compensation in excess of the section 401(a)(17) 
limit, and the benefits based on such compensation are eligible for the 
grandfather rules.
    These regulations set forth rules for computing the limitation of 
section 415(b)(1)(B) of 100 percent of the participant's average 
compensation for the period of the participant's high-3 years of 
service for a participant who is employed with the employer for less 
than 3 consecutive calendar years. For such a participant, the period 
of the participant's high-3 years of service is the actual number of 
consecutive years of service (including fractions of years, but not 
less than one year). In such a case, the limitation of section 
415(b)(1)(B) of 100 percent of the participant's average compensation 
for the period of the participant's high-3 years of service is computed 
by averaging the participant's compensation during the participant's 
longest consecutive period of service over the actual period of service 
(including fractions of years, but not less than one year). In a change 
from the proposed regulations, these regulations provide that, in the 
case of a participant who has had a severance from employment with the 
employer maintaining the plan and who is subsequently rehired by that 
employer, the period of the participant's high-3 years of service is 
calculated by excluding any years for which the participant performs no 
services for and receives no compensation from the employer maintaining 
the plan (the break period), and by treating the year of service 
immediately prior to and the year of service immediately after the 
break period as if the years were consecutive.
    These regulations also modify the proposed regulations by providing 
a rule that applies in the case of an employee who is rehired after 
severing employment. If the plan provides for the adjustment of a 
participant's compensation limit in accordance with section 415(d) for 
limitation years following the limitation year in which the employee 
severs employment, the rehired employee's compensation limit under 
section 415(b) is the greater of 100 percent of the participant's 
average compensation for the period of the participant's high-3 years 
of service, as determined prior to the employee's severance from 
employment and as adjusted pursuant to section 415(d), or 100 percent 
of the participant's average compensation for the period of the 
participant's high-3 years of service, taking into account service both 
before and after rehire. This rule was added because a participant's 
compensation limit should not be lower than it would otherwise be 
merely because the participant in rehired.

D. Treatment of Benefits Paid Partially in the Form of a QJSA

    Under section 415(b)(2)(B), the survivor annuity portion of any 
joint and survivor annuity that constitutes a qualified joint and 
survivor annuity (QJSA), as defined in section 417(b), is not taken 
into account in determining the annual benefit for purposes of applying 
the limitations of section 415(b). As under the proposed regulations, 
these regulations clarify how this exception from the limitations of 
section 415 for the survivor annuity portion of a QJSA applies to 
benefits paid partially in the form of a QJSA and partially in some 
other form. Under this clarification, the rule excluding the survivor 
portion of a QJSA from the annual benefit applies to the survivor 
annuity payments under the portion of a benefit that is paid in the 
form of a QJSA, even if another portion of the benefit is paid in some 
other form.

E. Dollar Limitation Applicable to Early or Late Commencement

    The determination of the age-adjusted dollar limitation under these 
regulations reflects the rules enacted in EGTRRA. As provided in Q&A-3 
of Rev. Rul. 2001-51, this determination generally follows the same 
steps and procedures as those used in Rev. Rul. 98-1, except that such 
determination takes into account the increased defined benefit dollar 
limitation enacted by EGTRRA and the adjustments for early or late 
commencement are no longer based on social security retirement age. 
Applying rules that are similar to those that are used for determining 
actuarial equivalence among forms of benefits, these regulations 
generally use the plan's determinations for actuarial equivalence of 
early or late retirement benefits, but override those determinations 
where the use of the specified statutory assumptions results in a lower 
limit. This methodology is retained from the proposed regulations 
because the IRS and the Treasury Department believe that generally a 
plan's actuarial equivalence for section 415 purposes should be the 
same as actuarial equivalence for other purposes and because of the 
need to have an administrable rule when a plan uses factors that are 
not explicitly based on an interest rate and mortality table.
    Some commentators expressed concern that these rules effectively 
result in no increase to the dollar limitation where a plan that is not 
subject to the requirements of section 411 does not increase the 
participant's benefit to reflect a delay in commencement beyond age 65. 
No change has been made to address this concern because the IRS and the 
Treasury Department believe it is not appropriate to increase the 
dollar limitation for commencement after age 65 where, under the plan 
terms, there is no increase to the participant's benefit on account of 
delayed commencement (so that any increase in a participant's benefit 
is solely on account of additional service or compensation). In 
response to other commentator

[[Page 16884]]

concerns, these regulations provide that an actuarial increase to a 
participant's benefit for commencement after age 65 is taken into 
account for this purpose even if the actuarial increase offsets 
additional benefit accruals under the plan.
    These regulations adopt rules for mortality adjustments used in 
computing the dollar limitation on a participant's annual benefit for 
distributions commencing before age 62 or after age 65 that are 
generally consistent with Notice 83-10 and Notice 87-21. Under these 
rules, to the extent that a forfeiture does not occur upon the 
participant's death before the annuity starting date, generally no 
adjustment is made to reflect the probability of the participant's 
death during the relevant time period (which is the period before age 
62 or after age 65), and to the extent a forfeiture occurs upon the 
participant's death before the annuity starting date, an adjustment 
must be applied to reflect the probability of the participant's death 
during the relevant time period.
    These regulations also provide a simplified method for applying 
these mortality adjustment rules. Under this simplified method, a plan 
is permitted to treat no forfeiture as occurring upon a participant's 
death if the plan does not charge participants for providing a 
qualified preretirement survivor annuity, but only if the plan applies 
this treatment for adjustments that apply both before age 62 and after 
age 65. This simplified method eliminates the need to determine the 
extent of a forfeiture upon death in the case where a plan provides for 
a qualified preretirement survivor annuity.
    One commentator asked whether, for purposes of adjusting the dollar 
limit for commencement prior to age 62, a plan is permitted to make a 
mortality adjustment for ages below age 62, even if the plan does not 
provide for a forfeiture upon the participant's death before the 
annuity starting date where it is before age 62. Recognizing that 
mortality adjustments would result in a lower limit in such a case, 
these regulations permit such an adjustment to be made if the plan so 
provides.
    Some commentators expressed concern that the application of the 
rules that adjust the section 415(b)(1)(A) dollar limit for pre-age 62 
benefit commencement as set forth in the proposed regulations could 
result in the limit decreasing as a participant ages under certain 
circumstances. To address this concern, these regulations provide that, 
notwithstanding the generally applicable rules for age adjustments to 
the dollar limitation, the age-adjusted section 415(b)(1)(A) dollar 
limit does not decrease on account of an increase in age or the 
performance of additional service.

F. Nonapplication of Adjustment to Dollar Limitation for Early 
Commencement With Respect to Police Department and Fire Department 
Employees

    Consistent with section 415(b)(2)(G) and (H), as amended by section 
906(b) of PPA '06, these regulations provide that the early retirement 
reduction does not apply to certain participants in plans of state, 
Indian tribal government, and local government units who are employees 
of a police department or fire department, or former members of the 
Armed Forces of the United States. This rule applies to any participant 
in a plan maintained by a state, Indian tribal government, or political 
subdivision thereof who is credited, for benefit accrual purposes, with 
at least 15 years of service as either (1) a full-time employee of any 
police department or fire department of the state, Indian tribal 
government, or political subdivision that provides police protection, 
firefighting services, or emergency medical services, or (2) a member 
of the Armed Forces of the United States. These regulations clarify 
that the application of this rule depends on whether the employer is a 
police department or fire department of the state, Indian tribal 
government, or political subdivision, rather than on the job 
classification of the individual participant. Also, this rule applies 
based on the function of an organization rather than based on the name 
of the organization.

G. Application of $10,000 Exception

    Pursuant to section 415(b)(4), the benefits payable with respect to 
a participant under a defined benefit plan satisfy the limitations of 
section 415(b) if the retirement benefits payable with respect to such 
a participant under the plan and all other defined benefit plans of the 
employer do not exceed $10,000 for the plan year or for any prior plan 
year, and the employer has not at any time maintained a defined 
contribution plan in which the participant participated. As under the 
proposed regulations, these regulations clarify that the alternative 
$10,000 limitation under section 415(b)(4) is applied to actual 
distributions made during each year. Thus, a distribution for a 
limitation year that exceeds $10,000 is not within the section 
415(b)(4) alternative limitation (and therefore will not be excepted 
from the otherwise applicable limits of section 415(b)), even if the 
distribution is a single-sum distribution that is the actuarial 
equivalent of an accrued benefit with annual payments that are less 
than $10,000.

H. Exclusion of Annual Benefit Attributable to Mandatory Employee 
Contributions From Annual Benefit

    These regulations retain the rules from the 1981 regulations that 
the annual benefit does not include the annual benefit attributable to 
mandatory employee contributions. For this purpose, the term mandatory 
employee contributions means amounts contributed to the plan by the 
employee that are required as a condition of employment, as a condition 
of participation in the plan, or as a condition of obtaining benefits 
(or additional benefits) under the plan attributable to employer 
contributions. See section 411(c)(2)(C). Employee contributions to a 
defined benefit plan that are not maintained in a separate account as 
described in section 414(k) constitute mandatory employee contributions 
(even if an employee can elect whether to make the contributions, and 
even if section 411 does not apply to the plan) because, depending upon 
the investment performance of plan assets, employer contributions may 
be needed to pay the portion of the participant's benefit that is 
conditioned upon these employee contributions. Any other employee 
contributions (plus earnings thereon) are treated as a separate defined 
contribution plan rather than as part of a defined benefit plan.
    These regulations retain the rule from the 1981 regulations that 
the annual benefit attributable to mandatory employee contributions is 
determined under the rules of section 411(c) and regulations 
promulgated under section 411, regardless of whether section 411 
applies to the plan. These regulations also clarify that the following 
are not treated as employee contributions: (1) Contributions that are 
picked up by a governmental employer as provided under section 
414(h)(2), (2) repayment of any loan made to a participant from the 
plan, and (3) repayment of any amount that was previously distributed. 
One commentator asked how to determine the annual benefit attributable 
to mandatory employee contributions under section 411(c) in the case of 
a plan that is not subject to the requirements of section 411 and 417, 
and suggested the use of the plan's factors for this purpose. This 
suggestion was not incorporated into these final regulations because 
the amount payable with respect to employee contributions

[[Page 16885]]

that is in excess of the amount that would be payable with respect to 
such contributions using the rules of section 411(c) is effectively a 
subsidy that should be included in determining the participant's annual 
benefit under the plan. These regulations also provide that, for 
purposes of determining the accumulated contributions described in 
section 411(c)(2)(C), where the plan is not subject to the requirements 
of section 411, the plan must determine what would have been the 
applicable effective date of section 411(a)(2) as if section 411 
applied to the plan, and in determining the annual benefit that is 
actuarially equivalent to these accumulated contributions, the plan 
must determine the interest rate that would have been required under 
section 417(e)(3) as if section 417 applied to the plan.
    Another commentator asked why the repayment of an employee 
contribution is not treated as an employee contribution under this 
rule. No change to the regulations has been made to reflect this 
concern because, while the repayment is not treated as an employee 
contribution for purposes of section 415, the original employee 
contribution is still considered an employee contribution for this 
purpose.

I. Exclusion of Annual Benefit Attributable to Rollover Contributions 
From Annual Benefit

    These regulations clarify that the annual benefit does not include 
the annual benefit attributable to rollover contributions made to a 
defined benefit plan (that is, rollover contributions that are not 
maintained in a separate account that is treated as a separate defined 
contribution plan under section 414(k)). In such a case, the annual 
benefit attributable to rollover contributions is determined by 
applying the rules of section 411(c) and treating the rollover 
contributions as employee contributions (regardless of whether sections 
411 and 417 apply to the plan). This will occur, for example, if a 
distribution is rolled over from a defined contribution plan to a 
defined benefit plan to provide an annuity distribution. Thus, in the 
case of rollover contributions from a defined contribution plan to a 
defined benefit plan to provide an annuity distribution, the annual 
benefit attributable to those rollover contributions for purposes of 
section 415 is determined by applying the rules of section 411(c), 
regardless of the assumptions used to compute the annuity distribution 
under the plan. Accordingly, in such a case, if the plan credits higher 
interest or uses more favorable factors than those specified in section 
411(c) to determine the amount of annuity payments arising from a 
rollover contribution, the annual benefit under the plan reflects the 
excess of those annuity payments over the amounts that would be payable 
using the rules of section 411(c) because such excess is effectively a 
subsidy which is included in determining the participant's annual 
benefit under the plan.
    These final regulations clarify that the rule that excludes the 
annual benefit attributable to rollover contributions applies to 
rollover contributions from an eligible retirement plan, as defined in 
section 402(c)(8)(B). Thus, the rule applicable to rollovers is not 
limited solely to rollovers from qualified plans.
    Rollover contributions to an account that is treated as a separate 
defined contribution plan under section 414(k) do not give rise to an 
annual benefit because the separate account is not treated as a defined 
benefit plan under section 415(b). Furthermore, under the rules 
relating to defined contribution plans, these rollover contributions to 
a separate account are excluded from the definition of annual additions 
to a defined contribution plan.

J. Treatment of Benefits Transferred Among Plans and Terminated Plans

    These regulations generally retain the provisions in the proposed 
regulations that modify the rules of the 1981 final regulations for 
determining the amount of transferred benefits that are excluded from 
the annual benefit under a defined benefit plan in the event of a 
transfer from another defined benefit plan. These modifications to the 
1981 final regulations are designed to ensure that transferred benefits 
are not counted more than once when the transferor plan and the 
transferee plan are aggregated under section 415(f) and Sec.  1.415(f)-
1, and to prevent the circumvention of the limitations of section 
415(b) through benefit transfers to plans of unrelated employers. The 
rules of section 415(b) that apply upon a transfer of benefits between 
plans operate independently from the requirements of section 414(l), 
and compliance with the requirements of section 414(l) does not ensure 
compliance with these rules.
    The proposed regulations provided that, if the transferee plan's 
benefits are required to be taken into account pursuant to section 
415(f) and Sec.  1.415(f)-1 in determining whether the transferor plan 
satisfies the limitations of section 415(b) for that limitation year, 
then the transferred benefits are disregarded in determining the annual 
benefit under the transferor plan. The final regulations modify this 
rule. This modification is being made in conjunction with modifications 
to the proposed regulations with respect to the aggregation of plans 
among formerly affiliated employers (discussed in more detail under the 
heading ``Sec.  1.415(f)-1: Aggregating plans''). Generally, under the 
modified section 415(f) aggregation rules, there are situations in 
which only a portion of the benefits provided under plans maintained by 
formerly affiliated employers is taken into account when applying 
section 415 on an aggregated basis to each employer. Given this 
modification to the aggregation rules, the determination of whether 
transferred benefits are nonetheless treated as provided by the 
transferor plan is properly based on whether the transferred benefits 
are included in the portion of the transferee plan that is aggregated 
with the transferor plan. Thus, the final regulations provide that, to 
the extent the benefits transferred to a transferee plan are otherwise 
required to be taken into account pursuant to section 415(f) and Sec.  
1.415(f)-1 in determining whether the transferor plan satisfies the 
limitations of section 415(b), the transferred benefits are not also 
treated as being provided under the transferor plan (because these 
benefits will be taken into account by the transferor plan when it is 
aggregated with the transferee plan).
    The proposed regulations provided that where there has been a 
transfer of liabilities between plans and the transferee plan's 
benefits are not required to be taken into account pursuant to section 
415(f) and Sec.  1.415(f)-1 in determining whether the transferor plan 
satisfies the limitations of section 415(b), the assets associated with 
those transferred liabilities (other than surplus assets) are treated 
by the transferor plan as distributed as a single-sum distribution. 
These final regulations modify this proposed transfer rule in two 
respects. First, for the reasons described in the paragraph above, this 
transfer rule is applicable only if the benefits transferred to the 
transferee plan are not otherwise required to be taken into account by 
the transferor plan pursuant to section 415(f) and Sec.  1.415(f)-1. 
Second, the final regulations modify this proposed rule in response to 
comments expressing concern with the administrative complexity 
associated with the calculation of the deemed single-sum distribution. 
Instead of treating the assets associated with the transferred 
liabilities as a deemed single-sum distribution, the final regulations 
treat the transferred liabilities as comprising a plan that must be 
aggregated with the

[[Page 16886]]

transferor plan, that had terminated with sufficient assets to pay 
benefit liabilities under the plan and had purchased annuities to 
provide plan benefits.
    Although such a transfer is treated as a plan termination in 
computing the annual benefit under the transferor plan, no 
corresponding adjustment to the annual benefit under the transferee 
plan is made to reflect the fact that some of the benefits provided 
under the transferee plan are attributable to the transfer. Thus, the 
actual benefit provided under the transferee plan is used to determine 
the annual benefit under the transferee plan even though the 
transferred amount is also included along with other benefits provided 
under the transferor plan in determining the participant's annual 
benefit under the transferor plan.
    While some commentators expressed concern that this resulted in 
double counting of benefits, in most such cases, a participant whose 
benefits have been transferred would accrue no additional benefit under 
the transferor plan that would be required to be tested under the 
transferor plan (in combination with the transferred benefits). 
Furthermore, these rules prevent the transferor plan from avoiding the 
limitations of section 415 for participants by spinning off the 
participants' benefits to a plan of an unrelated employer and then 
accruing additional benefits for the participants. For example, without 
these rules, the benefit of an executive in a plan maintained by the 
executive's employer could be transferred to a plan maintained by a 
business that is owned by the executive and that is not aggregated with 
the executive's employer for purposes of section 415, and the executive 
could accrue an additional benefit up to the section 415 limits under 
the plan maintained by the executive's employer.
    The final regulations provide rules specifying how to take into 
account benefits provided under a terminated plan. If a defined benefit 
plan is terminated with sufficient assets to pay accrued benefits and a 
participant in the plan has not yet commenced benefits under the plan, 
for purposes of satisfying section 415(b) with respect to the 
participant, the final regulations require that all other defined 
benefit plans maintained by the employer that maintained the terminated 
plan take into account the benefits provided pursuant to the annuities 
purchased to provide benefits under the terminated plan at each 
possible annuity starting date. The final regulations provide that if a 
defined benefit plan is terminated and there are not sufficient assets 
for the payment of the accrued benefit of all plan participants, all 
other defined benefit plans maintained by the e