Internal Revenue Bulletin 2005-27 (PDF rendition): IRS Revenue Rulings

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
5-27
July 5, 2005
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2005–38, page 6.
Federal rates; adjusted federal rates; adjusted federal
long-termrateandthelong-termexemptrate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for July 2005.
Rev. Rul. 2
005–39, page 1.
Golden par
achute payments; treatment of section 83(b)
elections
.This ruling discusses whether restricted stock for
which a sec
tion 83(b) election has been made is treated as
outstand
ing stock for purposes of determining whether there
has been a
change in ownership or control under section 280G
of the Cod
e and for determining the amount of stock held by
sharehol
ders in testing whether the shareholder is a disqualified
individu
al under section 280G.
Rev. Rul. 2005–40, page 4.
Insurance, federal income tax purposes.This ruling con-
siders four circumstances in which arrangements between un-
related entities do, and do not, constitute insurance for federal
income tax purposes and whether the issuer qualifies as an in-
surance company for federal income tax purposes.
Notice 2005–48, page 9.
This notice solicits applications for designation of a project as
a qualified green building and sustainable design project under
section 142(l) of the Code. The notice also provides guidance
on the requirements a project must meet in order to be eligible
for designation as a qualified green building and sustainable
design project.
Notice 2005–49, page 14.
This notice requests comments on the qualification of addi-
tional arrangements as insurance, including cell captive ar-
rangements, loan-backs of amounts paid as premiums, the rel-
evance of homogeneity in determining whether risk has been
adequately distributed, and arrangements involving finite risk.
Notice 2005–50, page 14.
This notice provides guidance on miscellaneous issues that
have arisen in the administration of the health coverage tax
credit (HCTC) under section 35 of the Code.
EMPLOYEE PLANS
REG–130241–04, page 18.
Proposed regulations under section 415 of the Code contain
proposed amendments to regulations regarding limitation on
benefits and contributions under qualified plans. The proposed
amendments provide comprehensive guidance regarding the
limitations of section 415, including updates to the regula-
tions for numerous statutory changes since regulations were
last published. The proposed regulations also make conform-
ing changes to regulations under sections 401(A)(9), 401(k),
403(b), and 457, and make other minor corrective changes to
regulations under section 457. A public hearing is scheduled
for August 17, 2005.
(Continued on the next page)
Fi
nding Lists begin on page ii.

EXEMPT ORGANIZATIONS
Notice 2005–49, page 14.
This notice requests comments on the qualification of addi-
tional arrangements as insurance, including cell captive ar-
rangements, loan-backs of amounts paid as premiums, the rel-
evance of homogeneity in determining whether risk has been
adequately distributed, and arrangements involving finite risk.
Announcement
2005–46, page 63.
A list is provi
ded of organizations now classified as private foun-
dations.
EXCISE TAX
Notice 2005–49, page 14.
This notice requests comments on the qualification of addi-
tional arrangements as insurance, including cell captive ar-
rangements, loan-backs of amounts paid as premiums, the rel-
evance of homogeneity in determining whether risk has been
adequately distributed, and arrangements involving finite risk.
ADMINISTRATIVE
Notice 2005–48, page 9.
This notice solicits applications for designation of a project as
a qualified green building and sustainable design project under
section 142(l) of the Code. The notice also provides guidance
on the requirements a project must meet in order to be eligible
for designation as a qualified green building and sustainable
design project.
July 5, 20052005–27 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2005–27 I.R.B.July 5, 2005

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
Section 83.—Property
Transferred in Connection
With Performance of
Services
How are section 83(b) elections treated for pur-
poses of measuring a change in ownership or control
under section 280G and in testing whether an individ-
ual is a disqualified individual under section 280G?
See Rev. Rul. 2005-39, page 1.
Section 14
2.—Exempt
Facility Bond
How may State and local governments apply for
designation by the Secretary as qualified green build-
ing and sustainable design projects? What are the re-
quirements for designating projects as qualified green
building and sustainable design projects? See Notice
2005-48, page 9.
Section 162.—Trade or
Business Expenses
26 CFR 1.162–1: Business expenses.
A revenue ruling that sets forth circumstances in
which arrangements between unrelated entities do not
constitute, and a circumstance in which such arrange-
ments do constitute, insurance for federal income tax
purposes. See Rev. Rul. 2005-40, page 4.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of July 2005. See Rev.
Rul. 2005-38, page 6.
26 CFR 1.280G–1: Golden parachute payments.
(Also § 83.)
Golden parachute payments; treat-
ment of section 83(b) elections.This rul-
ing discusses whether restricted stock for
which a section 83(b) election has been
made is treated as outstanding stock for
purposes of determining whether there has
been a change in ownership or control un-
der section 280G of the Code and for deter-
mining the amount of stock held by share-
holders in testing whether the shareholder
is a disqualified individual under section
280G.
Rev. Rul. 2005–39
ISSUES
1) In determining whether a corporation
has experienced a change in ownership or
control under § 280G(b)(2)(A)(i) of the In-
ternal Revenue Code, are unvested shares
of restricted stock for which an election
under § 83(b) has been made treated as out-
standing stock?
2) In determining the amount of stock
held by a shareholder for purposes of test-
ing whether the shareholder is a disquali-
fied individual under §1.280G–1, Q/A–17
of the Income Tax Regulations, are un-
vested shares of restricted stock for which
an election under § 83(b) has been made
treated as outstanding stock?
FACTS
Corporation X and Corporation Y are
unrelated publicly-held companies. Both
Corporation X and Corporation Y main-
tain restricted stock plans and option plans
for their respective employees. Immedi-
ately prior to the merger described below,
without considering any outstanding op-
tions or restricted stock, the shareholders
of Corporation X own stock with a total
fair market value of $105xand the share-
holders of Corporation Y own stock with a
total fair market value of $105x.
Employees of Corporation X hold re-
stricted Corporation X stock that is not
substantially vested but with respect to
which elections under § 83(b) have been
made. Theyalsoholdvestedoptionsto
purchase vested stock of Corporation X.
The fair market value of this Corporation
X restricted stock and the Corporation X
stock subject to these options is $3x.
Employees of Corporation Y hold re-
stricted Corporation Y stock that is not
substantially vested but with respect to
which elections under § 83(b) have been
made. Theyalsoholdvestedoptionsto
purchase vested stock of Corporation Y.
The fair market value of this Corporation
Y restricted stock and the Corporation Y
stock subject to these options is $2x.
Certain employees of Corporation X
and Corporation Y also hold restricted
stock that is not substantially vested with
respect to which no election under § 83(b)
has been made and vested options to pur-
chase substantially nonvested stock.
On February 20, 2005, Corporation X
merges into Corporation Y, with Corpora-
tion Y as the surviving corporation. In the
merger, the shareholders of Corporation X
receive Corporation Y stock in exchange
for their Corporation X stock. The hold-
ers of nonvested restricted Corporation X
stock receive nonvested restricted Corpo-
ration Y stock in exchange for their non-
vested restricted Corporation X stock. The
holders of options to acquire Corporation
X stock receive options to acquire Corpo-
ration Y stock in exchange for their op-
tions to acquire Corporation X stock. After
the merger, Corporation Y stock (vested or
nonvested, as applicable) will be issued on
the exercise of all outstanding options.
LAW
Section 83(a) provides that the excess
of the fair market value of property trans-
ferred in connection with the performance
of services over the amount (if any) paid
for the property is included in the gross in-
come of the person performing the services
in the first taxable year in which the rights
of the person having the beneficial interest
in such property are transferable or are not
subject to a substantialrisk of forfeiture,
whichever occurs earlier.
Section 83(b) permits any person per-
forming services in connection with which
property is transferred to elect to include in
gross income for the taxable year in which
the property is transferred the excess of
its fair market value at the time of trans-
fer (determined without regard to lapse re-
strictions) over the amount (if any) paid for
the property.
Section 1.83–1(a) provides that prop-
ertytransferredtoanemployeeincon-
nection with the performance of services
by such employee is not taxable until the
2005–27 I.R.B.1July 5, 2005

employee acquires a beneficial ownership
interest in such property and it has be-
come substantially vested (as defined in
§ 1.83–3(b)) in such employee. Until such
property becomes substantially vested, the
transferor is regarded as the owner of such
property, and any income from such prop-
erty received by the employee is included
in the gross income of such employee as
additional compensation for the taxable
year in which such income is received.
Section 1.83–3(b) provides that prop-
erty is substantially nonvested if it is sub-
ject to a substantial risk of forfeiture and is
nontransferable.
Section 1.83–2(a) provides that the em-
ployee providing the services may elect to
include in gross income under § 83(b), as
compensation for services, the excess (if
any) of the fair market value of the prop-
erty at the time of transfer (determined
without regard to any lapse restrictions)
over the amount (if any) paid for such
property. If this election is made, the sub-
stantial vesting rules of § 83(a) and the reg-
ulations thereunder donotapplywithre-
spect to such property. Thus, property with
respect to which this election is made is in-
cludible in gross income as of the time of
transfer, and no compensation will be in-
cludible in gross income when such prop-
erty becomes substantially vested.
In Rev. Rul. 83–22, 1983–1 C.B. 17,
an employee who received restricted stock
made an election under § 83(b) and later
earned dividends on the restricted stock.
The ruling provides that the regulations
under § 83(b) treat stock transferred to an
employee in connection with the perfor-
mance of services as substantially vested
when the employee makes an election un-
der § 83(b), and the employee is consid-
ered the owner of the stock. Accordingly,
the ruling holds that a dividend paid to the
employee who has made a § 83(b) election
is not additional compensation to the em-
ployee, but retains its character as a divi-
dend in the hands of the employee.
Section 280G denies a deduction for
any excess parachute payment. Section
4999 imposes a nondeductible 20-percent
excise tax on the recipient of any excess
parachute payment, within the meaning of
§ 280G(b).
An excess parachute payment is defined
in § 280G(b)(1) as an amount equal to
the excess of any parachute payment over
the portion of the disqualified individual’s
base amount that is allocated to such pay-
ment.
Section 280G(b)(2)(A) defines a
parachute payment as any payment in
the nature of compensation to (or for the
benefit of) a disqualified individual if (i)
such payment is contingent on a change
in the ownership of a corporation, the
effective control of a corporation, or the
ownership of a substantial portion of the
assets of a corporation (a change in own-
ership or control), and (ii) the aggregate
present value of the payments in the nature
of compensation which are contingent on
such change equals or exceeds an amount
equal to 3 times the base amount.
Section 1.280G–1, Q/As–27 and 29,
provides guidance concerning whether a
corporation is considered to have under-
gone a change in ownership or control in
amerger.
Section 1.280G–1, Q/A–27(a), pro-
vides that a change in the ownership of a
corporation occurs on the date that any one
person, or more than one person acting as a
group (as defined in Q/A–27(b)), acquires
ownership of stock of the corporation that,
togetherwithstockheldbysuchpersonor
group, possesses more than 50 percent of
the total fair market value or total voting
power of the stock of such corporation.
Section 1.280G–1, Q/A–27(b), provides
that persons will not be considered to be
acting as a group merely because they hap-
pen to purchase or own stock of the same
corporation at the same time, or as a result
of the same public offering. However,
persons will be considered to be acting as
a group if they are owners of a corporation
that enters into a merger, consolidation,
purchase or acquisition of stock, or similar
business transaction with the corporation.
Section 1.280G–1, Q/A–27(c), pro-
vides that § 318(a) applies to determine
stock ownership. Section 1.280G–1,
Q/A–27(c), also provides that stock un-
derlying a vested option is considered
owned by an individual who holds the
vested option (and the stock underlying an
unvested option is not considered owned
by an individual who holds the unvested
option). For purposes of the preceding
sentence, however, if the option is exer-
cisable for stock that is not substantially
vested (as defined in § 1.83–3(b) and (j)),
the stock underlying the option is not
treated as owned by the individual who
holds the option.
Section 1.280G–1, Q/A–29, provides
that a change in the ownership of a sub-
stantial portion of a corporation’s assets
occurs on the date that any one person, or
more than one person acting as a group (as
defined in Q/A–29(c)), acquires (or has ac-
quired during the 12-month period ending
on the date of the most recent acquisition
by such person or persons) assets from the
corporation that have a total gross fair mar-
ket value equal to or more than one-third of
the total gross fair market value of all of the
assets of the corporation immediately prior
to such acquisition or acquisitions. For this
purpose, gross fair market value means the
value of the assets of the corporation, or the
value of the assets being disposed of, de-
termined without regard to any liabilities
associated with such assets.
Section 1.280G–1, Q/A–29(b)(1), pro-
vides that there is no change in ownership
or control under Q/A–29(a) when there is a
transfer to an entity that is controlled by the
shareholders of the transferring corpora-
tion immediately after the transfer, as pro-
vided in Q/A–29(b).
Section 1.280G–1, Q/A–29(c), con-
tains the same language as § 1.280G–1,
Q/A–27(b), concerning when persons will
be considered to be acting as a group.
Section 1.280G–1, Q/A–29(d), refers to
Q/A–27(c) for purposes of determining
stock ownership.
For purposes of determining when a
payment in the nature of compensation
under § 280G(b)(2)(A) has been made,
§ 1.280G–1, Q/A–12(b), provides that an
election made by a disqualified individual
under § 83(b) with respect to the trans-
ferred property does not apply. A payment
in the nature of compensation for purposes
of that determination is generally consid-
ered made (or to be made) when the prop-
erty is transferred to, and becomes sub-
stantially vested in, such individual. The
§ 280G regulations, however, are silent for
purposes of determining whether restricted
stock subject to an election under § 83(b)
is outstanding when determining whether
there has been a change in ownership or
control.
The position in § 1.280G–1,
Q&A–12(b) was adopted, in part, be-
cause the legislative history provides that
all transfers of property are to be valued
for purposes of the golden parachute rules.
See H.R. Conf. Rep. No. 98–861, 98
th
Cong. 2d Sess. at 851 (1984), 1984–3
July 5, 200522005–27 I.R.B.

C.B. (Vol. 2) 851; Joint Committee on
Taxation Staff,General Explanation of
the Revenue Provisions of the Deficit Re-
duction Act of 1984,98
th
Cong. 2d Sess.
(1984) at 203. The vesting of payments
contingent on a change in control fre-
quently provides substantial benefits to
an individual without regard to whether
an election under § 83(b) has been made.
This concern, however, is not present
when determining whether a change in
ownership or control has occurred.
ANALYSIS
The regulations under § 280G have
generally adopted objective rules to de-
termine whether a change in ownership
or control has occurred. Pursuant to
§ 1.280G–1, Q/A–27(c), vested stock un-
derlying a vested option is considered
owned by the individual who holds the
vested option. Thus, the vested shares
subject to vested options held by the for-
mer Corporation X employees and the
Corporation Y employees are considered
outstanding for purposes of determining
whether a change in ownership or control
occurred. However, the substantially non-
vested shares underlying vested options
held by the former Corporation X employ-
ees and the Corporation Y employees are
not considered outstanding for purposes
of determining whether a change in own-
ership or control occurred.
In determining whether a change
in ownership or control has occurred,
§ 1.280G–1, Q/A–27(c) generally imple-
ments an expansive rule for determining
the shares treated as owned by an individ-
ual, treating, for example, shares subject
to a vested option as owned by the holder
of the option. Accordingly, an employee
should be considered the owner of un-
vested shares of restricted stock for which
an election under § 83(b) has been made
for purposes of § 1.280G–1, Q/A–27 be-
cause the regulationsunder § 83(b) treat
stock transferred to an employee in con-
nection with the performance of services
as substantially vested when the employee
makes an election under § 83(b), and
the employee is considered the owner of
the stock for that purpose. However, re-
stricted stock with respect to which an
election under § 83(b) has not been made
is not considered outstanding for purposes
of determining whether a change in own-
ership or control occurred.
Consequently, the shareholders of Cor-
poration X and Corporation Y, along with
the employees holding vested options to
receive vested stock and holding restricted
stock that has been subject to an election
under § 83(b), will be treated as acting as a
group with respect totheir acquisition of
stock or assets. Applying the above-de-
scribed rules, the Corporation X share-
holders acquired ownership of Corpora-
tion Y stock ($108x) that has more than 50
percent of the total fair market value of the
Corporation Y stock ($215x) outstanding
immediately after the merger. Thus, there
is a change in control of Corporation Y un-
der § 1.280G–1, Q/A–27.
Turning to Corporation X, all of the as-
sets of Corporation X were transferred to
Corporation Y in exchange for Corpora-
tion Y stock. Because more than 50 per-
cent of the fair market value of the out-
standing stock of Corporation Y is owned
by the former shareholders of Corporation
X (immediately after the exchange), the
transfer of assets toCorporation Y is not
treated as a change in ownership of a sub-
stantial portion of the assets of Corporation
X under § 1.280G–1, Q/A–29(b)(1).
Additionally, for purposes of deter-
mining the amount of stock owned by
an individual under §1.280G–1, Q/A–17,
the same rule as described above applies.
Thus, an individual who holds restricted
stock with respect to which an election
under § 83(b) has been made is consid-
ered to hold the outstanding stock under
§ 1.280G–1, Q/A–17.
HOLDINGS
1) In determining whether a corporation
has experienced a change in ownership or
control under § 280G(b)(2)(A)(i) of the In-
ternal Revenue Code, unvested shares of
restricted stock for which an election un-
der § 83(b) has been made are treated as
outstanding stock.
2) In determining the amount of stock
held by a shareholder for purposes of
testing whether the shareholder is a dis-
qualified individual under §1.280G–1,
Q/A–17 of the Income Tax Regulations,
unvested shares of restricted stock for
which an election under § 83(b) has been
made are treated as outstanding stock.
DRAFTING INFORMATION
The principal authors of this revenue
ruling are Erinn Madden and Jean Casey of
the Office of the Division Counsel/Asso-
ciate Chief Counsel (Tax Exempt and Gov-
ernment Entities). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in its development. For
further information regarding this revenue
ruling, contact Ms. Casey or Ms. Madden
at (202) 622–6030 (not a toll-free call).
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of July 2005. See Rev. Rul.
2005-38, page 6.
Section 401.—Qualified
Pension, Profit-Sharing,
and Stock Bonus Plans
26 CFR 1.401(a)(9)–6: Required minimum distribu-
tions for defined benefit plans and annuity contracts.
26 CFR 1.401(k)–1: Certain cash or deferred ar-
rangements.
To conform to the proposed amendments to the
section 415 Income Tax Regulations, Q&A–13(c)(3)
of section 1.401(a)(9)–6 is revised. Also, to con-
form to the proposed amendments to the section
415 Income Tax Regulations, section 1.401(k)–1
is amended by adding paragraph (e)(8). See
REG-130241-04, page 18.
Section 403.—Taxation of
Employee Annuities
26 CFR 1.403(b)–3: Exclusion for contributions to
purchase section 403(b) contracts.
To conform to the proposed amendments to
the section 415 Income Tax Regulations, section
1.403(b)–3(b)(4)(ii) is proposed to be revised. See
REG-130241-04, page 18.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
2005–27 I.R.B.3July 5, 2005

Section 457.—Deferred
Compensation Plans
of State and Local
Governments and
Tax-Exempt Organizations
26 CFR 1.457–4: Annual deferrals, deferral limita-
tions, and deferral agreements under eligible plans.
To conform to the proposed amendments to the
section 415 Income Tax Regulations, section 1.457–4
is proposed to be amended by revising paragraph
(d). Also, proposed minor corrective changes are
made to section 1.457–5(d). Example 2, section
1.457–6(a) and (c) and section 1.457–10(b)(8). See
REG-130241-04, page 18.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
Section 468.—Special
Rules for
Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of July 2005. See Rev.
Rul. 2005-38, page 6.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of July 2005. See Rev.
Rul. 2005-38, page 6.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
Section 831.—Tax on
Insurance Companies
Other Than Life Insurance
Companies
(Also § 162; 1.162–1.)
Insurance, federal income tax pur-
poses.This ruling considers four circum-
stances in which arrangements between
unrelated entities do, and do not, constitute
insurance for federal income tax purposes
and whether the issuer qualifies as an in-
surance company for federal income tax
purposes.
Rev. Rul. 2005–40
ISSUE
Do the arrangements described below
constitute insurance for federal income tax
purposes? If so, are amounts paid to the
issuer deductible as insurance premiums
and does the issuer qualify as an insurance
company?
FACTS
Situation 1.X, a domestic corporation,
operates a courier transport business cov-
ering a large portion of the United States.X
owns and operates a large fleet of automo-
tive vehicles representing a significant vol-
ume of independent, homogeneous risks.
For valid, non-tax business purposes,Xen-
teredintoanarrangementwithY,anun-
related domestic corporation, whereby in
exchange for an agreed amount of “premi-
ums,”Y“insures”Xagainst the risk of loss
arising out of the operation of its fleet in
the conduct of its courier business.
The amount of “premiums” under the
arrangement is determined at arm’s length
according to customary insurance indus-
try rating formulas.Ypossesses adequate
capital to fulfill its obligations toXunder
the agreement, and in all respects operates
in accordance with the applicable require-
ments of state law. There are no guaran-
tees of any kind in favor ofYwith respect
to the agreement, nor are any of the “pre-
miums” paid byXtoYin turn loaned back
toX.XhasnoobligationtopayYaddi-
tional premiums ifX’s actual losses during
any period of coverage exceed the “premi-
ums” paid byX.Xwill not be entitled to
any refund of “premiums” paid ifX’s ac-
tual losses are lower than the “premiums”
paid during any period. In all respects, the
parties conduct themselves consistent with
the standards applicable to an insurance ar-
rangement between unrelated parties, ex-
cept thatYdoes not “insure” any entity
other thanX.
Situation 2. The facts are the same as
in Situation 1 except that, in addition to
its arrangement withX,Yenters into an
arrangement withZ, a domestic corpora-
tion unrelated toXorY, whereby in ex-
change for an agreed amount of “premi-
ums,”Yalso “insures”Zagainst the risk
of loss arising out of the operation of its
own fleet in connection with the conduct
of a courier business substantially similar
to that ofX. The amountsYearns from
its arrangements withZconstitute 10% of
Y’s total amounts earned during the taxable
year on both a gross and net basis. The ar-
rangement withZaccounts for 10% of the
total risks borne byY.
Situation 3.X, a domestic corpora-
tion, operates a courier transport business
covering a large portion of the United
States.Xconducts the courier transport
business through 12 limited liability com-
panies (LLCs) of which it is the single
member. The LLCs are disregarded as en-
tities separate fromXunder the provisions
of § 301.7701–3 of the Procedure and
Administration Regulations. The LLCs
own and operate a large fleet of automo-
tive vehicles, collectively representing a
significant volume of independent, ho-
mogeneous risks. For valid, non-tax
business purposes, the LLCs entered into
arrangements withY, an unrelated do-
mestic corporation, whereby in exchange
for an agreed amount of “premiums,”Y
“insures” the LLCs against the risk of loss
arising out of the operation of the fleet
in the conduct of their courier business.
None of the LLCs account for less than
5%, or more than 15%, of the total risk
assumed byYunder the agreements.
The amount of “premiums” under the
arrangement is determined at arm’s length
according to customary insurance industry
rating formulas.Ypossesses adequate cap-
ital to fulfill its obligations to the LLCs
under the agreement, and in all respects
July 5, 200542005–27 I.R.B.

operates in accordance with the licensing
and other requirements of state law. There
are no guarantees of any kind in favor of
Ywith respect to the agreements, nor are
any of the “premiums” paid by the LLCs
toYin turn loaned back toXor to the
LLCs. No LLC has any obligation to pay
Yadditional premiums if that LLC’s ac-
tual losses during the arrangement exceed
the“premiums”paidbythatLLC.NoLLC
will be entitled to a refund of “premiums”
paid if that LLC’s actual losses are lower
than the “premiums” paid during any pe-
riod.Yretainstherisksthatitassumes
under the agreement. In all respects, the
parties conduct themselves consistent with
the standards applicable to an insurance ar-
rangement between unrelated parties, ex-
cept thatYdoes not “insure” any entity
other than the LLCs.
Situation 4. The facts are the same as
in Situation 3, except that each of the 12
LLCs elects pursuant to § 301.7701–3(a)
to be classified as an association.
LAW
Section 831(a) of the Internal Revenue
Code provides that taxes, computed as pro-
vided in § 11, are imposed for each tax-
able year on the taxable income of each
insurance company other than a life insur-
ance company. Section 831(c) provides
that, for purposes of § 831, the term “in-
surance company” has the meaning given
to such term by § 816(a). Under § 816(a),
the term “insurance company” means any
company more than half of the business of
which during the taxable year is the issu-
ing of insurance or annuity contracts or the
reinsuring of risks underwritten by insur-
ance companies.
Section 162(a) provides, in part, that
there shall be allowed as a deduction all
the ordinary and necessary expenses paid
or incurred during the taxable year in car-
rying on any trade or business. Section
1.162–1(a) of the Income Tax Regulations
provides, in part, that among the items in-
cluded in business expenses are insurance
premiums against fire, storms, theft, acci-
dent, or other similar losses in the case of
a business.
Neither the Code nor the regulations
define the terms “insurance” or “insurance
contract.” The United States Supreme
Court, however, has explained that in
order for an arrangement to constitute in-
surance for federal income tax purposes,
both risk shifting and risk distribution
must be present.Helvering v. Le Gierse,
312 U.S. 531 (1941).
The risk transferred must be risk of eco-
nomic loss.AlliedFidelityCorp.v.Com-
missioner, 572 F.2d 1190, 1193 (7
th
Cir.),
cert. denied, 439 U.S. 835 (1978). The
risk must contemplate the fortuitous oc-
currence of a stated contingency,Com-
missioner v. Treganowan, 183 F.2d 288,
290–91 (2d Cir.),cert. denied,340U.S.
853 (1950), and must not be merely an in-
vestment or business risk.Le Gierse,at
542; Rev. Rul. 89–96, 1989–2 C.B. 114.
Risk shifting occurs if a person facing
the possibility of an economic loss trans-
fers some or all of the financial conse-
quences of the potential loss to the insurer,
such that a loss by the insured does not af-
fect the insured because the loss is offset
by a payment from the insurer. Risk dis-
tribution incorporates the statistical phe-
nomenon known as the law of large num-
bers. Distributing risk allows the insurer to
reduce the possibility that a single costly
claim will exceed the amount taken in as
premiums and set aside for the payment of
such a claim. By assuming numerous rel-
atively small, independent risks that occur
randomly over time, the insurer smooths
out losses to match more closely its receipt
of premiums.Clougherty Packing Co. v.
Commissioner, 811 F.2d 1297, 1300 (9
th
Cir. 1987).
Courts have recognized that risk distri-
bution necessarily entails a pooling of pre-
miums, so that a potential insured is not
in significant part paying for its own risks.
Humana, Inc. v. Commissioner,881F.2d
247, 257 (6
th
Cir. 1989).See also Ocean
Drilling & Exploration Co. v. United
States, 988 F.2d 1135, 1153 (Fed. Cir.
1993) (“Risk distribution involves spread-
ing the risk of loss among policyholders.”);
Beech Aircraft Corp. v. United States,797
F.2d 920, 922 (10th Cir. 1986) (“‘[R]isk
distributing’ means that the party assum-
ing the risk distributes his potential liabil-
ity, in part, among others.”);Treganowan,
at 291 (quoting Note,The New York Stock
Exchange Gratuity Fund: Insurance that
Isn’t Insurance, 59 Yale L. J. 780, 784
(1950)) (“‘By diffusing the risks through
a mass of separate risk shifting contracts,
the insurer casts his lot with the law of
averages. The process of risk distribu-
tion, therefore, is the very essence of insur-
ance.’”);Crawford Fitting Co. v. United
States, 606 F. Supp. 136, 147 (N.D. Ohio
1985) (“[T]he court finds . . . that var-
ious nonaffiliated persons or entities fac-
ing risks similar but independent of those
faced by plaintiff were named insureds un-
der the policy, enabling the distribution of
the risk thereunder.”);AMERCO and Sub-
sidiaries v. Commissioner,96T.C.18,41
(1991),aff’d, 979 F.2d 162 (9
th
Cir. 1992)
(“The concept of risk-distributing empha-
sizes the pooling aspect of insurance: that
it is the nature of an insurance contract
to be part of a larger collection of cover-
ages, combined to distribute risk between
insureds.”).
ANALYSIS
In order to determine the nature of an
arrangement for federal income tax pur-
poses, it is necessaryto consider all the
facts and circumstances in a particular
case, including not only the terms of the
arrangement, but also the entire course
of conduct of the parties. Thus, an ar-
rangement that purports to be an insurance
contract but lacks the requisite risk distri-
bution may instead be characterized as a
deposit arrangement, a loan, a contribu-
tion to capital (to the extent of net value,
if any), an indemnity arrangement that is
not an insurance contract, or otherwise,
based on the substance of the arrangement
between the parties. The proper character-
ization of the arrangement may determine
whether the issuer qualifies as an insur-
ance company and whether amounts paid
under the arrangement may be deductible.
In Situation 1,Yenters into an “insur-
ance” arrangement withX. The arrange-
ment withXrepresentsY’s only such
agreement. Although the arrangement
may shift the risks ofXtoY, those risks
are not, in turn, distributed among other
insureds or policyholders. Therefore, the
arrangement betweenXandYdoes not
constitute insurance for federal income tax
purposes.
In Situation 2, the fact thatYalso en-
ters into an arrangement withZdoes not
change the conclusion that the arrange-
ment betweenXandYlacks the requisite
risk distribution to constitute insurance.
Y’s contract withZrepresents only 10% of
the total amounts earned byY, and 10% of
total risks assumed, under all its arrange-
ments. This creates an insufficient pool
2005–27 I.R.B.5July 5, 2005

of other premiums to distributeX’s risk.
SeeRev. Rul. 2002–89, 2002–2 C.B. 984
(concluding that risks from unrelated par-
ties representing 10% of total risks borne
by subsidiary are insufficient to qualify ar-
rangement between parent and subsidiary
as insurance).
In Situation 3,Ycontracts only with
12 single member LLCs through whichX
conducts a courier transport business. The
LLCs are disregarded as entities separate
fromXpursuant to § 301.7701–3. Sec-
tion 301.7701–2(a) provides that if an en-
tity is disregarded, its activities are treated
in the same manner as a sole proprietor-
ship, branch or division of the owner. Ap-
plying this rule in Situation 3,Yhas en-
tered into an “insurance” arrangement only
withX. Therefore, for the reasons set forth
in Situation 1 above, the arrangement be-
tweenXandYdoes not constitute insur-
ance for federal income tax purposes.
In Situation 4, the 12 LLCs are not dis-
regarded as entities separate fromX,but
instead are classified as associations for
federal income tax purposes. The arrange-
ments betweenYand each LLC thus shift
a risk of loss from each LLC toY.The
risks of the LLCs are distributed among
the various other LLCs that are insured
under similar arrangements. Therefore the
arrangements between the 12 LLCs and
Yconstitute insurancefor federal income
tax purposes.SeeRev. Rul. 2002–90,
2002–2 C.B. 985 (similar arrangements
between affiliated entities constituted in-
surance). Because the arrangements with
the 12 LLCs representY’s only business,
and those arrangements are insurance con-
tracts for federal income tax purposes,Y
is an insurance company within the mean-
ing of §§ 831(c) and 816(a). In addition,
the 12 LLCs may be entitled to deduct
amounts paid under those arrangements
as insurance premiums under § 162 if the
requirements for deduction are otherwise
satisfied.
HOLDINGS
In Situations 1, 2 and 3, the arrange-
ments do not constitute insurance for fed-
eral income tax purposes.
In Situation 4, the arrangements consti-
tute insurance for federal income tax pur-
poses and the issuer qualifies as an insur-
ance company. The amounts paid to the
issuer may be deductible as insurance pre-
miums under § 162 if the requirements for
deduction are otherwise satisfied.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is John E. Glover of the Office of the
Associate Chief Counsel (Financial Insti-
tutions & Products). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Glover at (202) 622–3970 (not a
toll-free call).
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for July 2005.
Rev. Rul. 2005–38
This revenue ruling provides vari-
ous prescribed rates for federal income
tax purposes for July 2005 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Table
5 contains the federal rate for determin-
ing the present value of an annuity, an
interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520. Finally, Table 6
contains the blended annual rate for 2005
for purposes of section 7872.
July 5, 200562005–27 I.R.B.

REV. RUL. 2005–38 TABLE 1
Applicable Federal Rates (AFR) for July 2005
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR3.45%3.42%3.41%3.40%
110% AFR3.80%3.76%3.74%3.73%
120% AFR4.14%4.10%4.08%4.07%
130% AFR4.50%4.45%4.43%4.41%
Mid-Term
AFR3.86%3.82%3.80%3.79%
110% AFR4.24%4.20%4.18%4.16%
120% AFR4.63%4.58%4.55%4.54%
130% AFR5.03%4.97%4.94%4.92%
150% AFR5.81%5.73%5.69%5.66%
175% AFR6.80%6.69%6.63%6.60%
Long-Term
AFR4.35%4.30%4.28%4.26%
110% AFR4.79%4.73%4.70%4.68%
120% AFR5.23%5.16%5.13%5.11%
130% AFR5.67%5.59%5.55%5.53%
REV. RUL. 2005–38 TABLE 2
Adjusted AFR for July 2005
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
2.82%2.80%2.79%2.78%
Mid-term adjusted AFR3.06%3.04%3.03%3.02%
Long-term adjusted
AFR
4.09%4.05%4.03%4.02%
REV. RUL. 2005–38 TABLE 3
Rates Under Section 382 for July 2005
Adjusted federal long-term rate for the current month4.09%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)4.37%
REV. RUL. 2005–38 TABLE 4
Appropriate Percentages UnderSection 42(b)(2) for July 2005
Appropriate percentage for the 70% present value low-income housing credit7.95%
Appropriate percentage for the 30% present value low-income housing credit3.41%
2005–27 I.R.B.7July 5, 2005

REV. RUL. 2005–38 TABLE 5
Rate Under Section 7520 for July 2005
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest4.6%
REV. RUL. 2005–38 TABLE 6
Rate Under Section 7520 for July 2005
Blended Annual Rate for 2005
Section 7872(e)(2) blended annual rate for 20053.11%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of July 2005. See Rev. Rul. 2005-38, page 6.
July 5, 200582005–27 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Brownfields Demonstration
Program for Qualified Green
Building and Sustainable
Design Projects
Notice 2005–48
PURPOSE
This notice solicits application
s for des-
ignation of a project as a qualifie
d green
building and sustainable design p
roject
undersection142(l)oftheIntern
al Rev-
enue Code (the Code). This notice
also
provides guidance on the require
ments
a project must meet in order to be e
ligi-
ble for designation as a qualifi
ed green
building and sustainable desig
n project.
Applications must be submitted
in accor-
dance with this notice.
INTRODUCTION
Section 701 of the American Jobs Cre-
ation Act of 2004, Pub. L. No. 108–357
(the Act) added sections 142(a)(14) and
142(l) to the Code. In general, sections
142(a)(14) and 142(l) authorize up to
$2,000,000,000 of tax-exempt private ac-
tivity bonds to be issued by State or local
governments for qualified green building
and sustainable design projects. Section
142(l)(1) defines “qualified green build-
ing and sustainable design project” as any
project meeting certain requirements, as
described below, that is designated by the
Secretary of the Treasury Department (the
Treasury Secretary), after consultation
with the Administrator of the Environ-
mental Protection Agency (the EPA Ad-
ministrator), as a qualified green building
and sustainable design project. With cer-
tain exceptions, sections 142(a)(14) and
142(l) apply to bonds issued after Decem-
ber 31, 2004, and before October 1, 2009.
BACKGROUND
Section 103(a) provides that, except as
provided in section 103(b), gross income
does not include interest on any State or
local bond.
Section 103(b)(1) provides that the ex-
clusion under section 103(a) does not ap-
plytoanyprivateactivitybondthatisnota
qualified bond (within the meaning of sec-
tion 141).
Section 141(e) provides that the term
“qualified bond” includes an exempt facil-
ity bond that meets certain requirements.
Section 142(a)(14)provides that the
term “exempt facility bond” includes any
bond issued as part of an issue 95 percent
or more of the net proceeds of which are to
be used to provide qualified green building
and sustainable design projects.
Section 142(l)(1) defines “qualified
green building and sustainable design
project,” in general, as any project that
is designated by the Treasury Secretary,
after consultation with the EPA Admin-
istrator, as a qualified green building and
sustainable design project and that meets
the following requirements: (1) at least 75
percent of the square footage of commer-
cial buildings that are part of the project is
registered for United States Green Build-
ing Council’s Leadership in Energy and
Environmental Design (LEED) certifica-
tion and is reasonably expected (at the time
of the designation) to receive such certi-
fication; (2) the project includes a brown-
field site as defined by section 101(39)
of the Comprehensive Environmental Re-
sponse, Compensation, and Liability Act
of 1980 (42 U.S.C. 9601) (CERCLA),
including a site described in subparagraph
(D)(ii)(II)(aa) thereof; (3) the project re-
ceives specific State or local government
resources of at least $5,000,000; and (4)
the project includes at least (a) 1,000,000
square feet of building or (b) 20 acres.
Under sections 142(l)(3) and (4), a
project may not be designated as a quali-
fied green building and sustainable design
project unless the project is nominated by
a State or local government within 180
days of the enactment of the Act. The ap-
plication for designation must describe the
energy efficiency, renewable energy, and
sustainable design features of the project.
The application also must demonstrate,
and provide written assurances, that: (1)
the project will satisfy the requirements
described above relating to LEED certi-
fication, brownfield sites, State or local
government resources, and square feet (or
acres) of building (or land); (2) the net
benefit of the tax-exempt financing will be
allocated to (a) the purchase, construction,
integration, or other use of energy effi-
ciency, renewable energy, and sustainable
design features of the project, (b) compli-
ance with LEED certification standards
cited under section 142(l)(4)(A)(i), or (c)
the purchase, remediation, and foundation
construction and preparation of the brown-
fields site; (3) no proceeds of the issue will
be used to provide a facility the principal
business of which is the sale of food or
alcoholic beverages for consumption on
the premises; and (4) the project is pro-
jected to provide permanent employment
of at least 1,500 full time equivalents (150
full time equivalents in rural States) when
completed and construction employment
of at least 1,000 full time equivalents (100
full time equivalents in rural States).
Furthermore,undersection
142(l)(4)(B), each application must
contain for each project a description of
(1) the amount of electric consumption
reduced as compared to conventional
construction, (2) the amount of sulfur
dioxide daily emissions reduced compared
to coal generation, (3) the amount of the
gross installed capacity of the project’s
solar photovoltaic capacity measured
in megawatts, and (4) the amount, in
megawatts, of the project’s fuel cell
energy generation.
Section 142(l)(2)(A) provides that the
Treasury Secretary, after consultation with
the EPA Administrator, shall designate
qualified green building and sustainable
design projects within 60 days after the
end of the application period under sec-
tion 142(l)(3)(A). Section 142(l)(2)(A)
also provides that: (1) at least one of the
designated projects must be located in, or
within a ten-mile radius of, an empower-
ment zone under section 1391; (2) at least
one of the designated projects must be
located in a rural State (as defined in sec-
tion 142(l)(6)(A)); (3) no more than one
project may be designated in any State;
and (4) a project may not be designated if
the project includesa stadium or arena for
professional sports exhibitions or games.
Section 142(l)(6)(A) defines “rural
State” as any State that has (1) a popula-
tion of less than 4,500,000 according to
the 2000 census, (2) a population density
of less than 150 people per square mile
according to the 2000 census, and (3) in-
2005–27 I.R.B.9July 5, 2005

creased in population by less than half the
rate of the national increase between the
1990 and 2000 censuses.
Section 142(l)(2)(B) provides that the
Treasury Secretary, after consultation with
the EPA Administrator, shall ensure that,
in the aggregate, the projects designated
shall (1) reduce electric consumption by
more than 150 megawatts annually as
compared to conventional generation, (2)
reduce daily sulfur dioxide emissions by
at least 10 tons compared to coal genera-
tion power, (3) expand by 75 percent the
domestic solar photovoltaic market in the
United States (measured in megawatts) as
compared to the expansion of that market
from 2001 to 2002, and (4) use at least 25
megawatts of fuel cell energy generation.
Under section 142(l)(7)(B), the Trea-
sury Secretary mayallocate authority
to issue qualified green building and
sustainable design project bonds in an
aggregate face amount not exceeding
$2,000,000,000.
Section 142(l)(7)(B) provides that an is-
sue shall not be treated as an issue de-
scribed in section 142(a)(14) if the aggre-
gate face amount of bonds issued by the
State or local government pursuant thereto
for a project (when added to the aggregate
face amount of bonds previously so issued
for such project) exceeds an amount desig-
nated by the Secretary as part of the desig-
nation.
Section 142(l)(5) provides that no later
than 30 days after the completion of each
designated project, the project must cer-
tify to the Treasury Secretary that the net
benefit of the tax-exempt financing was
used for the purposes described in section
142(l)(4).
Section 142(l)(6)(C) defines “net bene-
fit of tax-exempt financing” as the present
value of the interest savings (determined
by a calculation established by the Secre-
tary) which result from the tax-exempt sta-
tus of the bonds.
The Act requires each issuer to main-
tain, on behalf of each project, an interest
bearing reserve account equal to one per-
cent of the net proceeds of any bond issued
under sections 142(a)(14) and 142(l) for
such project. Not later than five years
after the date of issuance, the Treasury
Secretary, after consultation with the EPA
Administrator, will determine whether
the project financed with such bonds has
substantially complied with the basic eli-
gibility requirements described in section
142(l)(4)(A). If the Treasury Secretary,
after such consultation, certifies that the
project has substantially complied with the
basic eligibility requirements described in
section 142(l)(4)(A), amounts in the re-
serve account, including all interest, will
be released to the project. If the Treasury
Secretary determines that the project has
not substantially complied with the basic
eligibility requirements, amounts in the
reserve account, including all interest, will
be paid to the United States Treasury.
APPLICATION REQUIREMENTS
Each application for designation of a
project as a qualified green building and
sustainable design project must be pre-
pared and submitted in accordance with
this section. By submitting an application
for designation pursuant to section 142(l)
and this notice, the applicant agrees to
comply with the requirements of this no-
tice.
1.State or local government. A project
must be nominated by a State or local gov-
ernment or a combination of State or lo-
cal governments. A “local government” is
any county, city, town, township, parish,
village, or other general purpose political
subdivision of a State. The application
must identify the nominating State or lo-
cal government(s).
2.Signatures. An application must be
signed by an authorized employee of each
nominating State or local government.
3.Addresses. Applications must
be submitted in duplicate to the Inter-
nal Revenue Service (IRS), Attention
CC:TEGE:EOEG:TEB, 1111 Constitution
Avenue, NW, Room 4306, Washington,
D.C. 20224. Applications may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to the
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC, attention CC:TEGE:EOEG:TEB.
A copy of each application also must be
submitted to the Environmental Protection
Agency (EPA) at Environmental Protec-
tion Agency, Office of Congressional and
Intergovernmental Relations, Mail Code
1305A, 1200 Pennsylvania Avenue, N.W.,
Washington, D. C. 20460.
4.Due date. Applications must be
filedwiththeIRSonorbeforeNovem-
ber 2, 2005. For purposes of section
142(l)(3)(A), if an application for a project
is filed with the IRS in accordance with
this notice on or before November 2,
2005, the project will be deemed nomi-
nated within 180 days of the enactment of
the Act.
5.Project description. Each applica-
tion must contain a detailed description of
the project, including the information re-
quired by this subsection 5.
a.Energy efficiency, renewable energy,
and sustainable design features.Theap-
plication must describe the energy effi-
ciency, renewable energy, and sustainable
design features of the project.
b.Basic eligibility requirements.The
application must demonstrate and provide
written assurances that the project will sat-
isfy each of the following eligibility re-
quirements:
i.Green building and sustainable de-
sign.
A.LEED certification. At least 75 per-
cent of the square footage of commercial
buildings that are part of the project is
registered for United States Green Build-
ing Council’s LEED certification and is
reasonably expected by the applicant (at
the time of the designation) to receive
such certification, based on all the facts
and circumstances, including statements
of the United States Green Building Coun-
cil, opinions of independent experts in
green building and sustainable design,
and relevant experience of the project de-
veloper. The application must include:
(1) LEED Letter Templates indicating
which LEED credits the applicant plans
to pursue and the applicant’s planned ap-
proach to pursuing such credits; (2) doc-
umentation demonstrating the applicant’s
plans to design and construct LEED-cer-
tified, sustainably-designed buildings,
including, where applicable, architectural
plans, drawings and specifications, pol-
icy statements, contracts, leases and other
applicable documents, and other related
applicable information; (3) information on
how plans to build LEED-certified, sus-
tainably-designed buildings will be imple-
mented through the management structure,
for example, by placing LEED-accredited
professional(s) and other experienced
green building professionals in positions
of authority over the project to ensure that
the applicant’s green building plans are
realized; (4) information on any plans to
attract broader expertise and perspectives
July 5, 2005102005–27 I.R.B.

to the project that could support the effort
to achieve LEED certification through
such means as green building design
charettes or consultation with additional
green building experts; and (5) informa-
tion on financial incentives and penalties
that will be included in the design, con-
struction, engineering and other building
contracts and subcontracts to tie a part
of the contractors’ and subcontractors’
compensation to their level of success in
designing and constructing LEED-certi-
fied, sustainably-designed buildings.
B.Certain practices relating to the use
of wood for the project. In connection with
demonstrating that the project will satisfy
the requirement for LEED certification,
the application should indicate the extent
to which any wood products will be used
in the project. In addition, the application
should indicate whether such wood prod-
ucts will receive certification under the
Sustainable Forestry Initiative Program or
the American Tree Farm System, or, in
the case of composite wood products, un-
der standards established by the American
National Standards Institute, or such other
voluntary standards as are published in the
Federal Registerby the EPA Administra-
tor.
ii.Brownfield redevelopment.The
project includes a brownfield site as de-
fined by section 101(39) of the Com-
prehensive Environmental Response,
Compensation, and Liability Act of 1980
(42 U.S.C. 9601), including a site de-
scribed in subparagraph (D)(ii)(II)(aa)
thereof. For purposes of meeting this
definition, applicants may use guidance
provided in Appendices 3 and 4 of the
EPA Proposal Guidelines for Brownfields
Assessment, Revolving Loan Fund and
Cleanup Grants. Appendices 3 and 4,
which provide guidance on the definition
of a brownfields site under section 101(39)
of CERCLA, are published by the EPA
on its internet site:http://www.epa.gov/
brownfields/pg/appendix3_fy05.htmand
http://www.epa.gov/brownfields/pg/appen
dix 4_fy05.htm.
iii.State and local support.
A.In general. The project will re-
ceive specific State or local government
resources that will support the project in
an amount equal to at least $5,000,000.
For this purpose, “resources” includes
tax abatement benefits and contributions
in kind. The State or local government
resources may be provided at any time
during the period beginning on October
22, 2001 (three years prior to the enact-
ment of the Act), and ending on the last
day that any bond issued for the project
as part of an issue under section 142(l)
remains outstanding.
B.Determination of amount of State or
local government resources.
I.Resources provided prior to issuance
of bonds. The amount of State or local
government resources that are provided for
a project prior to the date of issuance of
any bonds subject to section 142(l) for the
project and on or after October 22, 2001, is
the amount of such resources as of the date
the resources were or are provided.
II.Resources provided on or after is-
suance of bonds. The amount of State
or local government resources that will be
provided for a project on or after the date
of issuance of the first issue of bonds sub-
ject to section 142(l) for the project is the
present value of such resources, as of the
date of issuance of such bonds, using as
a discount rate the long-term adjusted Ap-
plicable Federal Rate (AFR), compounded
semi-annually, for the month in which the
bonds are sold.
iv.Size. The project includes at least
one of the following: (1) at least 1,000,000
square feet of building; or (2) at least 20
acres. A project shall not fail to qual-
ify as a green building and sustainable de-
sign project solely because it does not lie
on contiguous parcels, or is interrupted by
streets, highways, or vacant land.
v.Net benefit of the tax-exempt financ-
ing. For each issue of bonds subject to
section 142(l) that finances the project,
the net benefit of the tax-exempt financ-
ing will not exceed the present value, as
of the date of issuance, of the reasonably
expected amount of proceeds of the issue
to be expended on the project for the fol-
lowing purposes: (1) the purchase, con-
struction, integration, or other use of en-
ergy efficiency, renewable energy, and sus-
tainable design features of the project; (2)
compliance with LEED certification stan-
dards cited under section 142(l)(4)(A)(i);
or (3) the purchase, remediation, and foun-
dation construction and preparation of the
brownfields site. The net benefit of the
tax-exempt financing for an issue is the
present value, as of the date of issuance,
of the interest savings that result from the
tax-exempt status of the bonds. The in-
terest savings that result from the tax-ex-
empt status of the bonds equal the sum of
the annual interest savings for each year
the issue is expected, as of the date of is-
suance, to be outstanding. The annual in-
terest savings for a year are determined by
multiplying: (1) the difference between (a)
110 percent of the long-term AFR (semian-
nual compounding) and (b) the long-term
adjusted AFR (semiannual compounding),
in each case for the month in which the
issue is sold; by (2) the total principal
amount of the issue that is expected, as of
the date of issuance, to be outstanding in
that year. For purposes of this paragraph,
present values shall be determined using
the long-term adjusted AFR (semiannual
compounding), for the month in which the
issue is sold, as the discount rate.
vi.Certain prohibited facilities.
A.Certain stadiums or arenas.The
project will not include a stadium or
arena for professional sports exhibitions
or games. For purposes of this notice and
section 142(l), a stadium or arena is a
stadium or arena for professional sports
exhibitions or games if: (1) it is designed
differently, sized larger, built sooner, or
constructed in a more costly manner than
is reasonably required for amateur ex-
hibitions or games; (2) it is designed or
constructed for any professional team or
organization; or (3) in any calendar year
in which bonds subject to section 142(l)
for the project are outstanding, it is used
more than five days during such calendar
year for professional sports exhibitions or
games.
B.Certain facilities for the sale of food
or alcoholic beverages. If the project is
designated, any issue financing the project
will not be treated as described in section
142(a)(14) if proceeds of the issue will be
used to provide any facility the principal
business of which is the sale of food or al-
coholic beverages for consumption on the
premises.
vii.Employment. Based on projec-
tions, the project will provide permanent
employment of at least 1,500 full time
equivalents (150 full time equivalents in
rural States) when completed and con-
struction employment of at least 1,000 full
time equivalents (100 full time equivalents
in rural States). For purposes of this notice,
a full time equivalent with respect to con-
struction employment is determined based
on the average daily full time employ-
2005–27 I.R.B.11July 5, 2005

ment during the construction period. For
example, if a project employs an average
of 1,200 full-time workers each business
day of the construction period, then the
project provides construction employment
of 1,200 full time equivalents. In addi-
tion, for purposes of section 142(l)(6)(A)
and this notice, a “rural State” means any
State that has (1) a population of less than
4,500,000 according to the 2000 census,
(2) a population density of less than 150
people per square mile according to the
2000 census, and (3) increased in pop-
ulation by less than half the rate of the
national increase between the 1990 and
2000 censuses. The following States (as
that term is defined in section 103(c)(2))
meet the definition of “rural State” under
section 142(l)(6)(A): Iowa, Louisiana,
Maine, North Dakota, and West Virginia.
In connection with demonstrating how
the project will meet this requirement, the
application must include an independent
analysis that describes the project’s eco-
nomic impact, including the amount of
projected employment.
c.Goals for conservation and technol-
ogy innovation. The application must de-
scribe:
i. The amount of electric consumption
(in megawatt hours) reduced by the project
as compared to conventional construction
and conventional generation. For this
purpose, a project will be considered to
reduce electric consumption as a result of
(1) conservation and energy efficiency in
the building system designs; (2) non-con-
ventional generation capacity installed
as part of the project (including, but not
limited to, photovoltaic, wind, biomass,
geothermal and fuel cell generation); (3)
the use of thermal output by the project
from a cogeneration system that is part
of the project in such a way as to reduce
electrical consumption (such as waste
heat-fired absorption cooling or displaced
electric space heating); or (4) avoidance
of transmission and distribution losses of
the electrical grid due to the reduction of
electric consumption resulting from items
(1), (2), and (3) of this paragraph 5.c.i.
The application must describe with speci-
ficity how the non-conventional design
of the building will reduce electric con-
sumption, the sources of energy for the
project, the extent to which these sources
of energy will reduce the project’s need
for energy from conventional generation,
and the methodology used to determine
the amount of transmission and distri-
bution losses avoided. Applicants are
encouraged to use the U.S. Department
of Energy’s Energy Plus software (avail-
able on-line at <www.energyplus.gov>) to
assist in determining the amount of elec-
tric consumption reduced as a result of
conservation and energy efficiency in the
building system designs.
ii. The amount of sulfur dioxide daily
emissions reduced by the project as com-
pared to coal generation. Applicants must
determine the amount of sulfur dioxide
daily emissions reduced by the project
as compared to coal generation by mul-
tiplying (1) the sulfur dioxide emission
rate set forth in the following table for
the North American Electric Reliabil-
ity Council (NERC) region (or State, in
the case of Alaska or Hawaii) where the
project is located, by (2) the daily amount
of electric consumption reduced by the
project as compared to conventional con-
struction and conventional generation (as
determined in accordance with paragraph
5.c.i. of this section). A description of
NERC regions may be found on-line at
<www.nerc.com/regional>.
Sulfur Dioxide (SO2) Emission Rate (lb/MWh) for
Coal-fired Power Plants
NERC region (as in effect on April 8, 2005) or State2000 SO2 Emission Rate for Coal-fired Power Plants
(lbs/MWh)
Alaska6.12
ECAR14.28
ERCOT8.26
FRCC8.44
Hawaii2.25
MAAC16.50
MAIN9.96
MRO (formerly MAPP)7.81
NPCC16.25
SERC12.88
SPP6.72
WECC4.54
iii. The amount of the gross installed
capacity of the project’s solar photovoltaic
capacity measured in megawatts. The ap-
plication must describe in detail the tech-
nology and the means and methods of its
application that are reasonably expected
to produce such capacity. The applica-
tion also should specify the percentage
by which the project will expand the do-
mestic solar photovoltaic market in the
United States (measured in megawatts)
as compared to the expansion of that
market from 2001 to 2002. This per-
centage must be determined by dividing
the project’s solar photovoltaic capac-
ity measured in megawatts by 14.424
megawatts, which represents the expan-
sion of the domestic solar photovoltaic
market from 2001 to 2002. This fig-
ure has been obtained from information
contained in Table 26 of the Energy In-
formation Administration’s report titled,
“Solar Thermal and Photovoltaic Collector
Manufacturing Activities 2003”, which is
available atwww.eia.doe.gov/cneaf/solar.
renewables/page/solarreport/soltable26.
html.
iv. The amount, in megawatts, of the
project’s fuel cell energy generation capac-
ity, which includes the fuel cells’ genera-
July 5, 2005122005–27 I.R.B.

tion of thermal and electrical energy used
by the project. The application must de-
scribe in detail the fuel cell installed elec-
trical generating capacity, as well as any
reduced electrical consumption that will
result from the use by the project of the fuel
cells’ thermal energy output. The applica-
tion must also describe how the fuel cell
electrical and thermal energy will be used
by the project.
d.Location of project. The application
must indicate the location of the project,
including: (i) the State in which the project
will be located; (ii) whether the project will
be located in, or within a ten-mile radius
of, an empowerment zone under section
1391; and (iii) whether the project will be
located in a rural State.
6.Plan of financing. The application
must contain a detailed description of the
plan of financing for the project, including
the expected issuer of the bonds, the antici-
pated date of issuance, the sources of secu-
rity and repayment for the bonds, and the
aggregate face amount of bonds expected
to be issued for the project.
DESIGNATIONS
Subject to the availability of eligible
projects, the IRS, after consultation with
the EPA, will designate qualified green
building and sustainable design projects.
In order to evaluate an application submit-
ted, the IRS may disclose selected infor-
mation from the application, pursuant to
section 6103(k)(6), in order to verify the
application’s contents and the project’s el-
igibility as a qualified green building and
sustainable design project. As part of the
designation process, the IRS may impose
requirements or conditions on a designee
that are in addition to those described in
this notice or other published guidance.
CERTIFICATION OF USE OF TAX
BENEFIT
No later than 30 days after the comple-
tion of a project, each issuer of qualified
green building and sustainable design
project bonds for the project must sub-
mit to the Internal Revenue Service,
Attn: SE:T:GE:TEB:O, 1111 Constitu-
tion Ave., NW, PE — 5T2, Washington,
DC 20224, the following certification:
“The [insert name of issuer] hereby certi-
fies that the net benefit of the tax-exempt
financing received pursuant to section
701 of the American Jobs Creation Act
of 2004 for [insert name of project] was
used for the purposes described in section
142(l)(4)(A)(v) of the Internal Revenue
Code.” Each issuer must submit docu-
mentation supporting the certification,
including documentation describing the
calculation and allocation of the net benefit
of the tax-exempt financing for the project
in accordance with paragraph 5.b.v. of
the “APPLICATION REQUIREMENTS”
section of this notice.
REPORT OF COMPLIANCE
Twenty-four months after the comple-
tion of a project, but not later than 48
months after the date of issuance of bonds
subject to section 142(l) that financed
the project, the issuer of the bonds must
submit to the Internal Revenue Service,
Attn: SE:T:GE:TEB:O, 1111 Constitution
Ave., NW, PE — 5T2, Washington, DC
20224, and to the Environmental Pro-
tection Agency, Office of Congressional
and Intergovernmental Relations, Mail
Code 1305A, 1200 Pennsylvania Avenue,
N.W., Washington, D. C. 20460 a written
report together with attachments listed
below that: (1) describes with specificity
whether the project has complied (and is
expected to comply in the future) with the
basic eligibility requirements of section
142(l)(4)(A) and currently meets (and is
expected to meet in the future) the com-
mitments with respect to conservation and
technology innovation set forth in the ap-
plication for the project; (2) provides the
identity of, and contact information for,
a person duly authorized to represent the
issuer before the IRS relating to the issue;
and (3) includes Form 8821 (Tax Infor-
mation Authorization) authorizing the IRS
to disclose any information relating to the
project to the officers and employees of
the Environmental Protection Agency and
the United States Department of Energy
for the purpose of determining whether the
project is accomplishing the goals for con-
servation and technology innovation set
forth in the application for the designation
of the project . The issuer shall attach to
this report a copy of the Form 8038 filed
with respect to the issue, as well as a copy
of the application for designation by the
IRS that was submitted in accordance with
the requirements described above.
ACCOUNTABILITY
Each issuer must maintain, on behalf
of each project, an interest bearing re-
serve account in an amount equal to one
percent of the net proceeds (as defined
in section 150(b)(3)) of any bond issued
under sections 142(a)(14) and 142(l) for
such project. Not later than five years
after the date of issuance of the bonds,
the IRS, after consultation with the EPA,
shall determine whether the project has
substantially complied with the basic eli-
gibility requirements described in section
142(l)(4)(A). The IRS may extend the
five-year period by up to two years if the
project is not placed in service, as de-
termined under § 1.150–2(c), within 48
months after the date of issuance of any
bonds issued under section 142(l) to fi-
nance any part of the project. If the IRS,
after receipt of the compliance report and
consultation with the EPA, certifies that
the project has substantially complied with
the basic eligibility requirements of sec-
tion 142(l)(4)(A), amounts in the reserve
account, including all interest, shall be
released to the project. If the IRS deter-
mines that the project has not substantially
complied with the basic eligibility require-
ments, amounts in the reserve account,
including all interest, shall be paid to the
United States Treasury.
COORDINATION WITH OTHER
RULES GOVERNING QUALIFIED
PRIVATE ACTIVITY BONDS.
Except as otherwise provided in this
notice, nothing in this notice shall be con-
strued as overriding any requirements or
limitations applicable to exempt facility
bonds found in sections 103, and 141
through 150 of the Code and the appli-
cable regulations thereunder, or affecting
the ability of the IRS to examine the bond
issue for compliance with those require-
ments or limitations.
REQUIRED DECLARATIONS
Each application, certification, report
or other document submitted under this no-
tice must include the following declaration
signed by an individual who has personal
knowledge of the relevant facts and cir-
cumstances: “Under penalties of perjury,
I declare that I have examined this docu-
ment and, to the best of my knowledge and
2005–27 I.R.B.13July 5, 2005

belief, the document contains all the rel-
evant facts relating to the document, and
such facts are true, correct, and complete.”
INFORMATION REPORTING
An issuer of qualified green building
and sustainable design project bonds must
complete Form 8038,Information Return
for Tax-Exempt Private Activity Bond Is-
sues, in accordance with the instructions
and complete Part II by checking the box
on Line 11m (Other), writing “qualified
green building and sustainable design
project bonds” in the space provided for
the bond description, and entering the
amount of the bonds in the Issue Price
column.
DRAFTING INFORMATION
The principal author of this notice
is Timothy L. Jones of the Office of As-
sociate Chief Counsel (Tax Exempt &
Government Entities). However, other
personnel from the IRS, the Treasury De-
partment, the Environmental Protection
Agency, and the Energy Department par-
ticipated in its development. For further
information regarding this notice, con-
tact Timothy L. Jones at (202) 622–3980
(not a toll-free call).
Qualification of Certain
Arrangements as Insurance
Notice 2005–49
This notice requests comments on ad-
ditional guidance concerning the standards
for determining whether an arrangement
constitutes insurance for federal income
tax purposes.
In Rev. Rul. 2001–31, 2001–1 C.B.
1348, the Internal Revenue Service an-
nounced that it would no longer raise the
“economic family theory” set forth in Rev.
Rul. 77–316, 1977–2 C.B. 53, in address-
ing whether captive insurance transactions
constitute insurance for federal income tax
purposes. Since 2001, the Service and
the Treasury Department have published
four revenue rulings providing guidance
on the standards to be used to determine
whether a particular arrangement consti-
tutes insurance. Most recently, Rev. Rul.
2005–40, page 4, this Bulletin, explains
that (1) in order for an arrangement to qual-
ify as insurance, both risk shifting and risk
distribution must be present, and (2) the
risk distribution requirement is not satis-
fied if the issuer of an “insurance” con-
tract enters into such a contract with only
one policyholder.See alsoRev. Rul.
2002–89, 2002–2 C.B. 984 (setting forth
circumstances under which arrangements
between a domestic parent corporation and
its wholly owned subsidiary constitute in-
surance); Rev. Rul. 2002–90, 2002–2
C.B. 985 (setting forth circumstances un-
der which payments for professional lia-
bility coverage by a number of operating
subsidiaries to an insurance subsidiary of a
common parent constitute insurance); Rev.
Rul. 2002–91, 2002–2 C.B. 991 (setting
forth circumstances under which amounts
paid to a group captive of unrelated in-
sureds are deductible as insurance premi-
ums and in which the group captive quali-
fies as an insurance company).
The Service and the Treasury Depart-
ment are aware that further guidance is
needed in this area and request comments
on issues that should be addressed. In
particular, comments are requested regard-
ing (1) the factors to be taken into ac-
count in determining whether a cell captive
arrangement constitutes insurance and, if
so, the mechanics of any applicable fed-
eral tax elections; (2) circumstances under
which the qualification of an arrangement
between related parties as insurance may
be affected by a loan back of amounts paid
as “premiums;” (3) the relevance of homo-
geneity in determining whether risks are
adequately distributed for an arrangement
to qualify as insurance, and (4) federal in-
come tax issues raised by transactions in-
volving finite risk.
Comments should be submitted in
writing on or before October 3, 2005,
and should include a reference to Notice
2005–49. Comments may be submitted
to CC:PA:LPD:PR (Notice 2005–49),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Alternatively,
comments may be submitted electroni-
cally via the following e-mail address:
Notice.Comments@irscounsel.treas.gov.
Please include “Notice 2005–49” in the
subject line of any electronic communica-
tions.
Submissions may be hand-delivered
Monday through Friday between the hours
of 8 a.m. and 4 p.m. to CC:PA:LPD:PR
(Notice 2005–49), Courier’s Desk, Inter-
nal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC 20224.
All comments will be available for public
inspection and copying.
DRAFTING INFORMATION
For further information regarding
this notice, contact William Sullivan or
Thomas Preston of the Office of Asso-
ciate Chief Counsel (Financial Institutions
& Products) at (202) 622–3970 (not a
toll-free call).
Miscellaneous Issues Arising
in Connection With the Health
Coverage Tax Credit
Notice 2005–50
This notice provides guidance on mis-
cellaneous issues that have arisen under
section 35 of the Internal Revenue Code
(added by the Trade Act of 2002, Public
Law 107–210). Section 35 provides a 65%
tax credit for amounts certain individuals
spend on certain kinds of health coverage
for themselves and certain family mem-
bers. This credit is referred to as the Health
Coverage Tax Credit (HCTC).
INTRODUCTION
The HCTC may be claimed for eligible
coverage months by eligible individuals.
There are three categories of eligible indi-
viduals: (1) eligible TAA recipients (indi-
viduals eligible for trade adjustment assis-
tance under a programadministered by the
Employment and Training Administration
of the U.S. Department of Labor); (2) el-
igible ATAA recipients (individuals eligi-
ble for alternative trade adjustment assis-
tance under a programadministered by the
Employment and Training Administration
of the U.S. Department of Labor); and (3)
eligible PBGC pension recipients (individ-
uals who are at least age 55 and who are
receiving a benefit any portion of which is
paid by the Pension Benefit Guaranty Cor-
poration). An eligible individual is entitled
to claim the HCTC with respect to quali-
fying family members. Qualifying family
July 5, 2005142005–27 I.R.B.

members include the eligible individual’s
spouse and any person the eligible individ-
ual can claim as a dependent on the eligible
individual’s federal income tax return.
An eligible individual can claim the
HCTC only for qualified health cover-
age. There are ten categories of qualified
health coverage. Seven of the categories
are qualified coverage only if a state gov-
ernment elects them to be qualified. These
are referred to as state-based coverage.
The other three categories are COBRA
coverage, coverage under a group health
plan that is available through the employ-
ment of an eligible individual’s spouse
(spousal coverage), and certain individual
insurance coverage.
An eligible individual who pays for
qualified health coverage for a month is
nevertheless not entitled to the HCTC for
that month if the eligible individual has
other specified coverage on the first day
of the month. Other specified coverage
generally includes health coverage 50
percent or more of the cost of which is
paid or incurred by an employer or former
employer of the eligible individual or of
the eligible individual’s spouse. For this
purpose, the cost of coverage is treated
as paid or incurred by an employer to the
extent the coverage is in lieu of a right to
receive cash or other qualified benefits un-
der a cafeteria plan (as defined in section
125(d) of the Code). (For ATAA recip-
ients, other specified coverage includes
health coverage if the employer pays or
incurs any portion of the cost of coverage.)
Coverage under the following programs
is also other specified coverage: Medi-
care, Medicaid, State Children’s Health
Insurance Program (S-CHIP), TRICARE
coverage (for members of the military and
their families), andFEHBP coverage (for
federal civil employees).
Eligible individuals and their qualify-
ing family members have certain rights
with respect to state-based coverage if
the eligible individual has at least three
months of creditable coverage, does not
have other specified coverage, and is not
imprisoned under federal, state, or local
authority. Such an eligible individual and
the eligible individual’s qualifying family
members are referred to as qualifying indi-
viduals. They have guaranteed issue rights
to state-based coverage, their state-based
coverage cannot be subject to a preexist-
ing condition exclusion, they cannot be
charged more for state-based coverage
than similarly situated individuals, and
they must be entitled to the same benefits
under state-based coverage as similarly
situated individuals.
The HCTC can be claimed on the eligi-
ble individual’s federal tax return. How-
ever, individuals can also claim the HCTC
under an advance payment program autho-
rized by section 7527 of the Code. Eli-
gible individuals registering with the ad-
vance payment program can send the IRS
35% of the cost of qualified health cover-
age on a monthly basis and the IRS will
pay the health coverage provider 100%
of the cost of qualified health coverage.
Amounts paid through the advance pay-
ment program cannot be claimed for the
HCTC on the eligible individual’s tax re-
turn.
QUESTIONS AND ANSWERS
Q–1. Is an individual who receives a
lump sum payment from the Pension Ben-
efit Guaranty Corporation (PBGC) on or
after August 6, 2002, considered to be re-
ceiving monthly benefits from the PBGC?
A–1. Yes. An individual who receives
a lump sum payment from the PBGC on
or after August 6, 2002 (the date of enact-
ment of the Trade Act of 2002), is consid-
ered to be receiving monthly benefits from
the PBGC for as long as the individual
would have received a PBGC annuity had
the PBGC not paid the individual a lump
sum of their PBGC benefit. Consequently,
if such an individual is at least age 55 as
of the first day of a month, the individual
is an eligible individual for purposes of the
Health Coverage Tax Credit (HCTC).
Q–2. Can an eligible individual claim
the HCTC with respect to amounts paid
for qualified health coverage of a qualify-
ing family member if that qualified health
coverage does not cover the eligible indi-
vidual?
A–2. Yes, but only if the eligible in-
dividual has qualified health coverage for
the month. However, that qualified health
coverage need not be the same as that cov-
ering a qualifying family member in order
for the eligible individual to be entitled to
claim the HCTC with respect to amounts
paid for the qualifying family member’s
qualified health coverage for that month.
For example, if an eligible individual is en-
rolled in qualified state-based health cov-
erage in a month and a qualifying family
member of the eligible individual is en-
rolled in COBRA coverage in that month,
the eligible individual is entitled to claim
the HCTC for that month with respect to
amounts paid both for the eligible individ-
ual’s enrollment in the state-based cover-
age and for the qualifying family mem-
ber’s enrollment in the COBRA coverage.
Q–3. If qualified health coverage of an
eligible individual or a qualifying family
member also covers someone who is nei-
ther an eligible individual nor a qualify-
ing family member (a nonqualifying bene-
ficiary), how is the amount paid by the el-
igible individual for qualified coverage al-
located between, on the one hand, the eli-
gible individual and any qualifying family
members, and, on the other hand, nonqual-
ifying beneficiaries?
A–3. Amounts paid by an eligible indi-
vidual for qualified health coverage cover-
ing one or more nonqualifying beneficia-
ries are allocated on an incremental basis,
attributing those amounts first to the cost
of covering the eligible individual and any
qualifying family members and then to the
cost of covering nonqualifying beneficia-
ries. Thus, if the cost of covering a non-
qualifying beneficiary does not add to the
cost of covering the eligible individual or
any qualifying family members, then the
cost of covering the nonqualifying benefi-
ciary is zero. If the cost of covering a non-
qualifying beneficiary adds to the cost of
covering an eligible individual or any qual-
ifying family member, it is the incremental
cost that is ineligible for the HCTC. This
incremental allocation rule for nonqualify-
ing beneficiaries is illustrated by the fol-
lowing examples:
Example 1.Facts. Qualified health coverage
of an eligible individual covers an eligible individ-
ual and the eligible individual’s spouse and two chil-
dren. The two children satisfy the conditions for be-
ing qualifying family members (that is, they do not
have other specified coverage and the eligible indi-
vidual is entitled to claim them as dependents on the
eligible individual’s federal income tax return). The
spouse, however, is not a qualifying family mem-
ber (because the spouse has other specified cover-
age). The eligible individual pays $800 per month
for self-plus-two-or-more-dependents under the qual-
ified coverage.
Conclusion. The amount the eligible individual
pays for covering the eligible individual and the two
children (the qualifying family members) under the
qualified health coverage is $800 per month. The
amount the eligible individual pays for the spouse
(the nonqualifying beneficiary) is $0 per month. The
2005–27 I.R.B.15July 5, 2005

eligible individual is entitled to claim the HCTC with
respect to $800 per month.
Example 2.Facts. The facts are the same as in
Example 1of this Q&A–3 except that the eligible in-
dividual has only one child. Although the eligible in-
dividual pays $800 per month for self-plus-two-or-
more-dependents under the qualified coverage, the el-
igible individual would be required to pay $600 per
month for self-plus-one-dependent under the cover-
age.
Conclusion. The amount the eligible individual
pays for covering the eligible individual and the child
(the one qualifying family member) under the quali-
fied health coverage is $600 per month. The amount
the eligible individual pays for the spouse (the non-
qualifying beneficiary) is $200 per month. The eli-
gible individual is entitled to claim the HCTC with
respect to $600 per month.
Q–4. Is entitlement to or receipt of
benefits from the Veterans Administration
other specified coverage?
A–4. No. The statute lists various
forms of health coverage — including the
entitlement to receivebenefits under chap-
ter 55 of title 10 of the United States Code
(TRICARE) — as other specified cover-
age. Entitlement to or receipt of benefits
from the Veterans Administration, how-
ever, comes under title 38 of the United
States Code and does not fit any of the cat-
egories of other specified coverage.
Q–5. How is a determination made
whether an employer pays or incurs at least
50% of the cost of coverage or any portion
of the cost of coverage?
A–5. (a) The rules of this Q&A–5 are
used to determine whether an employer
pays or incurs at least 50% of the cost
of coverage or any portion of the cost of
coverage. The factors for making such
a determination consist of (1) the basis
for determining the dollar amount of the
cost (described in paragraph (b) of this
Q&A–5); (2) the effect of cafeteria plan
contributions under section 125 of the
Code (described in paragraph (c) of this
Q&A–5); and (3) the category of cover-
age (described in paragraph (d) of this
Q&A–5).
(b) The dollar amount of cost is de-
termined in accordance with the rules in
section 4980B(f)(4) of the Code (used in
determining the applicable premium for
COBRA continuation coverage).
(c) Any portion of the cost of coverage
of an individual paid or incurred in lieu of a
right to receive cash or other qualified ben-
efits under a cafeteria plan under section
125isconsideredtobepaidorincurredby
an employer.
(d) If the proportion of the cost of cover-
agepaidorincurredbyanemployervaries
with the category of coverage, the amount
paid or incurred by the employer for each
category is determined on an aggregate ba-
sis. Thus, for example, in a plan that makes
coverage available in self-only and family
categories, the portion of the cost of fam-
ilycoveragepaidorincurredbytheem-
ployer is determined by dividing the total
cost of such coverage by the total amount
the employer pays or incurs for such cov-
erage. This rule is further illustrated in the
following example:
Example.Facts. Employees participating in
a group health plan maintained by an employer
may choose among three categories of coverage:
(1) self-only, (2) self-plus-one-dependent, and (3)
self-plus-two-or-more-dependents. The total cost of
the coverage, as determined under the rules of sec-
tion 4980B(f)(4), is (1) $300 per month for self-only
coverage, (2) $600 per month for self-plus-one-de-
pendent coverage, and (3) $800 per month for
self-plus-two-or-more-dependents coverage. No
portion of the cost of coverage is paid or incurred un-
der a cafeteria plan under section 125. The employer
pays or incurs (1) $225 per month for self-only
coverage, (2) $325 per month for self-plus-one-de-
pendent coverage, and (3) $350 per month for
self-plus-two-or-more-dependents coverage.
Conclusion. The portion of the cost of cover-
age that the employer pays for each category is (1)
75% for self-only coverage ($225/$300), (2) 54%
for self-plus-one-dependent coverage ($325/$600,
rounded to the nearest whole percentage), and (3)
44% for self-plus-two-or-more-dependents coverage
($350/$800, rounded to nearest whole percentage).
Thus, for any eligible individual or qualifying fam-
ily member receiving coverage under the plan, the
categories self-only and self-plus-one-dependent
are other specified coverage (and thus the eligible
individual cannot claim the HCTC); the category
self-plus-two-or-more-dependents is not other speci-
fied coverage (except in connection with the special
rules that apply for ATAA recipients).
Q–6. May a plan providing COBRA
coverage to an eligible individual or a
qualifying family member reject payment
from the HCTC advance payment program
because it does not come directly from a
COBRA qualified beneficiary?
A–6. No. Under the COBRA con-
tinuation coverage requirements of section
4980B of the Code, payment is merely re-
quired to be made; there is no require-
ment that it be made by the qualified ben-
eficiary. If full payment by a third party
(such as the HCTC advance payment pro-
gram) is tendered timely to a plan for the
COBRA coverage of a qualified benefi-
ciary and the plan terminates the cover-
age of the qualified beneficiary for failure
to make timely payment, the plan is not
in compliance with the COBRA continu-
ation coverage requirements and is subject
to the excise tax of section 4980B (gener-
ally, $100 per day per beneficiary for each
day that the plan is not in compliance with
respect to that beneficiary).
Q–7. To be qualified health coverage,
must a state-based plan allow qualify-
ing individuals to pay for their coverage
through the HCTC advance payment pro-
gram?
A–7. Yes. Part of the guaranteed is-
sue requirement for any state-based plan
is that the plan allow qualifying individu-
als to pay for their coverage through the
HCTC advance payment program.
Q–8. How is it determined if a qualify-
ing family member of an eligible individ-
ual is a qualifying individual?
A–8. If the family member has met the
requirements for being a qualifying family
member (relationship to eligible individual
and no other specified coverage) and the
eligible individual is a qualifying individ-
ual, then the family member is a qualify-
ing individual. There are no additional re-
quirements for the family member to sat-
isfy (such as having a certain amount of
creditable coverage).
Q–9. How is it determined whether
an eligible individual has three months or
more of creditable coverage?
A–9. The rules of section 9801 of the
Code and the regulations thereunder (in-
cluding those rules describing what con-
stitutes a significant break in coverage and
tolling rules for significant breaks in cover-
age) apply in determining if an eligible in-
dividual has three months or more of cred-
itable coverage as of any date. Those rules
prescribe that creditable coverage is de-
termined on the basis of days rather than
months. In applying those rules under sec-
tion 35, an individual who has at least 89
days of creditable coverage as of a certain
date is considered to have three months or
more of creditable coverage as of that date.
Q–10. Must a state-based plan restrict
eligibility for enrollment among eligible
individuals and qualifying family mem-
bers to those who are also qualifying in-
dividuals in order for the state-based plan
to be qualified health coverage?
A–10. No. A state-based plan does not
fail to satisfy the requirements for quali-
fied health coverage merely because it al-
lows eligible individuals and qualifying
July 5, 2005162005–27 I.R.B.

family members who are not qualifying in-
dividuals to enroll in the plan.
Q–11. Does a state-based plan fail to
satisfy the guaranteed issue requirement
merely because it restricts eligibility under
the plan to residents of the state?
A–11. No. Moreover, if a state has
a system of plans covering distinct geo-
graphic regions in the state, each plan may
restrict eligibility to residents of that re-
gion as long as any qualifying individual
in the state is eligible for at least one plan
in the system.
Q–12. Are there other restrictions that a
state-based plan can impose on the enroll-
ment of qualifying individuals?
A–12. Yes. State-based plans can
require qualifying individuals to enroll
within a reasonable period after becoming
qualifying individuals or during limited
regular enrollment periods thereafter (such
as annual enrollment periods), can deny
enrollment to qualifying individuals for
fraud or misrepresentation of material
facts, and can deny enrollment for failure
to make timely payment.
Q–13. Can state-based coverage (in-
cluding a high risk pool) condition enroll-
ment of a qualifying individual on being
rejected for coverage in the individual or
group health insurance market?
A–13. No. Any coverage elected by a
state to be qualified health coverage must
be made available to a qualifying individ-
ual if the qualifying individual pays for en-
rollment (or enrolls in the advance pay-
ment program and the IRS pays for enroll-
ment on behalf of the qualifying individ-
ual) and cannot be subject to any condition
other than those described in Q&A–11 and
Q&A–12 of this notice.
DRAFTING INFORMATION
The principal author of this notice is
Russ Weinheimer of the Office of Division
Counsel/Associate Chief Counsel (Tax Ex-
empt and Government Entities). For fur-
ther information about this notice, contact
Mr. Weinheimer at (202) 622–6080 (not a
toll-free call).
2005–27 I.R.B.17July 5, 2005

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Limitations on Benefits and
Contributions Under Qualified
Plans
REG–130241–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed amendments to the regulations
under section 415 of the Internal Revenue
Code regarding limitations on benefits
and contributions under qualified plans.
The proposed amendments would pro-
vide comprehensive guidance regarding
the limitations of section 415, including
updates to the regulations for numerous
statutory changes since regulations were
last published under section 415. The
proposed amendments would also make
conforming changes to regulations un-
der sections 401(a)(9), 401(k), 403(b),
and 457, and would make other minor
corrective changes to regulations under
section 457. These regulations will af-
fect administrators of, participants in, and
beneficiaries of qualified employer plans
and certain other retirement plans. This
document also provides notice of a public
hearing on these proposed regulations.
DATES: Written or electronic comments
must be received by July 25, 2005. Re-
quests to speak and outlines of topics to be
discussed at the public hearing scheduled
for August 17, 2005, at 10 a.m., must be
received by July 27, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–130241–04), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, 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–130241–04),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington D.C. Alternatively, taxpayers may
submit comments electronically directly to
the IRS Internet site atwww.irs.gov/regs.
ThepublichearingwillbeheldintheAu-
ditorium, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
D.C.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Vernon S. Carter at (202) 622–6060 or
Linda S. F. Marshall at (202) 622–6090;
concerning submissions and the hearing
and/or to be placed on the building access
list to attend the hearing, Richard A. Hurst
at (202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regu-
lations (26 CFR Parts 1 and 11) under
section 415 of the Internal Revenue Code
(Code) relating to limitations on benefits
and contributions under qualified plans.
In addition, this document contains con-
forming amendments to the Income Tax
Regulations under sections 401(a)(9),
401(k), 403(b), and 457 of the Code, as
well as minor corrective changes to the
regulations under section 457.
Section 415 was added to the Internal
Revenue Code by the Employee Re-
tirement Income Security Act of 1974
(ERISA), and has been amended many
times since. Section 415 provides a se-
ries of limits on benefits under qualified
defined benefit plans and contributions
and other additions under qualified de-
fined 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 con-
tribution plans apply to contributions al-
located 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 ben-
efits allocated to an account 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 de-
ductions for contributions to a defined ben-
efit plan, and in computing the full fund-
ing limitation, an adjustment under section
415(d)(1) is not taken into account for any
year before the year for which that adjust-
ment 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 Internal Revenue 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% of com-
pensation as defined in section 415(c)(3).
Section 404(a)(12) provides that, for vari-
ous specified purposes in determining de-
ductible limits under section 404, the term
compensationincludes amounts treated as
participant’s compensationunder section
415(c)(3)(C) or (D). Pursuant to section
409(b)(2), for purposes of determining
whether employer securities are allocated
proportionately to compensation in accor-
dance with the rules of section 409(b)(1),
the amount of compensation paid to a par-
ticipant 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)(3), for pur-
poses of determining whether an employee
is a highly compensated employee within
the meaning of section 414(q), the term
compensationhas the meaning given such
term by section 415(c)(3). Section 414(s),
which defines the termcompensationfor
purposes of certain qualification require-
ments, generally provides that the term
compensationhas 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% of the partici-
pant’s compensation (within the meaning
of section 415(c)(3)). Pursuant to section
457(e)(5), the termincludible compensa-
July 5, 2005182005–27 I.R.B.

tion, 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 termparticipant’s com-
pensationunder section 415(c)(3).
Comprehensive regulations regarding
section 415 were last issued in 1981. See
T.D. 7748, 1981–1 C.B. 259, published in
theFederal Registeron January 7, 1981
(46 FR 1687). Since then, changes to sec-
tion 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 Miscella-
neous 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 Protec-
tion Act of 1996, Public Law 104–188
(110 Stat. 1755) (SBJPA), the Commu-
nity Renewal Tax Relief Act of 2000,
Public Law 106–554 (114 Stat. 2763),
theEconomicGrowthandTaxRelief
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), and the Working Fam-
ilies Tax Relief Act of 2004, Public Law
108–311 (118 Stat. 1166).
Although two minor changes to the reg-
ulations 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 guid-
ance of general applicability, as follows:
•Notice 82–13, 1982–1 C.B. 360, pro-
vides guidance on deductible em-
ployee contributions (including guid-
ance under section 415) to reflect the
addition of provisions relating to de-
ductible employee contributions in
ERTA.
•Notice 83–10, 1983–1 C.B. 536, pro-
vides guidance on the changes to sec-
tion 415 made by TEFRA. The TEFRA
changes were extensive, and included
reductions of the dollar limits on an-
nual benefits under a defined benefit
plan and annual additions under a de-
fined contribution plan, changes to the
age and form adjustments made in the
application of the limits under a de-
fined benefit plan, and rules regarding
the deductibility of contributions with
respect to benefits that exceed the ap-
plicable limitations of section 415.
•Notice 87–21, 1987–1 C.B. 458, pro-
vides guidance on the changes to sec-
tion 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 contribu-
tion 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 par-
ticipation, as well as rules permitting
the limitations of section 415 to be
incorporated by reference under the
terms of a plan.
•Rev. Rul. 95–6, 1995–1 C.B. 80, and
Rev. Rul. 2001–62, 2001–2 C.B. 632,
(superseding Rev. Rul. 95–6) provide
mortality tables to be used to make cer-
tain form adjustments to benefits un-
der 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.
•Rev. Rul. 95–29, 1995–1 C.B. 81,
and Rev. Rul. 98–1, 1998–1 C.B.
249, (modifying and superseding Rev.
Rul. 95–29) provide guidance regard-
ing certain form and age adjustments
under a defined benefit plan pursuant
to changes made by GATT (as mod-
ified under SBJPA), including transi-
tion rules relating to those adjustments.
•Notice 99–44, 1999–2 C.B. 326, pro-
vides 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 C.B. 1340,
provides guidance regarding the inclu-
sion of salary reduction amounts for
qualified transportation fringe benefits
in the definition of compensation for
purposes of section 415, as provided
under the Community Renewal Tax
Relief Act of 2000.
•Rev. Rul. 2001–51, 2001–2 C.B. 427,
provides guidance relating to the in-
creases in the limitations of section 415
for both defined benefit and defined
contribution plans, which were enacted
as part of EGTRRA.
•Notice 2002–2, 2002–1 C.B. 285, pro-
vides guidance regarding the treatment
of reinvested ESOP dividends under
section 415(c), to reflect changes made
by SBJPA.
•Rev. Rul. 2002–27, 2002–1 C.B. 925,
provides guidance pursuant to which
a definition of compensation can be
used for purposes of applying the lim-
itations of section 415 even if that def-
inition treats certain specified amounts
that may not be available to an em-
ployee in cash as subject to section 125
(and therefore included in compensa-
tion).
•Rev. Rul. 2002–45, 2002–2 C.B. 116,
provides guidance regarding the treat-
ment of certain payments to defined
contribution plans to restore losses re-
sulting from actions by a fiduciary for
which there is a reasonable risk of li-
ability for breach of a fiduciary duty
(including the treatment of those pay-
ments under section 415).
•Notice 2004–78, 2004–48 I.R.B. 879,
provides guidance regarding the actu-
arial assumptions that must be used
for distributions with annuity starting
dates occurring during plan years be-
ginning in 2004 and 2005, to determine
whether an amount payable under a de-
fined benefit plan in a form that is sub-
ject to the minimum present value re-
quirements of section 417(e)(3) satis-
fies the requirements of section 415.
This guidance reflects changes made in
PFEA.
These guidance items are reflected
in the proposed regulations with some
modifications. In addition, the proposed
regulations reflect other statutory changes
2005–27 I.R.B.19July 5, 2005

not previously addressed by guidance, and
include some other changes and clarifi-
cations to the existing final regulations.
Treasury 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. To the extent practicable,
this preamble identifies and explains sub-
stantive changes from the existing final
regulations or existing guidance.
Explanation of Provisions
Overview
A.Reflection of statutory changes
These proposed 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 proposed regulations are as
follows:
•The current statutory limitations under
section 415(b)(1)(A) and 415(c)(1)
applicable for defined benefit and
defined contribution plans, respec-
tively, as most recently amended by
EGTRRA.
•Changes to the rules for age adjust-
ments 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 for benefit ad-
justments under defined benefit plans.
The proposed regulations also specify
the parameters under which a benefit
payable in a form other than a straight
life annuity is adjusted in order to de-
termine the actuarially equivalent an-
nual benefit that is subject to the limi-
tations of section 415(b).
•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 per-
mitted to be taken into account in deter-
mining plan benefits, as added by TRA
’86, and the interaction of this require-
ment with the limitations under section
415.
•Exceptions to the compensation-based
limitation under section 415(b)(1)(B)
for governmental plans, multiem-
ployer plans, and certain other collec-
tively bargained plans.
•Changes to the aggregation rules under
section 415(f) under which multiem-
ployer plans are not aggregated with
single-employer plans for purposes of
applying the compensation-based lim-
itation of section 415(b)(1)(B) to a sin-
gle-employer plan.
•The repeal under SBJPA of the section
415(e) limitation on the combination
of a defined benefit plan and a defined
contribution plan.
•The changes to section 415(c) that
were made in conjunction with the re-
peal under EGTRRA of the exclusion
allowance under section 403(b)(2).
•The current rounding and base period
rules for annual cost-of-living adjust-
ments pursuant to section 415(d), as
most recently amended in EGTRRA
and the Working Families Tax Relief
Act of 2004.
•Changes to section 415(c) under which
certain types of arrangements are no
longer subject to the limitations of sec-
tion 415(c) (e.g., individual retirement
accounts other than SEPs) and other
types of arrangements have become
subject to the limitations of section
415(c) (e.g., certain individual medi-
cal accounts).
•The inclusion in compensation (for
purposes of section 415) of certain
salary reduction amounts not included
in gross income.
B.Other significant changes
The proposed regulations contain new
rules for determining the annual benefit
under a defined benefit plan where there
has been more than one annuity starting
date (e.g., where benefits under a plan are
aggregated with benefits under another
plan under which distributions previously
commenced). These rules would resolve
the numerous issues that have arisen in
determining the annual benefit under a
plan where the application of the section
415(b) limitations must take into account
prior distributions as well as currently
commencing distributions.
The proposed regulations also provide
specific rules regarding when amounts
received following severance from em-
ployment are considered compensation
for purposes of section 415, and when
such amounts are permitted to be deferred
pursuant to section 401(k), section 403(b),
or section 457(b). These rules would re-
solve issues that have arisen with respect
to payments made after the end of employ-
ment. The proposed regulations generally
provide that amounts received following
severance from employment are not con-
sidered to be compensation for purposes
of section 415, but provide exceptions for
certain payments made within 2
1
/2months
following severance from employment.
These exceptions apply to payments (such
as regular compensation, and payments
for overtime, commissions, and bonuses)
that would have been payable if employ-
ment had not terminated, and to payments
with respect to leave that would have been
available for use if employment had not
terminated. This notice of proposed rule-
making includes corresponding changes
to the regulations under sections 401(k),
403(b), and 457 that would provide that
amounts receivable following severance
from employment can only be deferred
if those amounts meet these conditions.
The rule pursuant to which compensation
received after severance from employ-
ment is not considered compensation for
purposes of section 415 generally does
not apply to payments to an individual in
qualified military service.
§1.415(a)–1: General rules
Section 1.415(a)–1 of these proposed
regulations sets forth general rules relat-
ing 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, and gov-
ernmental plans. In addition, this section
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
July 5, 2005202005–27 I.R.B.

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, and rules that apply in other
special situations.
§1.415(b)–1: Limitations applicable to
defined benefit plans
Section 1.415(b)–1 of these proposed
regulations sets forth rules for applying
the limitations on benefits under a defined
benefit plan. Under these limitations, the
annual benefit must not be greater than
the lesser of $160,000 (as adjusted pur-
suant to section 415(d)) or 100% of the
participant’s average compensation for the
participant’s high 3 consecutive years. 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 addi-
tion, the dollar limitation under section
415(b)(1)(A) is actuarially adjusted for
benefit payments that commence before
age 62 or after age 65. The proposed
regulations clarify that, in addition to ap-
plying to benefits payable to participants
and beneficiaries, the limitations of sec-
tion 415(b) apply to accrued benefits and
benefits payable from an annuity contract
distributed to a participant. Thus, the
limitations of section 415(b) apply to a
participant’s entire accrued benefit, re-
gardless of whether the benefit is vested.
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 ben-
efit 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. In addition,
the proposed regulations provide a num-
ber of other updates, clarifications, and
other changes to the existing regulations,
as described below.
A. Actuarial assumptions used to convert
benefit to a straight life annuity
The proposed regulations provide rules
under which a retirement benefit payable
in any form other than a straight life an-
nuity is converted to the straight life an-
nuity that is actuarially equivalent to that
other form to determine the annual ben-
efit (which is used to demonstrate com-
pliance with section 415) with respect to
that form of distribution. These rules re-
flect statutory changes that specify the ac-
tuarial assumptions that are to be used for
these equivalency calculations (including,
for plan years beginning in 2004 and 2005,
the use of a 5.5% interest rate for benefits
that are subject to the present value rules of
section 417(e)(3),
1
as set forth in PFEA),
as well as published guidance that has been
issued since 1981. In addition to setting
forth rules for adjusting forms of benefit
other than straight life annuities, the pro-
posed regulations would permit the IRS to
issue published guidance setting forth sim-
plified methods for making these adjust-
ments.
Under the proposed regulations, the
annual benefit is determined as the greater
of the actuarially equivalent straight life
annuity determinedunder the plan’s ac-
tuarial 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 is actuarially
equivalent to a particular optional form
of benefit is overridden only when the
optional form of benefit is more valu-
able than the corresponding straight life
annuity when compared using statutorily
specified actuarial assumptions.
The rules in the proposed regulations
under which a retirement benefit payable
in any form other than a straight life an-
nuity is converted to a straight life annu-
ity to determine the annual benefit with
respect to that form of distribution gen-
erally follow the rules set forth in Rev.
Rul. 98–1. However, the calculation of the
actuarially equivalentstraight life annuity
determined using the plan’s assumptions
for actuarial equivalence has been simpli-
fied for a form of benefit that is not subject
to the minimum present value rules of sec-
tion 417(e)(3). Under the simplified cal-
culation, instead of determining the actu-
arial assumptions used under the plan and
applying those assumptions to convert an
optional form of benefit to an actuarially
equivalent straight life annuity, the regu-
lations use the straight life annuity, if any,
that is payable at the same age under the
plan. This straight life annuity is then com-
pared to the straight life annuity that is the
actuarial equivalent of the optional form
of benefit, determined using the standard-
ized 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 ex-
tended to forms of benefit that are subject
to the minimum present value rules of sec-
tion 417(e), however, because under the
plan those forms of benefit may be deter-
mined as the actuarial equivalent of the de-
ferred annuity, rather than as the actuarial
equivalent of the immediate straight life
annuity.
B. Inclusion of social security supplements
in annual benefit
The proposed regulations clarify that
a social security supplement is included
in determining the annual benefit. Un-
der section 415(b)(2)(B), the annual ben-
efit does not include ancillary benefits that
are not directly related to retirement ben-
efits. However, because a social security
supplement is payable upon retirement as
a form of retirement income, it is a retire-
ment benefit. Thus, a social security sup-
plement is included in determining the an-
nual benefit without regard to whether it is
an ancillary benefit or a QSUPP within the
meaning of §1.401(a)(4)–12.
C. Determination of high 3 average
compensation
The proposed regulations would make
two changes that would have a signif-
icant effect on the determination of a
participant’s average compensation for
the participant’s high 3 consecutive years.
Consistent with the provisions of section
1
Section 417(e)(3) provides minimum present value requirements for certain forms of benefit payable from a defined benefit plan under which paymentscannot be less than the amount
calculated using a specified interest rate and a specified mortality table. For forms of benefit that are subjectto the minimum present value rules ofsection 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
§1.417(e)–1(d)(1).
2005–27 I.R.B.21July 5, 2005

415(b)(3), the proposed regulations would
restrict compensation used for this pur-
pose to compensation earned in periods
during which the participant was an active
participant in the plan. In addition, the
proposed regulations under §1.415(c)–2
would clarify the interaction of the re-
quirements of section 401(a)(17) and the
definition of compensation that must be
used for purposes of determining a par-
ticipant’s average compensation for the
participant’s high 3 consecutive years.
Because a plan may not base benefit ac-
cruals on compensation in excess of the
limitation 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 com-
pensation in excess of the limitation under
section 401(a)(17). Thus, for example,
where a participant commences receiv-
ing benefits in 2005 at age 75 (so that
the adjusted dollar limitation could be as
high as $379,783), and the participant had
compensation in excess of the applicable
section 401(a)(17) limit for 2002, 2003,
and 2004, the participant’s benefit under
the plan is limited by the average compen-
sation for his highest three years as limited
by section 401(a)(17) (i.e., $201,667, or
the average of $200,000, $200,000, and
$205,000).
The proposed regulations set forth rules
for computing the limitation of section
415(b)(1)(B) of 100% of the participant’s
compensation for the period of the par-
ticipant’s high 3 years of service for a
participant who is employed with the em-
ployer while an active participant for less
than 3 consecutivecalendar years. For
such a participant, the period of a partici-
pant’s high 3 years of service is the actual
number of consecutive years of employ-
ment (including fractions of years) while
an active participant in the plan. In such a
case, the limitation of section 415(b)(1)(B)
of 100% of the participant’s 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
employment while a plan participant over
the actual period of service (including
fractions of years, but not less than one
year).
D. Treatment of benefits paid partially in
the form of a QJSA
Under section 415(b)(2)(B), the portion
of any joint and survivor annuity that con-
stitutes a qualified joint and survivor an-
nuity (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). The pro-
posed regulations would 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
benefitispaidinsomeotherform.
E. Dollar limitation applicable to early or
late commencement
The determination of the age-adjusted
dollar limitation under the proposed reg-
ulations 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 pro-
cedures as those used in Rev. Rul. 98–1,
except that such determination takes into
account the increased defined benefit dol-
lar limitation enacted by EGTRRA and
that the adjustments for early or late com-
mencement 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, the proposed regulations
generally use the plan’s determinations
for actuarial equivalence of early or late
retirement benefits, but override those de-
terminations where the use of the specified
statutory assumptions results in a lower
limit.
The proposed regulations adopt rules
for mortality adjustments used in comput-
ing the dollar limitation on a participant’s
annual benefit for distributions commenc-
ing before age 62 or after age 65. Un-
der these rules, to the extent that a forfei-
ture does not occur upon the participant’s
death, no adjustment is made to reflect the
probability of the participant’s death dur-
ing the relevant time period, and to the ex-
tent a forfeiture occurs upon the partici-
pant’s death, an adjustment must be ap-
plied to reflect the probability of the par-
ticipant’s death during the relevant time
period. These rules generally are consis-
tent with the guidance provided in Notice
83–10.
The proposed regulations would also
provide a simplified method for applying
this rule. 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 pro-
viding 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.
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), the proposed regulations would
provide that the early retirement reduction
does not apply to certain participants in
plans of state 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 or political
subdivision of a state 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 or political sub-
division that provides police protection,
firefighting services, or emergency medi-
cal services, or (2) a member of the Armed
Forces of the United States. The proposed
regulations would clarify that the applica-
tion of this rule depends on whether the
employer is a police department or fire
department of the state or political subdi-
vision, rather than on the job classification
of the individual participant.
G. Application of $10,000 exception
Pursuant to section 415(b)(4), the ben-
efits payable with respect to a participant
satisfy the limitations of section 415(b) if
the retirement benefits payable with re-
spect to such a participant under the plan
and all other defined benefit plans of the
employer do not exceed $10,000 for the
July 5, 2005222005–27 I.R.B.

plan year or for any prior plan year, and
the employer has not at any time main-
tained a defined contribution plan in which
the participant participated. The proposed
regulations would clarify that the section
415(b)(4) alternative $10,000 limitation is
applied to actual distributions made during
each year. Thus, a distribution for a limita-
tion 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 sin-
gle-sum distribution that is the actuarial
equivalent of an accrued benefit with an-
nual payments that are less than $10,000.
H. Exclusion of annual benefit attributable
to mandatory employee contributions
from annual benefit
The proposed regulations would retain
the rules under existing final regulations
that the annual benefit does not include
the annual benefit attributable to manda-
tory employee contributions. For this
purpose, the term “mandatory employee
contributions” means amounts contributed
to the plan by the employee that are re-
quired 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 con-
tributions 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 section 411 does not apply to the plan)
because, depending upon the investment
performance of plan assets, employer con-
tributions may be needed to pay a portion
of the participant’s benefit that is condi-
tioned upon these employee contributions.
The rules covering mandatory employee
contributions do not extend to voluntary
contributions because voluntary employee
contributions (plus earnings thereon) are
treated as a separate defined contribution
plan rather than as part of a defined benefit
plan.
The proposed regulations would retain
the rule under the existing regulations that
the annual benefit attributable to manda-
tory employee contributions is determined
using the factors described in section
411(c)(2)(B) and the regulations there-
under, regardless of whether section 411
applies to the plan. The proposed regula-
tions also would 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.
I. Exclusion of annual benefit attributable
to rollover contributions from annual
benefit
The proposed regulations would clar-
ify that the annual benefit does not include
the annual benefit attributable to rollover
contributions made to a defined benefit
plan (i.e., rollover contributions that are
not maintained in a separate account that
is treated as a separate defined contribu-
tion plan under section 414(k)). In such
a case, the annual benefit attributable to
rollover contributions is determined by ap-
plying the rules of section 411(c) treat-
ing the rollover contributions as employee
contributions (regardless of whether sec-
tion 411 applies to the plan). This will oc-
cur, 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 bene-
fit attributable to those rollover contribu-
tions for purposes of section 415 is de-
termined 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 uses more favorable factors than
those specified in section 411(c) to deter-
mine the amount of annuity payments aris-
ing from a rollover contribution, the an-
nual benefit under the plan would reflect
the excess of those annuity payments over
the amounts that would be payable using
the factors specified in section 411(c)(3).
Rollover contributions to an account
that is treated as a separate defined con-
tributionplanundersection414(k)donot
give rise to an annual benefit because the
separate account is not treated as a defined
benefit plan under section 415(b). Further-
more, under the rules relating to defined
contribution plans, these rollover contri-
butions to a separateaccount are excluded
from the definition of annual additions to
a defined contribution plan.
J. Treatment of benefits transferred among
plans
The proposed regulations would mod-
ify the rules of the existing final regula-
tions for determining the amount of trans-
ferred benefits that are excluded from the
annual benefit under a defined benefit plan
in the event of a transfer from another de-
fined benefit plan. These modifications
are designed to ensure that transferred ben-
efits are not counted twice by the same
employer toward the limitations of section
415(b) and, similarly, to prevent the cir-
cumvention of the limitations of section
415(b) through benefit transfers to plans of
unrelated employers. Under the proposed
regulations, if the transferee plan’s bene-
fitsarerequiredtobe taken into account
pursuant to section 415(f) and §1.415(f)–1
in determining whether the transferor plan
satisfies the limitations of section 415(b),
then the transferred benefits are included
in determining the annual benefit under
the transferee plan and are disregarded in
determining the annual benefit under the
transferor plan. Accordingly, in such a
case, the annual benefit under each plan is
determined taking into account the actual
benefits provided under that plan after the
transfer.
In contrast, if the transferee plan’s
benefits are not required to be taken into
account pursuant to section 415(f) and
§1.415(f)–1 in determining whether the
transferor plan satisfies the limitations
of section 415(b), then the assets asso-
ciated with those transferred liabilities
(other than surplus assets) are treated by
the transferor plan as distributed as a sin-
gle-sum distribution. This will occur, for
example, if the employer sponsoring the
transferor plan is a predecessor employer
with respect to the participant whose ben-
efits are transferred to the transferee plan,
where the transfereeplan’s benefits are
not required to be taken into account pur-
suant to section 415(f) and §1.415(f)–1 in
determining whether the transferor plan
satisfies the limitations of section 415(b).
Although such a transfer is treated as a dis-
tribution in computing the annual benefit
under the transferor plan, no correspond-
ing adjustment to the annual benefit under
2005–27 I.R.B.23July 5, 2005

the transferee plan is made to reflect the
fact that some of the benefits provided
under the transfereeplan are attributable
to the transfer. Thus, the actual bene-
fit provided under the transferee plan is
used to determine the annual benefit un-
der the transferee plan even though the
transferred amount is included as a distri-
bution in determining the annual benefit
under the transferor plan. In most such
cases, however, a participant whose ben-
efits have been transferred would accrue
no additional benefit under the transferor
plan that would be required to be tested
under the plan (in combination with the
transferred benefits).
K. 10-year phase-in of limitations based
on years of participation and years of
service
The proposed regulations would pro-
vide rules for applying the 10-year
phase-in of the dollar limitation based
on years of participation in the plan, as
added by TRA ’86, and would modify
the rules set forth in final regulations
for applying the 10-year phase-in of the
compensation limit based on years of ser-
vice. The proposed regulations follow the
guidance set forth in Notice 87–21 for de-
termining years of participation, and apply
analogous rules for determining years of
service for this purpose.
§1.415(b)–2: Multiple annuity starting
dates
Section 1.415(b)–2 of the proposed
regulations sets forth rules that apply in
computing the annual benefit under one
or more defined benefit plans in the case
of multiple annuity starting dates (i.e.,in
cases in which a participant has received
one or more distributions in limitation
years prior to an increase in the accrued
benefit occurring during the current limi-
tation year or prior to the annuity starting
date for a distribution that commences
during the current limitation year). These
rules apply, for example, where benefit
distributions to a participant have pre-
viously commenced under a plan that is
aggregated with a plan from which the
participant receives current accruals, or
where a new distribution election is effec-
tive during the current limitation year with
respect to a distribution that commenced
in a prior limitation year. These rules
also apply where benefit payments are in-
creased as a result of plan terms applying
a cost-of-living adjustment pursuant to an
adjustment of the dollar limit of section
415(b)(1)(A) made pursuant to section
415(d), if the plan does not provide for ap-
plication of the safe harbor methodology
set forth in the proposed regulations for
determining the adjusted amount of the
benefit.
In the case of multiple annuity start-
ing dates, the annual benefit that is sub-
ject to the limits of section 415(b) and
§1.415(b)–1(a) is equal to the sum of (1)
the annual benefit determined with respect
to any accrued benefit with respect to
which distribution has not yet commenced
as of the current determination date, com-
puted pursuant to the rules of §1.415(b)–1,
(2) the annual benefit determined with
respect to any distribution with an an-
nuity starting date that occurs within the
current limitation year and on or before
the current determination date, computed
pursuant to the rules of §1.415(b)–1, (3)
the annual benefit determined with respect
to the remaining amounts payable under
any distribution with an annuity starting
date that occurred during a prior limitation
year, computed pursuant to the rules of
§1.415(b)–1, and (4) the annual benefit
attributable to prior distributions. For this
purpose, the current determination date is
the last day of period for which an increase
in the participant’s benefit accrues if an
increase in the participant’s accrued bene-
fit occurs during the limitation year, and if
there is no such increase, the current deter-
mination date is the annuity starting date
for the distribution that commences during
the limitation year. The annual benefit
determined using this formula is tested for
compliance with section 415(b) as of the
current determination date, applying the
dollar limitation (which is adjusted under
section 415(d) to the current determination
date and is also adjusted for the partici-
pant’s age as of the current determination
date) and the compensation limitation ap-
plicable as of that date (which is adjusted
under section 415(d) to the current deter-
mination date but is not adjusted based on
the participant’s age).
Under the proposed regulations, the
annual benefit attributable to prior dis-
tributions is determined by adjusting the
amounts of prior distributions to an ac-
tuarially equivalent straight life annuity
commencing at the current determination
date. The proposed regulations apply rules
that are analogous to the rules for adjust-
ing other benefits to determine the amount
of the actuarially equivalent straight life
annuity for purposes of determining the
annual benefit attributable to prior distri-
butions. Under these rules, the amount
and time of prior distributions made to
the participant is taken into account, and
the prior distributions are adjusted to the
actuarially equivalent straight life annuity
commencing at the current determination
date using interest and mortality assump-
tions that apply generally for purposes of
applying the limitations of section 415(b)
to a benefit in a form other than a straight
life annuity. For this purpose, the ac-
tuarially equivalent straight life annuity
commencing at the current determination
date must reflect an actuarial increase to
the present value of payments to reflect
that the participant has survived during the
interim period.
The actuarial assumptions used to cal-
culate the annual benefit attributable to
a prior distribution are determined as of
the current determination date, and are
based on the form of the prior distribu-
tion. For a prior distribution to which
section 417(e)(3) did not apply, the annual
benefit attributable to the prior distribu-
tion is the greater of the annual amount
of a straight life annuity commencing at
the current determination date that is the
actuarial equivalent of that prior distribu-
tion, computed using the actuarial factors
specified under the plan that provides
for the current distribution or current ac-
crual that are used to determine offsets, if
any, for prior distributions, or the annual
amount of a straight life annuity com-
mencing at the current determination date
that is the actuarial equivalent of that prior
distribution, computed using the currently
applicable statutoryactuarial factors under
section 415(b)(2)(E)(i) and (v). Similarly,
for a prior distribution to which section
417(e)(3) applied, the annual benefit at-
tributable to the prior distribution is the
greater of the annual amount of a straight
life annuity commencing at the current
determination date that is the actuarial
equivalent of that prior distribution, com-
puted using the actuarial factors specified
under the plan that provides for the cur-
rent distribution or current accrual that are
used to determine offsets, if any, for prior
July 5, 2005242005–27 I.R.B.

distributions, or the annual amount of a
straight life annuity commencing at the
current determination date that is the actu-
arial equivalent of that prior distribution,
computed using the currently applicable
statutory actuarial factors under section
415(b)(2)(E)(ii) and (v).
Apart from determining the actuarial
factors applicable to calculating the annual
benefit attributable to prior distributions,
the form of the prior distribution does not
otherwise affect the determination of the
annual benefit attributable to prior distri-
butions. Thus, for example, if a partici-
pant has received $50,000 per year for the
past four years, the determination of the
annual benefit attributable to prior distri-
butions will be the same if those distribu-
tions are part of a 10-year certain and life
annuity or are part of a straight life annuity
because both of those distribution forms
are subject to the same actuarial factors for
determining the annual benefit attributable
to prior distributions. In either case, the
determination of the annual benefit attrib-
utable to prior distributions will be deter-
minedbyapplyingtheinterestandmor-
tality assumptions used under the plan to
determine offsets, if any, for prior distri-
butions to determine a straight life annu-
ity that is actuarially equivalent to the four
prior payments of $50,000, applying the
statutory actuarialassumptions to deter-
mine a straight life annuity that is actuari-
ally equivalent to the four prior payments
of $50,000, and then taking the greater of
the two straight life annuity amounts. De-
termining the annual benefit attributable
to prior distributions on the basis of the
amount of distributions made rather than
on the form of those distributions (or on
the basis of the accrued benefit that under-
lies those distributions) is designed to sim-
plify the application of the multiple annu-
ity starting date rules.
The proposed regulations provide that
a prior distribution is not reflected in the
annual benefit attributable to prior distri-
butions to the extent the prior distribution
has been repaid to the plan with interest
(because the amounts attributable to such
a prior distribution are reflected in the an-
nual benefit in other ways). Thus, a prior
distribution that has been entirely repaid to
the plan (with interest) does not give rise
to an annual benefit attributable to prior
distributions. Similarly, if a prior distri-
bution was made, and a repayment was
subsequently made that was less than the
amount of the prior distribution (includ-
ing reasonable interest), the annual bene-
fit attributable to prior distributions is de-
termined by multiplying the annual benefit
attributable to the prior distribution by one
minus a fraction, the numerator of which
is the amount of the repayment and the de-
nominator of which is the amount of the
prior distribution plus reasonable interest.
The proposed regulations provide an
additional requirement that applies where
a stream of annuity payments is modi-
fied by a new distribution election. This
additional requirement is also imposed
in §1.401(a)(9)–6, Q&A–13(c)(3). Un-
der this additional requirement, which is
intended to limit the extent to which ben-
efits can increase as a result of a change
in market interest rates, if a stream of
annuity payments is modified by a new
distribution election, the payments under
the annuity that are paid before the modi-
fication plus the modified payments must
satisfy the requirements of §1.415(b)–1
determined as of the original annuity
starting date, using the interest rates and
mortality table applicable to such date.
Following the issuance of the regulations
under section 401(a)(9), commentators
suggested that the rule should be modified
to permit a plan to reflect cost-of-living
adjustments under section 415(d) that
occur between the original annuity start-
ing date and the date of modification in
applying the additional test. These pro-
posed regulations adopt this suggestion,
and provide that a plan will not fail to
satisfy the additional requirement merely
because payments reflect cost-of-living
adjustments pursuant to section 415(d) for
payments no earlier than the time those
adjustments are effective and in amounts
no greater than amounts determined under
§1.415(d)–1(a)(5). In addition, the pro-
posed regulations include an amendment
to §1.401(a)(9)–6, Q&A–13(c)(3), to re-
flect this change.
§1.415(c)–1: Limitations applicable to
defined contribution plans
Section 1.415(c)–1 of these proposed
regulations sets forth rules that apply to
limitations on annual additions under a
defined contribution plan. Under these
limitations, annual additions must not be
greater than the lesser of $40,000 (as ad-
justed pursuant to section 415(d)) or 100%
of the participant’s compensation for the
limitation year. The term “annual addi-
tions” generally means the sum for any
year of employer contributions, employee
contributions, and forfeitures. In addition
to applying to qualified defined contribu-
tion plans, the limitations on defined con-
tribution plans apply to section 403(b) an-
nuity contracts, simplified employee pen-
sions described in section 408(k), manda-
tory employee contributions to qualified
defined benefit plans, and contributions to
certain medical accounts.
The proposed regulations reflect a
number of statutory changes to section
415(c) that were made after the issuance
of existing final regulations. Among these
changes are the revised limitation amounts
under section 415(c), the revised rules
applicable to employee stock ownership
plans, and the rules applying the limita-
tions of section 415(c) to certain medical
benefit plans. The proposed regulations
also would make some other changes to
existing regulations, as discussed below.
If annual additions under an annu-
ity contract that otherwise satisfies the
requirements of section 403(b) exceed
the limitations of section 415(c), then
the portion of the contract that includes
that excess annual addition fails to be
a section 403(b) annuity contract (and
instead is a contract to which section
403(c) applies), and the remaining por-
tion of the contract is a section 403(b)
annuity contract. As under regulations
recently proposed under section 403(b)
(REG–155608–02, 2004–49 I.R.B. 924)
(69 FR 67075, November 16, 2004), the
proposed regulations include a provision
under which the status of the remaining
portion of the contract as a section 403(b)
contract is not retained unless, for the year
of the excess and each year thereafter, the
issuer of the contract maintains separate
accounts for each such portion. In addi-
tion, consistent with the change to section
403(b)(1) made in JCWAA, the proposed
regulations provide that the limitations
under section 415(c) apply to any sec-
tion 403(b) annuity contract, regardless of
whether the contract satisfies the require-
ments of section 414(i) to be a defined
contribution plan. Thus, the limitations
under section 415(c) apply to a section
403(b) annuity contract even if the limi-
tations of section 415(b) also apply to the
2005–27 I.R.B.25July 5, 2005

contract (i.e., if the contract is a church
plan that is covered by the grandfather rule
of section 251(e)(5) of TEFRA).
The proposed regulations clarify that
theIRSwilltreatasaleorexchangeby
the employee or the employer that trans-
fers assets to a plan where the considera-
tion paid by the plan is less than the fair
market value of the assets transferred to the
plan as giving rise to an annual addition in
the amount of the difference between the
value of the assets transferred and the con-
sideration.
Consistent with Rev. Rul. 2002–45,
the proposed regulations provide that a
restorative payment that is allocated to a
participant’s accountdoes not give rise to
an annual addition for any limitation year.
For this purpose, restorative payments are
payments made to restore losses to a plan
resulting from actions by a fiduciary for
which there is reasonable risk of liability
for breach of a fiduciary duty under Title I
of ERISA, where plan participants who are
similarly situated are treated similarly with
respect to the payments. Generally, pay-
ments to a defined contribution plan are
restorative payments only if the payments
are made in order to restore some or all
of the plan’s losses due to an action (or
a failure to act) that creates a reasonable
risk of liability for such a breach of fidu-
ciary duty. The proposed regulations pro-
videthat,inadditiontopaymentstoaplan
made pursuant to Department of Labor or-
der or court-approved settlement to restore
losses to a qualified defined contribution
plan on account of the breach of fidu-
ciary duty, restorative payments include
payments made pursuant to the Depart-
ment of Labor’s Voluntary Fiduciary Cor-
rection Program to restore losses to a qual-
ified defined contribution plan on account
of the breach of fiduciary duty. However,
payments made to a plan to make up for
losses due merely to market fluctuations
and other payments that are not made on
account of a reasonable risk of liability for
breach of a fiduciary duty under Title I
of ERISA are contributions that give rise
to annual additions and are not restorative
payments.
The proposed regulations would retain
the rule for taxable employers under exist-
ing regulations thatthe deadline for mak-
ingacontributiontothe plan that is cred-
ited to a participant’s account for a limi-
tation year for purposes of section 415(c).
Under this rule, employer contributions
are not treated as credited to a partici-
pant’s account for a particular limitation
year unless the contributions are actually
made to the plan no later than 30 days
after the end of the period described in
section 404(a)(6) applicable to the taxable
year with or within which the particular
limitation year ends. The proposed reg-
ulations would modify the corresponding
rule for tax-exempt employers. Under the
proposed regulations, the deadline for a
tax-exempt employer to make a contri-
bution to the plan that is credited to a
participant’s account for a limitation year
for purposes of section 415(c) is the 15
th
day of the tenth calendar month follow-
ing the close of the taxable year with or
within which the particular limitation year
ends. This date corresponds to the due
date for Form 5500 (with extensions) in
cases in which the taxable year coincides
with the plan year, and generally corre-
sponds to the contribution due date for tax-
able employers who request filing exten-
sions. The deadline for contributions for
tax-exempt employers under the proposed
regulations would be an extension from the
earlier deadline now applicable under ex-
isting regulations (i.e., the 15
th
day of the
sixth calendar month following the close
of the taxable year with or within which the
particular limitation year ends). The extent
to which elective contributions constitute
plan assets for purposes of the prohibited
transaction provisions of section 4975 and
Title I of ERISA is determined in accor-
dance with regulations and rulings issued
by the Department of Labor. See 29 CFR
2510.3–102.
The proposed regulations clarify the
operation of the special increased limi-
tation applicable to church plans under
section 415(c)(7). Under this rule, not-
withstanding the generally applicable
limitations, annual additions for a section
403(b) annuity contract for a year with
respect to an individual who is a church
employee are treated as not exceeding the
limitation of section 415(c) if such annual
additions for the year are not in excess
of $10,000. However, the total amount
of additions with respect to any partici-
pant that are permitted to be taken into
account for purposes of this rule for all
years may not exceed $40,000. In addi-
tion, for any individual who is a church
employee performing any services for the
church outside the United States, additions
for a section 403(b) annuity contract for
any year are not treated as exceeding the
limitations of section 415(c) if those an-
nual additions for the year do not exceed
the greater of $3,000 or the employee’s
includible compensation. The proposed
regulations would clarify that the $40,000
cumulative total only applies to excesses
over what would have been permitted
to be contributed without regard to this
special rule, and clarifies the interaction
between the generally applicable church
employee rule and the rule for church
employees performing services outside
the United States. In addition, the pro-
posed regulations would clarify that the
special rule that applies to services for a
church performed abroad applies to the
employee’s includible compensation only
with respect to services for the church
outside the United States.
The correction mechanism in current
§1.415–6(b)(6) for handling excess annual
additions is not included in the proposed
regulations. It is anticipated that this cor-
rection mechanism will be included in the
Employee Plans Compliance Resolution
System (see Rev. Proc. 2003–44, 2003–1
C.B. 1051) in the future.
The proposed regulations generally
would retain the rules under existing reg-
ulations providing that a contribution to
reduce accumulated funding deficiencies
or a contribution made pursuant to a fund-
ing waiver relates to the limitation year of
the initial funding obligation. However,
the proposed regulations would provide
that any interest paid by the employer with
respect to such a contribution that is in
excess of a reasonable amount is taken
into account as an annual addition for the
limitation year when the contribution is
made (in contrast to existing regulations,
which require interest in excess of a rea-
sonable amount to be taken into account as
an annual addition for the limitation year
for which the contribution was originally
required). Rev. Rul. 78–223, 1978–1 C.B.
125, provides a method for determining
contributions required to amortize waived
contributions under a defined contribution
plan. The application of any of the meth-
ods described in Rev. Rul. 78–223 will
result in reasonable interest payments for
purposes of applying the rules of section
415 (provided that, if a fixed interest rate
in excess of 5% is used to amortize waived
July 5, 2005262005–27 I.R.B.

contributions, the interest rate is reason-
able). Thus, for example, the actual yield
method (under which the adjusted account
balance is increased or decreased periodi-
cally at the actual rate of investment return
experienced by the plan for such period)
can be used for this purpose.
§1.415(c)–2: Definition of compensation
Section 1.415(c)–2 of these proposed
regulations defines the termcompensa-
tion,whichisdefinedinsection415(c)(3)
and used for purposes of applying the limi-
tations of section 415 as well as for various
other purposes specified under the Internal
Revenue Code. The proposed regulations
reflect a number of statutory changes to
section 415(c)(3) that were made after
the issuance of existing final regulations.
Among these changes are the inclusion in
compensation of certain deemed amounts
for disabled participants and nontaxable
elective amounts for deferrals under sec-
tions 401(k), 403(b), and 457, cafeteria
plan elections under section 125, and
qualified transportation fringe elections
under section 132(f)(4). In addition to
these changes, the proposed regulations
would make some other changes to exist-
ing regulations, as discussed below.
The proposed regulations provide spe-
cific guidelines regarding when amounts
received following severance from em-
ployment are considered compensation
for purposes of section 415. The follow-
ing are types of post-severance payments
that are not excluded from compensation
because of timing if they are paid within
2
1
/2months following severance from
employment: (1) payments that, absent
a severance from employment, would
have been paid to the employee while the
employee continued in employment with
the employer and are regular compensa-
tion for services during the employee’s
regular working hours, compensation for
services outside the employee’s regular
working hours (such as overtime or shift
differential), commissions, bonuses, or
other similar compensation; and (2) pay-
ments for accruedbona fidesick, vacation,
or other leave, but only if the employee
would have been able to use the leave if
employment had continued. Under the
proposed regulations, the rule generally
excluding payments after severance from
employment from compensation does not
apply to payments to an individual who
does not currently perform services for the
employer by reason of qualified military
service (as that term is used in section
414(u)(1)) to the extent those payments
do not exceed the amounts the individ-
ual would have received if the individual
had continued to perform services for the
employer rather than entering qualified
military service. This notice of proposed
rulemaking also contains corresponding
proposed amendments to the regulations
under sections 401(k), 403(b), and 457
that would provide that amounts received
following severance from employment
can be deferred only if they are considered
compensation under the rules of section
415.
§1.415(d)–1: Cost-of-living adjustments
Section 1.415(d)–1 of these proposed
regulations sets forth rules that apply to
cost-of-living adjustments to the various
limitations of section 415 pursuant to sec-
tion 415(d). Section 415(d) provides for
the dollar and compensation limitations on
annual benefits and the dollar limitation on
annual additions to be adjusted annually
for increases in the cost of living based
on adjustment procedures similar to the
procedures used to adjust social security
benefit amounts. These adjustments also
apply for other purposes as specified in
the Internal Revenue Code. The proposed
regulations specify the manner in which
these adjustments are determined each
year, and reflect statutory changes to the
adjustment methodology made after the
1981 regulations were issued. In addition,
the proposed regulations make several
other changes to existing final regulations,
as discussed below.
The proposed regulations would spec-
ify the circumstances under which an
adjusted limit is permitted to be applied
to participants who have previously com-
menced receiving benefits under a defined
benefit plan. Under the proposed regu-
lations, the adjusted dollar limitation is
applicable to current employees who are
participants in a defined benefit plan and
to former employees who have retired or
otherwise terminated their service under
the plan and have a nonforfeitable right
to accrued benefits, regardless of whether
they have actually begun to receive such
benefits. A plan ispermitted to provide
that the annual increase applies for a par-
ticipant who has previously commenced
receiving benefits only to the extent that
benefits have not been paid. Thus, for
example, a plan cannot provide that this
annual increase applies to a participant
who has previously received the entire
plan benefit in a single-sum distribution.
However, a plan is permitted to provide
for an increase in benefits to a participant
who accrues additional benefits under the
plan that could have been accrued without
regard to the adjustment of the dollar lim-
itation (including benefits that accrue as a
result of a plan amendment) on or after the
effective date of the adjusted limitation.
The proposed regulations provide for a
safe harbor under which the annual ben-
efit will satisfy the limitations of section
415(b) for the current limitation year fol-
lowing an adjustment to benefit payments
that is made to reflect the cost-of-living ad-
justment made pursuant to section 415(d).
If such adjustments are made in accor-
dance with this safe harbor, the multiple
annuity starting date rules of §1.415(b)–2
do not apply on account of such adjust-
ments. Under this safe harbor, if a par-
ticipant has received one or more distri-
butions under an annuitystream that satis-
fies the requirements of section 415(b) be-
fore the adjustment, the plan’s benefits will
satisfy the limitations of section 415(b) if
the amounts payable to the employee for
the limitation year and subsequent limita-
tion years are not greater than the amounts
that would otherwise be payable under the
annuity stream without regard to the ad-
justment, multiplied by a fraction. The
numerator of this fraction is the limita-
tion under section 415(b) (i.e., the lesser of
the applicable dollar limitation under sec-
tion 415(b)(1)(A), as adjusted for age at
commencement, and the applicable com-
pensation-based limitation under section
415(b)(1)(B)) in effect for the distribution
following the adjustment, and the denomi-
nator of this fraction is such limitation un-
der section 415(b) in effect for the distri-
bution immediately before the adjustment.
§1.415(f)–1: Combining and aggregating
plans
Section 1.415(f)–1 of these proposed
regulations sets forth rules for combining
and aggregating plans pursuant to section
415(f). Under section 415(f) and these
2005–27 I.R.B.27July 5, 2005

proposed regulations, for purposes of ap-
plying the limitations of section 415(b)
and (c), all defined benefit plans of an em-
ployer are treated as one defined benefit
plan, and all defined contribution plans
of an employer are treated as one defined
contribution plan. The controlled group
rules of section 414(b) and (c) (as modified
by section 415(h)), the affiliated service
group rules of section 414(m), and the
leased employee rules of section 415(n)
apply for purposes of determining whether
aplanthatismaintainedbyanentityother
than the employer is considered main-
tained by the employer for purposes of
applying the aggregation rules of section
415(f).
The proposed regulations would also
make various changes and clarifications
to the existing regulations. The proposed
regulations would clarify that an em-
ployer’s plan must beaggregated with all
plans maintained by a predecessor em-
ployer (see section 414(a)), regardless of
whether any such plan is assumed by the
employer. Pursuant to section 414(a)(1),
the proposed regulations would provide
that, for purposes of section 415, a former
employer is a predecessor employer with
respect to a participant in a plan main-
tained by an employer if the employer
maintains a plan under which the par-
ticipant had accrued a benefit while per-
forming services for the former employer,
but only if that benefit is provided under
the plan maintained by the employer. In
addition, the proposed regulations would
provide pursuant to section 414(a)(2) that,
with respect to an employer of a partic-
ipant, a former entity that antedates the
employer is a predecessor employer with
respect to the participant if, under the facts
and circumstances, the employer consti-
tutes a continuation of all or a portion of
the trade or business of the former en-
tity. This will occur, for example, where
formation of the employer constitutes a
mere formal or technical change in the
employment relationship and continuity
otherwise exists in the substance and ad-
ministration of the business operations of
the former entity and the employer. See
Lear Eye Clinic, Ltd. v. Commissioner,
106 T.C. 418, 425–429 (1996).
The proposed regulations provide rules
for aggregating participation and service
for purposes of the 10-year phase-in of the
limitations on defined benefit plans. Un-
der these rules, years of participation in
all aggregated plans and years of service
for employers maintaining all aggregated
plans are counted for purposes of applying
the 10-year phase-in rules.
The proposed regulations clarify the ag-
gregation rules that applytosection403(b)
annuity contracts, other plans of the em-
ployer, and plans of related employers, in
light of changes made in EGTRRA. Gen-
erally a section 403(b) annuity contract is
not aggregated with plans that are main-
tained by the participant’s employer be-
cause the section 403(b) annuity contract is
deemed maintained by the participant and
not the employer for purposes of section
415. However, if a participant on whose
behalf a section 403(b) annuity contract is
purchased is in control of any employer for
a limitation year, the annuity contract for
the benefit of the participant is treated as
a defined contribution plan maintained by
both the controlled employer and the par-
ticipant for that limitation year and accord-
ingly, the section 403(b) annuity contract
is aggregated with all other defined contri-
bution plans maintained by the employer.
Accordingly, the employer that contributes
to the section 403(b) annuity contract must
obtain information from participants re-
garding employers controlled by those par-
ticipants and plans maintained by those
controlled employers to monitor compli-
ance with applicable limitations to comply
with applicable reporting and withholding
obligations. In addition to applying the
rules under existing final regulations for
purposes of determining control for pur-
poses of section 415(f), the proposed reg-
ulations would apply the rules under pro-
posed §1.414(c)–5 (regarding aggregation
rules for tax-exempt employers), as pub-
lished in theFederal Registeron Novem-
ber 16, 2004 (69 FR 67075).
The proposed regulations also provide
that a multiemployerplan, as defined in
section 414(f), is not aggregated with
other multiemployer plans for purposes
of determining any section 415 limita-
tion. In addition, a multiemployer plan
will not be aggregated with non-multi-
employer plans for purposes of applying
the 100% of compensation benefit limit
to non-multiemployer plans under sec-
tion 415(b)(1)(B). In general, under the
proposed regulations, benefits of all em-
ployers are taken into account in applying
the limitations of section 415 to a multi-
employer plan. However, a multiemployer
plan is permitted to provide that, where
a participating employer maintains both
a plan which is not a multiemployer plan
and a multiemployer plan, only the ben-
efits provided by the employer under the
multiemployer plan are aggregated with
the benefits under the non-multiemployer
plan.
§1.415(g)–1: Disqualification of plans
and trusts
Section 1.415(g)–1 of these proposed
regulations sets forth rules regarding dis-
qualification of plans and trusts, including
plans and trusts that are aggregated pur-
suant to §1.415(f)–1. In large part, pro-
posed §1.415(g)–1 replicates the rules of
§1.415–9 of the existing final regulations
regarding ordering rules for disqualifying
plans and trusts that are aggregated for pur-
poses of compliance with section 415. In
addition, the proposed regulations provide
rules for disqualification where an individ-
ual medical account (as described in sec-
tion 415(l)) and a post-retirement medical
benefits account for key employees (as de-
scribed in section 419A(d)) is combined
with a qualified defined contribution plan
for purposes of applying section 415(c).
If the combined plan exceeds those limi-
tations for a particular limitation year, the
qualified defined contribution plan (rather
than the medical account) is disqualified
for the limitation year.
§1.415(j)–1: Limitation year
Section 1.415(j)–1 of these proposed
regulations sets forth rules regarding lim-
itation years that are used as the period
for demonstrating compliance with section
415. In addition to setting forth general
rules that generally correspond to rules un-
der existing regulations, the proposed reg-
ulations provide specific guidelines with
respect to overlapping limitation years for
aggregated plans. These rules reflect the
guidance provided in Rev. Rul. 79–5,
1979–1 C.B. 165. Where defined con-
tribution plans with different limitations
years are aggregated, the rules of section
415(c) must be applied with respect to each
limitation year of each such plan. For each
such limitation year, the requirements of
section 415(c) are applied to annual ad-
ditions that are made for that time period
with respect to the participant under all
July 5, 2005282005–27 I.R.B.

aggregated plans. Similarly, where de-
fined benefit plans with different limita-
tions years are aggregated, the rules of
section 415(c) must be applied with re-
spect to each limitation year of each such
plan. Thus, for example, the dollar lim-
itation of section 415(b)(1)(A) applicable
to the limitation year for each plan must
be applied to annual benefits under all ag-
gregated plans to determine whether the
plan satisfies the requirements of section
415(b).
Sections 415(m) and 415(n)
These proposed regulations do not con-
tain provisions relating to section 415(m)
(regarding treatment of qualified govern-
mental excess benefit arrangements) and
section 415(n) (regarding the purchase of
permissive service credit from a govern-
mental defined benefit plan). Comments
are requested regarding the need for regu-
lations or other guidance on issues arising
under these statutory provisions.
Other changes: section 457 regulations
These proposed regulations also in-
clude revisions to the regulations under
section 457 that are in addition to the
revisions to reflect the treatment of com-
pensation paid after severance from em-
ployment. The additional revisions do
not include any substantive changes, but
would merely make clarifications, includ-
ing corrections in an example illustrating
the section 457 catch-up rules and a correc-
tion in the rules relating to unforeseeable
emergencies to reflect recent revisions in
the definition of a dependent (made under
the Working Families Tax Relief Act of
2004, which modified the definition of the
termdependentunder section 152).
Proposed Effective Dates
The regulations under section 415 are
proposed to apply to limitation years be-
ginning on or after January 1, 2007. Ex-
cept as described below, until these regu-
lations are issued as final regulations, the
existing regulations remain in effect (to the
extent not modified by statutory changes).
A defined benefit plan that was adopted
and effective before May 31, 2005, will be
considered to satisfy the limitations of sec-
tion 415(b) for a participant with respect
to benefits accrued or payable under the
plan as of the effective date of final regula-
tions implementing these proposed regula-
tions pursuant to plan provisions adopted
and in effect on May 31, 2005, but only
if such plan provisions meet the require-
ments of statutory provisions, regulations,
and other published guidance in effect on
May 31, 2005. Thus, plans that were in
compliance with the rules of section 415 as
in effect prior to the finalization of these
regulations will not be disqualified based
on benefits that arise pursuant to plan pro-
visions that were adopted and in effect on
May 31, 2005, and that accrue prior to the
effective date of final regulations imple-
menting these proposed regulations, even
if those benefits no longer comply with the
requirements of section 415 as set forth
under those final regulations. However,
such a plan will not be permitted to pro-
vide for the accrual of additional bene-
fits for a participant on or after the effec-
tive date of final regulations implementing
these proposed regulations unless such ad-
ditional benefits, together with the partici-
pant’s other accrued benefits, comply with
those new final regulations.
Reliance on Compensation Timing Rules
and Changes to Regulations Under
Sections 401(a)(9) and 457
Pending issuance of final regulations,
taxpayers may rely on the modifications
in these proposed regulations contained
in §1.401(k)–1(e)(8), §1.415(c)–2(e), and
§1.457–4(d) regarding post-severance
compensation payments and other com-
pensation timing rules, §1.401(a)(9)–6
regarding certain changes in form of pay-
ment, and §§1.457–5, –6, and –10 pro-
viding corrective and clarifying changes.
Pursuant to this reliance, taxpayers may
apply the proposed amendments described
in this paragraph for periods prior to the
effective date of final regulations.
Sunset of EGTRRA Changes
The proposed regulations do not pro-
vide rules for the application of the
EGTRRA sunset provision (section 901 of
EGTRRA), under which the provisions of
EGTRRA do not apply to taxable, plan, or
limitation years beginning after December
31, 2010. Unless the EGTRRA sunset
provision is repealed before it becomes ef-
fective, additionalguidance will be needed
to clarify its application.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and, because the regulations do not im-
pose 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 Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The IRS and Treasury Department
specifically request comments on the clar-
ity of the proposed regulations and how
they may be made easier to understand.
All comments will be available for public
inspection and copying.
A public hearing has been scheduled
for August 17, 2005, at 10 a.m. in the
auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW, Wash-
ington, DC. Due to building security
procedures, visitors must use the main
building entrance on Constitution Avenue.
In addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate
entrance area more than 30 minutes before
the hearing starts. For more informa-
tion about having your name placed on
the list to attend the hearing, see the “FOR
FURTHER INFORMATION CONTACT”
section of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written (signed original and eight
(8) copies) or electronic comments and an
outline of the topics to be discussed and the
time to be devoted to each topic by July
27, 2005. A period of 10 minutes will be
2005–27 I.R.B.29July 5, 2005

allotted to each person for making com-
ments. 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.
Drafting Information
The principal authors of these reg-
ulations are Vernon S. Carter and
Linda S. F. Marshall, Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). How-
ever, other personnel from the IRS and
Treasury participated in the development
of these regulations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 11 are
proposed to be amended as follows:
PART 1 — INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
*****
Par. 2. Section 1.401(a)(9)–6,
Q&A–13(c)(3) is revised to read as fol-
lows:
§1.401(a)(9)–6 Required minimum
distributions for defined benefit plans and
annuity contracts.
A–13. * * * * *
(c) * * *
(3) In accordance with §1.415(b)–2(c),
after taking into account the modification,
the payments under the annuity that are
paid before the modification plus the mod-
ified payments must satisfy the require-
ments of §1.415(b)–1 determined as of the
original annuity starting date, using the in-
terest rates and mortality table applicable
to such date, except that, for this purpose,
payments will not fail to satisfy the re-
quirements of §1.415(b)–1 determined as
of the original annuity starting date merely
because the payments are adjusted to re-
flect cost-of-living adjustments pursuant
to section 415(d) that are determined in ac-
cordance with §1.415(d)–1(a)(5); and
*****
Par. 3. Section 1.401(k)–1 is amended
by adding paragraph (e)(8) to read as fol-
lows:
§1.401(k)–1 Certain cash or deferred
arrangements.
*****
(e) * * *
(8)Section 415 compensation required.
A cash or deferred arrangement satisfies
this paragraph (e) only if cash or de-
ferred elections can only be made with
respect to amounts that are compensation
within the meaning of section 415(c)(3)
and §1.415(c)–2. Thus, for example, the
arrangement is not a qualified cash or
deferred arrangement if an eligible em-
ployee who is not in qualified military
service (as that term is defined in sec-
tion 414(u)) can make a cash or deferred
election with respect to an amount paid
after severance from employment, unless
the amount is paid within 2
1
/2months
following the eligible employee’s sever-
ance from employment and is described in
§1.415(c)–2(e)(3)(ii).
*****
Par. 4. Section 1.403(b)–3(b)(4)(ii) (as
proposed on November 16, 2004 (69 FR
67087) is revised to read as follows:
§1.403(b)–3 Exclusion for contributions
to purchase section 403(b) contracts.
(b) * * *
(4) * * *
(ii)Exceptions. The exclusion from
gross income provided by section 403(b)
applies to contributions made for former
employees with respect to compensation
described in §1.415(c)–2(e)(3)(ii) (relat-
ing to certain compensationpaidwithin
2
1
/2months following severance from
employment), compensation described
in §1.415(c)–2(g)(4) (relating to com-
pensation paid to participants who are
permanently and totally disabled), and
compensation relating to qualified mili-
tary service under section 414(u).
*****
§1.415–1 thru §1.415–10 [Removed]
Par. 5. Sections 1.415–1 through
1.415–10 are removed.
Par. 6. Section 1.415(a)–1 is added to
read as follows:
§1.415(a)–1 General rules with respect to
limitations on benefits and contributions
under qualified plans.
(a)Trusts. Under sections 415 and
401(a)(16), a trust that forms part of a pen-
sion, profit-sharing, or stock bonus plan
will not be qualified under section 401(a)
if any of the following conditions exists—
(1) In the case of a defined benefit
plan, the annual benefit with respect to
any participant for any limitation year ex-
ceeds the limitations of section 415(b) and
§1.415(b)–1 (taking into account the rules
of §1.415(b)–2);
(2) In the case of a defined contribution
plan, the annual additions credited with
respect to any participant for any limita-
tion year exceed the limitations of section
415(c) and §1.415(c)–1; or
(3) The trust has been disqualified un-
der section 415(g) and §1.415(g)–1 for any
year.
(b)Certain annuities and ac-
counts—(1)In general. Under section
415, an employee annuity plan described
in section 403(a), anannuity contract de-
scribed in section 403(b), or a simplified
employee pension described in section
408(k) will not be considered to be de-
scribed in the otherwise applicable section
if any of the following conditions exists—
(i) The annual benefit under a de-
fined benefit plan with respect to any
participant for any limitation year ex-
ceeds the limitations of section 415(b) and
§1.415(b)–1 (taking into account the rules
of §1.415(b)–2);
(ii) The contributions and other addi-
tions credited under a defined contribution
plan with respect to any participant for any
limitation year exceed the limitations of
section 415(c) and §1.415(c)–1; or
(iii) The employee annuity plan, annu-
ity contract, or simplified employee pen-
sion has been disqualified under section
415(g) and §1.415(g)–1 for any year.
(2)Special rule for section 403(b) an-
nuity contracts—(i)In general. If the con-
tributions and other additions under an an-
nuity contract that otherwise satisfies the
requirements of section 403(b) with re-
spect to any participant for any limita-
tion year exceed the limitations of section
415(c) and §1.415(c)–1, then the portion of
the contract that includes such excess an-
nual addition fails to be a section 403(b)
contract (and instead is a contract to which
July 5, 2005302005–27 I.R.B.

section 403(c) applies), and the remaining
portion of the contract is a section 403(b)
contract. The status of the remaining por-
tion of the contract as a section 403(b) con-
tract is not retained unless, for the year
of the excess and each year thereafter, the
issuer of the contract maintains separate
accounts for each such portion. See also
§1.403(b)–3(c)(3).
(ii)Defined benefit plans. If the annual
benefit under an annuity contract that oth-
erwise satisfies the requirements of section
403(b) and that is a defined benefit plan
with respect to any participant for any lim-
itation year exceeds the limitations of sec-
tion 415(b) and §1.415(b) (taking into ac-
count the rules of §1.415(b)–2), then the
portion of the contract that includes such
excess annual benefit fails to be a section
403(b) annuity contract (and instead is a
contract to which section 403(c) applies),
and the remaining portion of the contract
is a section 403(b) annuity contract. The
status of the remaining portion of the con-
tract as a section 403(b) annuity contract
is not retained unless, for the year of the
excess and each year thereafter, the issuer
of the contract maintains separate accounts
for each such portion.
(3)Section 403(b) annuity contract.
For purposes of section 415 and regula-
tions thereunder, the termsection 403(b)
annuity contractincludes arrangements
that are treated as annuity contracts for
purposes of section 403(b). For exam-
ple, such term includes custodial accounts
describedinsection403(b)(7)andretire-
ment income accounts described in section
403(b)(9).
(c)Regulations—(1)In general.This
section provides general rules regarding
the application of section 415. For further
rules regarding the application of section
415, see—
(i) Section 1.415(b)–1 (for general rules
regarding the limit applicable to defined
benefit plans);
(ii) Section 1.415(b)–2 (for special
rules for defined benefit plans where a
participant has multiple annuity starting
dates);
(iii) Section 1.415(c)–1 (for general
rules regarding the limit applicable to de-
fined contribution plans);
(iv) Section 1.415(c)–2 (for rules re-
garding the definition of compensation for
purposes of section 415);
(v) Section 1.415(d)–1 (for rules re-
garding cost-of-living adjustments to the
various limits of section 415);
(vi) Section 1.415(f)–1 (for rules for
aggregating plans for purposes of section
415);
(vii) Section 1.415(g)–1 (for rules re-
garding disqualification of plans that fail
to satisfy the requirements of section 415);
and
(viii) Section 1.415(j)–1 (for rules re-
garding limitation years).
(2)Cross references to additional rules
for section 403(b) annuity contracts.For
additional rules relatingtosection403(b)
annuity contracts, see—
(i) Section 1.415(c)–2(g)(1) and (3) (re-
lating to the definition of compensation for
such annuity contracts);
(ii) Section 1.415(f)–1(g) (relating to
rules for such annuity contracts for pur-
poses of combining plans);
(iii) Section 1.415(g)–1(b)(3)(iv)(C)
(regarding disqualification of section
403(b) annuity contract aggregated with a
qualified defined contribution plan if the
combined plans exceed the limitations of
section 415(c));
(iv) Section 1.415(g)–1(e) (relating to
the plan year for such annuity contracts);
and
(v) Section 1.415(j)–1(e) (relating to
the limitation year for such annuity con-
tracts).
(3)Cross references to additional rules
for governmental plans. For additional
rules relating to governmental plans, see—
(i) Section 1.415(b)–1(a)(6)(i) (pro-
viding an exception from the compensa-
tion-based limit of section 415(b)(1)(B)
for governmental plans);
(ii) Section 1.415(b)–1(a)(7)(ii) (re-
garding a special limitation for govern-
mental plans making an election during
1990);
(iii) Section 1.415(b)–1(b)(4) (regard-
ing qualified governmental excess benefit
arrangements);
(iv) Section 1.415(b)–1(d)(3) and (4)
(regarding age adjustments to the dollar
limit of section 415(b)(1)(A) in the case
of employees of police departments and
fire departments and former members of
the United States Armed Forces, and in the
case of survivor and disability benefits);
(v) Section 1.415(b)–1(g)(3) (regarding
adjustments to applicable limitations for
years of participation,andadjustmentsto
applicable limitations for years of service
for survivor and disability benefits); and
(vi) Section 1.415(c)–1(b)(3)(iii) (re-
garding amounts not treated as annual
additions).
(4)Cross references to additional rules
for multiemployer plans. For additional
rules relating to multiemployer plans,
see—
(i) Paragraph (e) of this section (regard-
ing benefits or contributions taken into ac-
count where a plan is maintained by more
than one employer);
(ii) Section 1.415(b)–1(a)(6)(ii) (pro-
viding an exception from the compensa-
tion-based limit for multiemployer plans);
(iii) Section 1.415(b)–1(f)(3) (re-
garding the application of the minimum
$10,000 limitation on benefits in the case
of a multiemployer plan);
(iv) Section 1.415(f)–1(h) (providing
special rules for aggregating multiem-
ployer plans with other plans); and
(v) Section 1.415(g)–1(b)(3)(ii) (re-
garding plan disqualification rules where
a multiemployer planis aggregated with a
plan that is not a multiemployer plan and
the combined plans exceed the limitations
of section 415).
(d)Plan provisions—(1)In general.
Although no specific plan provision is
required under section 415 in order for a
plan to establish or maintain its qualifi-
cation, the plan provisions must preclude
the possibility thatany accrual, distribu-
tion, or annual addition will exceed the
limitations of section 415. For example, a
plan may include provisions that automat-
ically freeze or reduce the rate of benefit
accrual (in the case of a defined benefit
plan) or the annual addition (in the case
of a defined contribution plan) to a level
necessary to prevent the limitations from
being exceeded with respect to any partic-
ipant. For rules relating to this type of plan
provision and the definitely determinable
benefit requirement for pension plans, see
§1.401(a)–1(b)(1).
(2)Special rule for profit-sharing and
stock bonus plans. A provision of a profit-
sharing or stock bonus plan that automati-
cally freezes or reduces the amount of an-
nual additions to ensure that the limitations
of section 415 will not be exceeded must
comply with the requirement set forth in
§1.401–1(b)(1)(ii) or (iii) (as applicable)
that such plans provide a definite prede-
termined formula for allocating the contri-
2005–27 I.R.B.31July 5, 2005

butions made to the plan among the par-
ticipants. If the operation of a provision
that automatically freezes or reduces the
amount of annual additions to ensure that
the limitations of section 415 are not ex-
ceeded does not involve discretionary ac-
tion on the part of the employer, the def-
inite predetermined allocation formula re-
quirement is not violated by the provision.
If the operation of such a provision in-
volves discretionary action on the part of
the employer, the definite predetermined
allocation formula requirement is violated.
For example, if two profit-sharing plans of
one employer otherwise provide for aggre-
gate contributions which may exceed the
limits of section 415(c), the plan provi-
sions must specify (without involving em-
ployer discretion) under which plan contri-
butions and allocations will be reduced to
prevent an excess annual addition and how
the reduction will occur.
(3)Incorporation by reference—(i)In
general. A plan is permitted to incorporate
by reference the limitations of section 415,
and will not fail to meet the definitely de-
terminable benefit requirement or the def-
inite predetermined allocation formula re-
quirement, whichever applies to the plan,
merely because it incorporates the limits of
section 415 by reference.
(ii)Section 415 can be applied in more
than one manner, but a statutory or regu-
latory default rule exists. Where a provi-
sion of section 415 is permitted to be ap-
plied in more than one manner but is to
be applied in a specified manner in the ab-
sence of contrary plan provisions (i.e.,a
default rule exists), if a plan incorporates
the limitations of section 415 by reference
with respect to that provision of section
415 and does not specifically vary from
the default rule, then the default rule ap-
plies. With respect to a provision of sec-
tion 415 for which a default rule exists, if
the limitations of section 415 are to be ap-
plied in a manner other than using the de-
fault rule, the plan must specify the man-
ner in which the limitation is to be ap-
plied in addition to generally incorporat-
ing the limitations of section 415 by refer-
ence. For example, if a plan generally in-
corporates the limitations of section 415 by
reference and does not restrict the accrued
benefits to which the amendments to sec-
tion 415(b)(2)(E) made by GATT apply (as
permittedbyQ&A–12ofRev.Rul.98–1,
1998–1 C.B. 249 (see §601.601(d) of this
chapter), which reflects the amendments
to section 767 of GATT made by section
1449 of SBJPA), then the amendments to
section 415(b)(2)(E) made by GATT apply
to all benefits under the plan.
(iii)Section 415 can be applied in more
than one manner with no statutory or reg-
ulatory default. If a limitation of section
415 may be applied in more than one man-
ner, and there is no governing principle
pursuant to which that limitation is applied
in the absence of contrary plan provisions,
then the plan must specify the manner in
which the limitation is to be applied in ad-
dition to generally incorporating the lim-
itations of section 415 by reference. For
example, if an employer maintains two
profit-sharing plans, and if any participant
participates in more than one such plan,
then both plans must specify (in a con-
sistent manner) under which of the em-
ployer’s two profit-sharing plans annual
additions must be reduced if aggregate an-
nual additions would otherwise exceed the
limitations of section 415(c)).
(iv)Former requirements. A plan can-
not incorporate by reference formerly ap-
plicable requirements of section 415 that
are no longer in force (such as the limits of
former section 415(e)).
(v)Cost-of-living adjustments—(A)In
general. A plan is permitted to incorpo-
rate by reference the annual adjustments
to the limitations of section 415 that are
made pursuant to section 415(d). See
§1.415(d)–1 for additional rules relating
to cost-of-living adjustments under section
415(d).
(B)Cost-of-living adjustments not in-
cluded in accrued benefit until effective.
Notwithstanding that a plan incorpo-
rates the increases to the applicable limits
under section 415(d) by reference, the
accrued benefit of a participant for pur-
poses of section 411 and the annual ben-
efit payable to a participant for purposes
of §1.415(b)–1(a)(1) are not permitted
to reflect increases pursuant to the an-
nual increase under section 415(d) of
the dollar limitation described in section
415(b)(1)(A) or the compensation limit
described in section 415(b)(1)(B) for any
period before the annual increase becomes
effective. A plan amendment does not vi-
olate the requirements of section 411(d)(6)
merely because it eliminates the incorpo-
ration by reference of the increases under
section 415(d) with respect to increases
that have not yet occurred. Pursuant to
§1.415(d)–1(a)(3), the increase in each
limit that is adjusted pursuant to section
415(d) is effective as of January 1 of each
calendar year, and applies with respect to
limitation years ending with or within that
calendar year. Thus, where an increase
in the dollar limitation under section
415(b)(1)(A) results in an increase to the
participant’s accrued benefit, the increase
to the accrued benefit is permitted to occur
as of a date no earlier than January 1 of
the calendar year for which the increase in
the dollar limitation is effective.
(C)Application of increase in defined
benefit dollar limit to participants who
have commenced receiving benefits.The
annual increase under section 415(d) of
the dollar limitation described in section
415(b)(1)(A) does 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. Similarly,
the annual increase under section 415(d)
of the compensation-based limitation de-
scribed in section 415(b)(1)(B) does 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 partici-
pant.
(D)Treatment of cost-of-living adjust-
ments for funding purposes. In general,
the annual increase under section 415(d)
of the dollar limitation described in section
415(b)(1)(A) and the compensation lim-
itation described in section 415(b)(1)(B)
is treated as a plan amendment for pur-
poses of applying sections 404 and 412,
regardless of whether the plan is amended
to reflect the increase or the plan reflects
the increase automatically through opera-
tion of plan provisions. However, where
a plan reflects the annual increase under
section 415(d) of the dollar limitation
described in section 415(b)(1)(A) or the
compensation limitation described in sec-
tion 415(b)(1)(B) automatically through
operation of plan provisions, the funding
method for the plan is permitted to provide
for this annual increase to be treated as an
experience loss for purposes of applying
sections 404 and 412.
(e)Rules for plans maintained by more
than one employer. Except as provided
July 5, 2005322005–27 I.R.B.

in §1.415(f)–1(h)(2)(i) (regarding aggre-
gation of multiemployer plans with plans
other than multiemployer plans), for pur-
poses of applying the limitations of sec-
tion 415 with respect to a participant in
a plan maintained by more than one em-
ployer, benefits and contributions attribut-
able to such participant from all of the em-
ployers maintainingthe plan must be taken
into account. Furthermore, in applying the
limitations of section 415 with respect to
such a participant, the total compensation
received by the participant from all of the
employers maintaining the plan is permit-
ted to be taken into account under any such
plan if the plan so provides.
(f)Special rules—(1)Affiliated em-
ployers. Pursuant to section 414(b) and
§1.414(b)–1, all employees of all corpo-
rations that are members of a controlled
group of corporations (within the meaning
of section 1563(a), as modified by section
1563(f)(5), and determined without regard
to section 1563(a)(4) and (e)(3)(C)) are
treated as employed by a single employer
for purposes of section 415. Similarly, pur-
suant to section 414(c) and §§1.414(c)–1
through 1.414(c)–6, all employees of
trades or businesses that are under com-
mon control are treated as employed by
a single employer. Thus, any defined
benefit plan or defined contribution plan
maintained by any member of a controlled
group of corporations (within the meaning
of section 414(b)) or by any trade or busi-
ness (whether or not incorporated) under
common control (within the meaning of
section 414(c)) is deemed maintained by
all such members or such trades or busi-
nesses. Pursuant to section 415(h), for
purposes of section 415, sections 414(b)
and 414(c) are applied by using the phrase
“more than 50 percent” instead of the
phrase “at least 80 percent” each place the
latter phrase appears in section 1563(a)(1),
in §1.414(c)–2, and in §1.414(c)–5.
(2)Affiliated service groups.Anyde-
fined benefit plan or defined contribution
plan maintained by any member of an af-
filiated service group (within the meaning
of section 414(m)) is deemed maintained
by all members of that affiliated service
group.
(3)Leased employees—(i)In general.
Pursuant to section 414(n), except as pro-
vided in paragraph (f)(3)(ii) of this section,
with respect to any person (referred to as
the recipient) for whom a leased employee
(within the meaning of section 414(n)(2))
performs services, the leased employee is
treated as an employee of the recipient,
but contributions or benefits provided by
the leasing organization that are attribut-
able to services performed for the recipient
are treated as provided under a plan main-
tained by the recipient.
(ii)Exception for leased employees cov-
ered by safe harbor plans.Pursuantto
section 414(n)(5), the rule of paragraph
(f)(3)(i) of this section does not apply to
a leased employee with respect to services
performed for a recipient if—
(A) The leased employee is covered by
a plan that is maintained by the leasing or-
ganization and that meets the requirements
of section 414(n)(5)(B); and
(B) Leased employees (determined
without regard to this paragraph (f)(3)(ii))
do not constitute more than 20% of the
recipient’s nonhighly compensated work-
force.
(4)Permissive service credit under gov-
ernmental plans. See section 415(n) for
rules regarding the application of the limi-
tations of sections 415(b) and (c) where an
employee makes contributions (including
a transfer described in section 403(b)(13)
or section 457(e)(17)) to a defined benefit
governmental plan to purchase permissive
service credit under the plan.
(5)Qualified domestic relations or-
ders. A benefit provided to an alternate
payee (as defined in section 414(p)(8)) of a
participant pursuant to a qualified domes-
tic relations order (as defined in section
414(p)(1)(A)) is treated as if it were pro-
vided to the participant for purposes of
applying the limitations of section 415.
(6)Effect on other requirements.Ex-
cept as provided in §1.417(e)–1(d)(1), the
application of section 415 does not relieve
a plan from the obligation to satisfy other
applicable qualification requirements. Ac-
cordingly, the terms of the plan must pro-
vide for the plan to satisfy section 415 as
well as all other applicable requirements.
For example, if a defined benefit plan has
a normal retirement age of 62, and if a par-
ticipant’s benefit remains unchanged be-
tween the ages of 62 and 65 because of
the application of the section 415(b)(1)(A)
dollar limit, the plan satisfies the require-
ments of section 411 only if the plan ei-
ther commences distribution of the partic-
ipant’s benefit at normal retirement age
(without regard to severance from employ-
ment) or provides for a suspension of ben-
efits at normal retirement age that satisfies
the requirements of section 411(a)(3)(B)
and 29 CFR 2530.203–3. Similarly, if the
increase to a participant’s benefit under
a defined benefit plan in a year after the
participant has attained normal retirement
age is less than the actuarial increase to
the participant’s previously accrued ben-
efit because of the application of the sec-
tion 415(b)(1)(B) compensation limitation
(which is not adjusted for commencement
after age 65), the plan satisfies the require-
ments of section 411 only if the plan ei-
ther commences distribution of the partic-
ipant’s benefit at normal retirement age
(without regard to severance from employ-
ment) or provides for a suspension of ben-
efits at normal retirement age that satisfies
the requirements of section 411(a)(3)(B)
and 29 CFR 2530.203–3.
(g)Effective date—(1)General
rule. Except as otherwise provided,
§§1.415(a)–1, 1.415(b)–1, 1.415(b)–2,
1.415(c)–1, 1.415(c)–2, 1.415(d)–1,
1.415(f)–1, 1.415(g)–1, and 1.415(j)–1
apply to limitation years beginning on or
after January 1, 2007.
(2)Option to apply regulations ear-
lier. A plan that was adopted and in effect
before January 1, 2007, is permitted to
apply the provisions of §§1.415(a)–1,
1.415(b)–1, 1.415(b)–2, 1.415(c)–1,
1.415(c)–2, 1.415(d)–1, 1.415(f)–1,
1.415(g)–1, and 1.415(j)–1 to limita-
tion years beginning after the date final
regulations are published in theFederal
Register.
(3)Grandfather rule for preexisting
benefits. A defined benefit plan that
was adopted and effective before May
31, 2005, is considered to satisfy the
limitations of section 415(b) for a par-
ticipant with respect to benefits accrued
or payable under the plan as of the ef-
fective date of final regulations under
§§1.415(a)–1, 1.415(b)–1, 1.415(b)–2,
1.415(c)–1, 1.415(c)–2, 1.415(d)–1,
1.415(f)–1, 1.415(g)–1, and 1.415(j)–1
(as provided under paragraph (g)(1) and
(2) of this section) pursuant to plan pro-
visions that were adopted and in effect on
May 31, 2005, but only if such plan pro-
visions meet the requirements of statutory
provisions, regulations, and other pub-
lished guidance in effect on May 31, 2005.
(4)Sunset of EGTRRA amend-
ments. Sections 1.415(a)–1, 1.415(b)–1,
2005–27 I.R.B.33July 5, 2005

1.415(b)–2, 1.415(c)–1, 1.415(c)–2,
1.415(d)–1, 1.415(f)–1, 1.415(g)–1, and
1.415(j)–1 do not address the application
of section 901 of the Economic Growth
and Tax Relief Reconciliation Act of 2001,
Public Law 107–16, 115 Stat. 38 (under
which the amendments made by that Act
do not apply to limitation years beginning
after December 31, 2010).
Par. 7. Section 1.415(b)–1 is added to
read as follows:
§1.415(b)–1 Limitations for defined
benefit plans.
(a)General rules—(1)Maximum lim-
itations. Except as otherwise provided
under this section, a defined benefit plan
fails to satisfy the requirements of section
415(a) for a limitation year if, during the
limitation year, either the annual benefit
(as defined in paragraph (b)(1)(i) of this
section) accrued by a participant or the an-
nual benefit payable to a participant at any
time under the plan exceeds the lesser of—
(i) $160,000 (as adjusted pursuant to
section 415(d), §1.415(d)–1(a), and this
section); or
(ii) 100% of the participant’s aver-
age compensation for the period of the
participant’s high 3 years of service
(as adjusted pursuant to section 415(d),
§1.415(d)–1(a), and this section).
(2)Defined benefit plan. For purposes
of section 415 and regulations thereunder,
a defined benefit plan is any plan, con-
tract, or account to which section 415 ap-
plies pursuant to §1.415(a)–1(a) or (b) (or
any portion thereof) that is not a defined
contribution plan within the meaning of
§1.415(c)–1(a)(2). In addition, a section
403(b) contract that is not described in sec-
tion 414(i) is treated as a defined benefit
plan for purposes of section 415 and regu-
lations thereunder.
(3)Plan provisions. As required in
§1.415(a)–1(d)(1), in order to satisfy the
limitations on benefits under this section,
the plan provisions (including the provi-
sions of any annuity) must preclude the
possibility that any annual benefit exceed-
ing these limitations will be accrued, dis-
tributed, or otherwise payable in any op-
tional form of benefit (including the nor-
mal form of benefit) at any time (from the
plan, from an annuity contract that will
make distributions to the participant on be-
half of the plan, or from an annuity con-
tract that has been distributed under the
plan). Thus, for example, a plan will fail
to satisfy the limitations of this section if
the plan does not contain terms that pre-
clude the possibilitythat any annual bene-
fit exceeding these limitations will be ac-
crued or payable in any optional form of
benefit (including the normal form of ben-
efit) at any time, even though no partici-
pant has actually accrued a benefit in ex-
cess of these limitations.
(4)Adjustments to dollar limitation for
commencement before age 62 or after age
65. The age-adjusted section 415(b)(1)(A)
dollar limit computed pursuant to para-
graph (d) or (e) of this section is used in
place of the dollar limitation described
in section 415(b)(1)(A) and paragraph
(a)(1)(i) of this section in the case of a
benefit with an annuity starting date that
occurs before the participant attains age
62 or after the participant attains age 65.
(5)Period of high 3 years of ser-
vice—(i)In general. For purposes of ap-
plying the limitation on benefits described
in this section, the period of a participant’s
high 3 years of service is the period of 3
consecutive calendar years during which
the employee was an active participant in
the plan and had the greatest aggregate
compensation (as defined in §1.415(c)–2)
from the employer. For purposes of this
paragraph (a)(5), in determining a partic-
ipant’s high 3 years of service, the plan
may use any 12-month period to determine
a year of service instead of the calendar
year, provided that it is uniformly and
consistently applied in a manner that is
specified under the terms of the plan. As
provided under §1.415(c)–2(f), because a
plan may not base benefit accruals (in the
case of a defined benefit plan) on com-
pensation in excess of the limitation under
section 401(a)(17), a plan’s definition of
compensation for a limitation year that is
used for purposes of applying the limi-
tations of section 415 is not permitted to
reflect compensation for a plan year that
is in excess of the limitation under section
401(a)(17) that applies to that plan year.
(ii)Short periods of service. For those
employees who are employed with the em-
ployer while an active participant for less
than 3 consecutive calendar years, the pe-
riod of a participant’s high 3 years of ser-
vice is the actual number of consecutive
years of employment (including fractions
of years) while an active participant in
the plan. In such a case, the limitation
of section 415(b)(1)(B) of 100% of the
participant’s compensation for the period
of the participant’s high 3 years of ser-
vice is computed by dividing the partic-
ipant’s compensation during the partici-
pant’s longest consecutive period of em-
ployment while a plan participant by the
number of years in that period (including
fractions of years, but not less than one
year).
(iii)Examples: The following exam-
ples illustrate the rules of this paragraph
(a)(5):
Example 1. (i) Plan A, which was established on
January 1, 2004, covers Participant M, who was hired
on January 1, 2000. The limitation year for Plan A is
the calendar year. Participant M’s compensation (as
defined in §1.415(c)–2) from the employer maintain-
ing the plan is $120,000 for 2000, $120,000 for 2001,
$120,000 for 2002, $120,000 for 2003, $100,000 for
2004, $100,000 for 2005, $100,000 for 2006, and
$80,000 for 2007. Plan A does not specify a period
other than the calendar year for determining the pe-
riod of a participant’s high 3 years of service while a
plan participant.
(ii) As of the end of the 2004 limitation year, the
period of M’s highest 3 consecutive years of service
while a plan participant (or fewer, if applicable) runs
from January 1, 2004, through December 31, 2004.
As of the end of the 2005 limitation year, the period
of M’s highest 3 consecutive years of service while
a plan participant (or fewer, if applicable) runs from
January 1, 2004, through December 31, 2005. As of
the end of the 2006 limitation year and the 2007 lim-
itation year, the period of M’s highest 3 consecutive
years of service while a plan participant (or fewer, if
applicable) runs from January 1, 2004, through De-
cember 31, 2006. For all of those periods, M’s aver-
age compensation is $100,000. Thus, the limitation
under section 415(b)(1)(B) for 2004 through 2007 is
applied using $100,000 as M’s average compensation
for the period of M’s high 3 consecutive years of ser-
vice while a plan participant (or fewer, if applicable).
Example 2. Participant P has participated in Plan
A, maintained by Employer M, for more than 10
years. P’s average compensation for P’s high 3 years
while a participant in Plan A (determined before the
application of section 401(a)(17)) is $220,000. On
January 1, 2007, P commences receiving benefits
from Plan A at the age of 75, 10 years after attaining
P’s normal retirement age under Plan A. Distribu-
tions to P under Plan A are actuarially adjusted to
reflect commencement 10 years after normal retire-
ment age using a 5% interest rate and the applicable
mortality table under section 417(e)(3) that applies
as of January 1, 2003. The limitation year and the
plan year for Plan A are the calendar year.
(ii) Pursuant to §1.415(c)–2(f) and section
401(a)(17), Plan A is not permitted to provide for a
definition of compensation that includes compensa-
tion for a plan year that is in excess of the limitation
under section 401(a)(17) that applies to that plan
year. Accordingly, the limitation under section
415(b)(1)(B) based on P’s average compensation
for P’s high three consecutive years must not reflect
July 5, 2005342005–27 I.R.B.

compensation for any plan year that is in excess of
the limitation under section 401(a)(17) that applies
to that plan year. Thus, for example, if the limitation
under section 401(a)(17) for plan years beginning
in 2004, 2005, and 2006 is $205,000, and if P had
compensation in excess of $205,000 in each of those
years, then the limitation under section 415(b)(1)(B)
based on P’s average compensation for P’s high three
consecutive years is $205,000.
(6)Exceptions from compensation
limit. The limit under paragraph (a)(1)(ii)
of this section (i.e., 100% of the partici-
pant’s average compensation for his high
3 years of service) does not apply to—
(i) A governmental plan (as defined in
section 414(d));
(ii) A multiemployer plan (as defined in
section 414(f)); or
(iii) A collectively bargained plan that
is described in section 415(b)(7).
(7)Special rules—(i)Total benefits
not in excess of $10,000. See section
415(b)(4) and paragraph (f) of this section
for an exception from the limits of section
415(b)(1) and paragraph (a)(1) of this sec-
tion with respect to retirement benefits that
do not exceed $10,000 for the limitation
year.
(ii)Governmental plans electing during
1990. For a special limitation applicable
to certain governmental plans electing the
application of this rule during the first plan
year beginning after December 31, 1989,
see section 415(b)(10).
(b)Annual benefit—(1)In general—(i)
Definition of annual benefit. For purposes
of this section and §1.415(b)–2, the term
annual benefitmeans a benefit that is
payable annually in the form of a straight
life annuity. 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 that is actu-
arially equivalent to the benefit payable
in such other form, determined under the
rules of paragraph (c) of this section.
(ii)Rules for determination of an-
nual benefit. The annual benefit does
not include the annual benefit attribut-
able to either employee contributions or
rollover contributions (as described in
sections 401(a)(31), 402(c)(1), 403(a)(4),
403(b)(8), and 408(d)(3), and 457(e)(16)),
determined pursuant to the rules of para-
graph (b)(2) of this section. The treatment
of transferred benefits is determined un-
der the rules of paragraph (b)(3) of this
section. Paragraph (b)(4) of this section
discusses the treatment of qualified gov-
ernmental excess benefit arrangements.
(iii)Determination of annual benefit in
the case of multiple annuity starting dates.
See §1.415(b)–2 for rules regarding the de-
termination of the annual benefit from one
or more plans in cases in which a partic-
ipant has received one or more distribu-
tions in limitation years prior to an increase
in the accrued benefit occurring during the
current limitation year or prior to the an-
nuity starting date for a distribution that
commences during the current limitation
year. The rules of §1.415(b)–2 apply, for
example, to multiple annuity starting dates
that result from the commencement of an
additional distribution and to multiple an-
nuity starting dates that result from a new
distribution election with respect to a dis-
tribution that commenced in a prior limi-
tation year. For purposes of §1.415(b)–2,
the determination of whether a new an-
nuity starting date has occurred is made
without regard to the rule of §1.401(a)–20,
Q&A–10(d) (under which the commence-
ment of certain distributions may not give
rise to a new annuity starting date).
(2)Determination of annual benefit at-
tributable to employee contributions and
rollover contributions—(i)In general.If
employee contributions (other than contri-
butions described in paragraph (b)(2)(ii) of
this section) or rollover contributions are
made to the plan, the annual benefit attrib-
utable to these contributions is determined
as provided in this paragraph (b)(2).
(ii)Certain employee contributions dis-
regarded. For purposes of this paragraph
(b)(2), the following are not treated as em-
ployee contributions—
(A) Contributions that are picked up by
a governmental employer as provided un-
der section 414(h)(2);
(B) Repayment of any loan made to a
participant from the plan;
(C) Repayment of a previously dis-
tributed amount as described in section
411(a)(7)(B) in accordance with section
411(a)(7)(C); and
(D) Repayment of a withdrawal of em-
ployee contributions as provided under
section 411(a)(3)(D).
(iii)Annual benefit attributable to
mandatory employee contributions.In
the case of mandatory employee contri-
butions as defined in section 411(c)(2)(C)
and §1.411(c)–1(c)(4) (or contributions
that would be mandatory employee con-
tributions if section 411 applied to the
plan), the annual benefit attributable to
those contributions is determined by ap-
plying the factors applicable to mandatory
employee contributions as described in
section 411(c)(2)(B) and (C) and the reg-
ulations thereunder to those contributions
to determine the amount of a straight
life annuity commencing at the annu-
ity starting date, regardless of whether
section 411 applies to that plan. See
§1.415(c)–1(a)(2)(ii)(B) and (b)(3) for
rules regarding treatment of mandatory
employee contributions to a defined bene-
fit plan as annual additions under a defined
contribution plan.
(iv)Voluntary employee contributions.
If voluntary employee contributions are
made to the plan, the portion of the plan to
which voluntary employee contributions
are made is treated as a defined contribu-
tion plan pursuant to section 414(k) and,
accordingly, is a defined contribution plan
pursuant to §1.415(c)–1(a)(2)(i). Accord-
ingly, the portion of a plan to which vol-
untary employee contributions are made is
not a defined benefit plan within the mean-
ing of paragraph (a)(2) of this section and
is not taken into account in determining the
annual benefit under the portion of the plan
that is a defined benefit plan.
(v)Annual benefit attributable to
rollover contributions. The annual benefit
attributable to rollover contributions from
another qualified plan (for example, a
contribution received pursuant to a direct
rollover under section 401(a)(31)) is de-
termined in the same manner as the annual
benefit attributable to mandatory em-
ployee contributions if the plan provides
for a benefit derived from the rollover
contribution (other than a benefit derived
from a separate account to be maintained
with respect to the rollover contribution
and actual earnings and losses thereon).
Thus, in the case of rollover contribu-
tions 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 uses more favorable factors than
those specified in section 411(c) to de-
termine the amount of annuity payments
2005–27 I.R.B.35July 5, 2005

arising from rollover contributions, the an-
nual benefit under the plan would reflect
the excess of those annuity payments over
the amounts that would be payable using
the factors specified in section 411(c)(3).
See §1.415(c)–1(b)(3)(i) for rules exclud-
ing rollover contributions maintained in
a separate account that is treated as a de-
fined contribution plan pursuant to section
414(k) from annual additions to a defined
contribution plan.
(3)Treatment of transferred bene-
fits—(i)In general—(A)Transferor plan
and transferee plan aggregated.Forthe
limitation year that includes the date of a
transfer between defined benefit plans, if
the transferee plan’s benefits are required
to be taken into account pursuant to sec-
tion 415(f) and §1.415(f)–1 in determining
whether the transferor plan satisfies the
limitations of section 415(b) for that lim-
itation year, then the transferred benefits
are included in determining the annual
benefit under the transferee plan and are
disregarded in determining the annual
benefit under the transferor plan. This
will occur, for example, if the employer
sponsoring the transferor plan and the
employer sponsoring the transferee plan
are in the same controlled group within
the meaning of section 414(b). Similarly,
with respect to a transfer between defined
benefit plans that occurred in a previous
limitation year, if the transferee plan’s ben-
efits are required to be taken into account
pursuant to section 415(f) and §1.415(f)–1
in determining whether the transferor plan
satisfies the limitations of section 415(b),
then the transferred benefits are included
in determining the annual benefit under
the transferee plan and are disregarded
in determining the annual benefit under
the transferor plan for the current limita-
tion year. Accordingly, if the transferee
plan’s benefits are required to be taken
into account pursuant to section 415(f)
and §1.415(f)–1 in determining whether
the transferor plan satisfies the limitations
of section 415(b) for the limitation year
with respect to a transfer occurring in the
current limitation year or a prior limitation
year, no adjustment is made to the bene-
fits actually provided under either plan for
purposes of determining the annual benefit
under the plans as aggregated.
(B)Transferor plan and transferee plan
not aggregated. When there has been a
transfer of liabilities from one qualified
plan to another, the benefits associated
with those transferred liabilities are treated
by the transferor plan as distributed as a
single-sum distribution in an amount de-
termined under paragraph (b)(3)(ii) of this
section if the transferee plan’s benefits
are not required to be taken into account
pursuant to section 415(f) and §1.415(f)–1
in determining whether the transferor plan
satisfies the limitations of section 415(b).
Although such a transfer is treated as a dis-
tribution in computing the annual benefit
under the transferor plan, no adjustment is
made to reflect the transfer for purposes
of determining the annual benefit under
the transferee plan. This will occur, for
example, if the employer sponsoring the
transferor plan is a predecessor employer
with respect to the participant whose ben-
efits are transferred to the transferee plan,
where the transferee plan’s benefits are
not required to be taken into account pur-
suant to section 415(f) and §1.415(f)–1 in
determining whether the transferor plan
satisfies the limitations of section 415(b).
(ii)Amount of deemed distribution on
account of transfer of benefits—(A)In
general. Where there has been a transfer
of liabilities from one qualified defined
benefit plan to another, the amount of the
single-sum distribution that is deemed dis-
tributed from the transferor plan pursuant
to paragraph (b)(3)(i)(B) of this section is
the amount of the assets transferred (other
than surplus assets transferred). Thus,
where the fair market value of assets
transferred from another defined benefit
plan in connection with the transfer of
liabilities equals or exceeds the actuarial
present value of liabilities transferred, the
annual benefit attributable to the liabili-
ties transferred is determined taking into
account the entire amount of liabilities
transferred as a single-sum distribution.
(B)Amount of assets transferred.
Where assets are transferred with respect
to more than one participant, the assets
transferred with respect to each partici-
pant (other than surplus assets transferred)
are determined as the actuarial present
value of the straight life annuity that is
actuarially equivalent to the amount the
participant would receive if the plan ter-
minated immediately before the transfer
(if the plan had then terminated) under
the rules of section 414(l) or Subtitle E of
Title IV of ERISA, whichever applies to
the transferor plan. If neither the rules of
section 414(l) nor the rules of Subtitle E
of Title IV of ERISA apply to the plan,
then the assets transferred with respect
to each participant are determined as the
actuarial present valueof the straight life
annuity that is actuarially equivalent to
the amount the participant would receive
if the plan terminated immediately before
the transfer, determined by allocating the
assets, to the extent possible, so that em-
ployees who are not officers, shareholders,
or highly compensated employees receive
from the plan at least the same propor-
tion of the present value of their accrued
benefits (whether or not nonforfeitable) as
employees who are officers, shareholders,
or highly compensated employees.
(iii)Transfer of immediately dis-
tributable amount. Where an immediately
distributable amount is transferred from
either a defined contribution plan or a de-
fined benefit plan to a defined benefit plan
(see §1.411(d)–4, Q&A–3(c) regarding
certain elective transfers of immediately
distributable benefits), the annual benefit
attributable to the benefits transferred is
determined pursuant to the rules of para-
graph (b)(2)(v) of this section regarding
rollover contributions.
(4)Treatment of qualified governmen-
tal excess benefit arrangements.Pursuant
to section 415(m), in determining whether
a governmental plan (as defined in sec-
tion 414(d)) meets the requirements of
this section and §1.415(b)–2, the annual
benefit does not include benefits provided
under a qualified governmental excess
benefit arrangement, as defined in section
415(m)(3).
(c)Adjustment to form of benefit for
forms other than a straight life annu-
ity—(1)In general. This paragraph (c)
provides rules for adjusting a form of ben-
efit other than a straight life annuity to an
actuarially equivalent straight life annuity
beginning at the same time for purposes of
determining the annual benefit described
in paragraph (b) of this section. Examples
of benefits that are not in the form of a
straight life annuity include an annuity
with a post-retirement death benefit and
an annuity providing for a guaranteed
number of payments. Paragraph (c)(2)
of this section describes how to adjust a
form of benefit to which section 417(e)(3)
does not apply. Paragraph (c)(3) of this
section describes how to adjust a form of
benefit to which section 417(e)(3) applies.
July 5, 2005362005–27 I.R.B.

Paragraph (c)(4) of this section describes
benefit forms for which no adjustment
is required. Paragraph (c)(5) of this sec-
tion sets forth examples illustrating the
application of this paragraph (c). The
Commissioner may, in revenue rulings,
notices, or other guidance published in
the Internal Revenue Bulletin set forth
simplified methods for adjusting a form
of benefit other than a straight life annu-
ity to an actuarially equivalent straight
life annuity beginning at the same time for
purposes of determining the annual benefit
described in paragraph (b) of this section.
See §601.601(d) of this chapter.
(2)Benefits to which section 417(e)(3)
does not apply. For a benefit to which sec-
tion 417(e)(3) does not apply, the actuari-
ally equivalent straight life annuity benefit
is the greater of—
(i) The annual amount of the straight
life annuity (if any) payable to the partic-
ipant under the plan commencing at the
same annuity starting date as the form of
benefit payable to the participant; or
(ii) 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 ben-
efit payable, computed using a 5% inter-
est assumption and theapplicable mortal-
ity table described in §1.417(e)–1(d)(2) for
that annuity starting date.
(3)Benefits to which section 417(e)(3)
applies—(i)In general. Except as pro-
vided in paragraph (c)(3)(ii) of this sec-
tion, for a benefit to which section 417(e)
applies, the actuarially equivalent straight
life annuity benefit is the greater of—
(A) 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 ben-
efit payable, computed using the interest
rate and mortality table, or tabular factor,
specified in the plan for actuarial equiva-
lence; or
(B) 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 ben-
efit payable, computed using the applica-
ble interest rate for the distribution un-
der §1.417(d)–1(d)(3) and the applicable
mortality table for the distribution under
§1.417(e)–1(d)(2).
(ii)Special rule for 2004 and 2005.For
distributions to which section 417(e) ap-
plies and which have annuity starting dates
beginning in 2004 or 2005, except as pro-
vided in section 101(d)(3) of the Pension
Funding Equity Act of 2004 (118 Stat.
596), the actuarially equivalent straight life
annuity benefit is the greater of—
(A) 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 ben-
efit payable, computed using the interest
rate and mortality table, or tabular factor,
specified in the plan for actuarial equiva-
lence; or
(B) 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%
interest assumption and the applicable
mortality table for the distribution under
§1.417(e)–1(d)(2).
(4)Certain benefit forms for which no
adjustment is required—(i)In general.For
purposes of the adjustments described in
this paragraph (c), the following benefits
are not taken into account—
(A) Survivor benefits payable to a sur-
viving spouse under a qualified joint and
survivor annuity (as defined in section
417(b)) to the extent that such benefits
would not be payable if the participant’s
benefit were not paid in the form of a
qualified joint and survivor annuity; and
(B) Ancillary benefits that are not di-
rectly related to retirement benefits, such
as preretirement disability benefits not in
excess of the qualified disability benefit,
preretirement incidental death benefits (in-
cluding a qualified preretirement survivor
annuity), and post-retirement medical ben-
efits.
(ii)Rules of application—(A)Social
security supplements. Although a social
security supplement described in section
411(a)(9) and §1.411(a)–7(c)(4) may be an
ancillary benefit, it is included in determin-
ing the annual benefit because it is payable
upon retirement and therefore is directly
related to retirement income benefits.
(B)QJSAs combined with other distri-
butions. If benefits are paid partly in the
form of a qualified joint and survivor annu-
ity and partly in some other form (such as
a single-sum distribution), the rule of para-
graph (c)(4)(i)(A) of this section (under
which survivor benefits are not included in
determining the annual benefit) applies to
the survivor annuity payments under the
portion of the benefit that is paid in the
form of a QJSA.
(5)Examples. The following examples
illustrate the provisions of this paragraph
(c). For purposes of these examples, ex-
cept as otherwise stated, actuarial equiva-
lence under the plan is determined using a
5% interest assumption and the mortality
table that applies under section 417(e)(3)
as of January 1, 2003. It is assumed for
purposes of these examples that the inter-
est rate that applies under section 417(e)(3)
for relevant time periods is 5.25% and that
the mortality table that applies under sec-
tion 417(e)(3) for relevant time periods is
the mortality table that applies under sec-
tion 417(e)(3) as of January 1, 2003. In
addition, it is assumed that all participants
discussed in these examples have at least
ten years of service with the employer and
at least ten years of participation in the plan
at issue, and that all payments other than a
payment of a single sum are made monthly,
on the first day of each calendar month.
The examples are as follows:
Example 1. (i) Plan A provides a single-sum dis-
tribution determined as theactuarial present value of
the straight life annuity payable at the actual retire-
ment date. Plan A provides that a participant’s single
sum is determined as the greater of the present value
using 5% interest and the applicable mortality table
under section 417(e)(3) as of January 1, 2003, and
the present value using the applicable interest rate and
the applicable mortality table under section 417(e). In
accordance with §1.417(e)–1(d)(1), Plan A also pro-
vides that the single sum is not less than the actuarial
present value of the accrued benefit payable at nor-
mal retirement age, determined using the applicable
interest rate and the applicable mortality table. Par-
ticipant M retires at age 65 with a formula benefit of
$152,619 and elects to receive a distribution in the
form of a single sum. Under the plan formula, and
before the application of section 415 under the plan,
the amount of the single sum is $1,800,002 (which is
based on the 5% interest rate and applicable mortality
table as of January 1, 2003, since that is greater than
the amount that would have been determined using
the 5.25% interest rate and the applicable mortality
table).
(ii) For purposes of this section, the annual ben-
efit is the greater of the annual amount of the actu-
arially equivalent straight life annuity commencing
at the same age (determined using the plan’s actu-
arial factors), and the annual amount of the actuar-
ially equivalent straight life annuity commencing at
the same age (determined using the applicable inter-
est rate and applicable mortality table). Based on the
factors used in the plan to determine the actuarially
equivalent lump sum (in this case, an interest rate of
5% and the applicable mortality table as of January 1,
2003), $1,800,002 payable as a single sum is actuar-
ially equivalent to an immediate straight life annuity
at age 65 of $152,619. Based on the applicable inter-
2005–27 I.R.B.37July 5, 2005

est rate and the applicable mortality table, $1,800,002
payable as a single sum is actuarially equivalent to an
immediate straight life annuity at age 65 of $155,853.
With respect to the single-sum distribution, M’s an-
nual benefit is equal to the greater of the two resulting
amounts ($152,619 and $155,853), or $155,853.
Example 2. (i) The facts are the same as inExam-
ple 1, except that Participant M elects to receive his
benefit in the form of a 10-year certain and life annu-
ity. Applying the plan’s actuarial equivalence factors
determined using 5% interest and the applicable mor-
tality table as of January 1, 2003, the benefit payable
in this form is $146,100.
(ii) For purposes of this section, the annual ben-
efit is the greater of the annual amount of the plan’s
straight life annuity commencing at the same age
or the annual amount of the actuarially equivalent
straight life annuity commencing at the same age, de-
termined using a 5% interest rate and the applicable
mortality table. In this case, the straight life annuity
payable under the plan commencing at the same age
is $152,619. Because the plan’s factors for actuarial
equivalence in this case are the same standardized
actuarial factors requiredtobeappliedtodetermine
the actuarially equivalent straight life annuity, the
actuarially equivalent straight life annuity using the
required standardized factors is also $152,619. With
respect to the 10-year certain and life annuity distri-
bution, M’s annual benefit is equal to the greater of
the two resulting amounts ($152,619 and $152, 619),
or $152,619.
Example 3. (i) The facts are the same as inExam-
ple 1. Participant N retires at age 62 with a formula
benefit, after application of the plan’s early retirement
factors, of $100,000 and a Social Security supplement
of $10,000 per year payable until age 65. N chooses
to receive the accrued benefit in the form of a straight
life annuity. The Plan has no provisions under which
the actuarial value of the Social Security supplement
can be paid as a level annuity for life.
(ii) Because the plan does not provide for a
straight life annuity beginning at age 62, the annual
benefit for purposes of this section is the annual
amount of the straight life annuity commencing at
age 62 that is actuarially equivalent to the distribu-
tion stream of $110,000 for three years and $100,000
thereafter, where actuarial equivalence is determined
using a 5% interest rate and the applicable mortality
table. In this case, the actuarially equivalent straight
life annuity is $102,180. Accordingly, with respect
to this distribution stream, N’s annual benefit is equal
to $102,180.
Example 4. (i) Plan B is a defined benefit plan
that provides a benefit equal to 100% of a partici-
pant’s compensation for the participant’s high 3 years
of service while a participant, payable as a straight
life annuity. For a married participant who does not
elect another form of benefit, the benefit is payable in
the form of a joint and 100% survivor annuity bene-
fit that is reduced from the straight life annuity and is
a QJSA within the meaning of section 417. For pur-
poses of determining the amount of this QJSA, the
plan provides that the reduction is only half of the
reduction that would normally apply under the actu-
arial assumptions specified in the plan for determin-
ing actuarial equivalence of optional forms. The plan
also provides that a married participant can elect to
receive the plan benefits asa straight life annuity, or
in the form of a single sum distribution that is the ac-
tuarial equivalent of the joint and 100% survivor an-
nuity. Participant O elects, with spousal consent, a
single-sum distribution.
(ii) The special rule thatdisregards the value of
the survivor portion of a QJSA set forth in paragraph
(c)(4)(i) of this section only applies to a benefit that is
payable in the form of a qualified joint and survivor
annuity. Any other form of benefit must be adjusted
to a straight life annuity inaccordance with paragraph
(c)(1) of this section. Accordingly, because the bene-
fit payable under the plan in the form of a single-sum
distribution is the actuarial equivalent of a straight life
annuity that is greater than 100% of a participant’s
compensation for his high 3 years, the limitation of
section 415(b)(1)(B) has been exceeded.
Example 5. (i) Plan C is a defined benefit plan that
provides an option to receive the benefit in the form
of a joint and 100% survivor annuity with a 10-year
certain feature, where the survivor beneficiary is the
participant’s spouse.
(ii) For a participant at age 65, the annual bene-
fit with respect to the joint and 100% survivor annu-
ity with a 10-year certain feature is determined as the
greater of the annual amount of the straight life an-
nuity payable to the participant under the plan at age
65 (if any), or the annual amount of the straight life
annuity commencing at age 65 that has the same ac-
tuarial present value as the joint and 100% survivor
annuity with a 10 year certain feature (but excluding
the survivor annuity payments pursuant to paragraph
(c)(4)(i)(A) of this section), computing using a 5%
interest assumption and the applicable mortality table
described in §1.417(e)–1(d)(2) for that annuity start-
ing date. This latter amount is equal to the product of
the annual payments under this optional form of ben-
efit and the factor that provides for actuarial equiv-
alence between a straight life annuity and a 10-year
certain and life annuity (with no annuity for the sur-
vivor) computed using a 5% interest rate and the ap-
plicable mortality table.
Example 6. (i) Plan D is a defined benefit plan
with a normal retirement age of 65. The normal re-
tirement benefit under Plan D (and the only life an-
nuity available under Plan D) is a life annuity with a
fixed increase of 2% per year. The increase applies
to the benefit provided in the prior year and is thus
compounded. The plan provides that the benefit is
limited to the lesser of 84% of the participant’s av-
erage compensation for the participant’s high 3 con-
secutive years of service while a plan participant or
84% of the section 415(b)(1)(A) dollar limit (which
is assumed to be $170,000). Participant P’s retires at
age 65, at which time P’s average compensation for
P’s high 3 consecutive years of service is $165,000.
Accordingly, P commences receiving benefits in the
form of a life annuity of $138,600 with a fixed in-
crease of 2% per year.
(ii) Because Plan D does not provide for a straight
life annuity, P’s annual benefit for purposes of sec-
tion 415(b) is the annual amount of the straight life
annuity, commencing at age 65, that is actuarially
equivalent to the distribution stream of $138,600
with a fixed increase of 2% per year, where actuarial
equivalence is determined using a 5% interest rate
and the applicable mortality table. In order to satisfy
the requirements of section 415 and this section, this
annual benefit must not exceed 100% of average
compensation for the participant’s high 3 consecu-
tive years, or $165,000. Using a 5% interest rate and
the section 417(e)(3) mortality table, the actuarially
equivalent straight life annuity is $165,453, which
exceeds $165,000. Accordingly, the plan fails to
satisfy the compensation-based limitation of section
415(b)(1)(B).
Example 7. (i) Plan E provides a benefit at age
65 of a straight life annuity equal to the lesser of 90%
of the participant’s average compensation for the par-
ticipant’s highest 3 consecutive years of service while
a plan participant and $148,500. Upon retirement at
age 65, the optional forms of benefit available to a
participant include payment of a QJSA with annual
payments equal to 50% of the annual payments un-
der the straight life annuity, along with a single-sum
distribution that is actuarially equivalent (determined
as the greater of the single sum calculated using a 5%
interest assumption and the section 417(e)(3) mortal-
ity table in effect on January 1, 2003, and the sin-
gle sum calculated using the section 417(e)(3) inter-
est rate and the section 417(e)(3) mortality table) to
50% of the annual payments under the straight life
annuity. Participant Q retires at age 65. Q’s average
compensation for Q’s highest 3 consecutive years is
$100,000. Q elects to receive a distribution in the op-
tional form of benefit described above, under which
the annual payments under the QJSA are $45,000 and
the single-sum distribution is equal to $530,734. Q’s
spouse is 3 years younger than Q.
(ii) Q’s annual benefit under Plan E is determined
as the sum of the annual benefit attributable to the
QJSA portion of the distribution and the annual ben-
efit attributable to the single-sum portion of the dis-
tribution.
(iii) Because survivor benefits are not taken into
account in determining the annual benefit attributable
to the QJSA portion of the distribution, the annual
benefit attributable to the QJSA portion of the dis-
tribution is determined as if that distribution were a
straight life annuity of $45,000 per year commenc-
ing at age 65. Thus, no form adjustment is needed
to determine the annual benefit attributable to the
QJSA portion of the distribution, and the annual ben-
efit attributable to the QJSA portion of the benefit is
$45,000.
(iv) The annual benefit attributable to the single
sum portion of the distribution is determined as the
greater of the annual amount of the actuarially equiv-
alent straight life annuity commencing at the same
age (determined using the plan’s actuarial factors),
and the annual amount of the actuarially equivalent
straight life annuity commencing at the same age (de-
termined using the applicable interest rate and ap-
plicable mortality table). With respect to the sin-
gle-sum distribution, the annual amount of the actu-
arially equivalent straight life annuity commencing
at the same age determined using the plan’s actuarial
factors is equal to $45,954, and the actuarially equiva-
lent straight life annuity commencing at the same age
determined using the applicable interest rate and the
applicable mortality table is equal to $45,954. Thus,
the annual benefit attributable to the single sum por-
tion of the benefit is $45,954.
(v) Q’s annual benefit under the optional form of
benefit is equal to the sum of the annual benefit attrib-
utable to the QJSA portion of the distribution and the
annual benefit attributable to the single sum portion
of the distribution, or $90,954. Because Q’s average
compensation for Q’s highest 3 consecutive years is
July 5, 2005382005–27 I.R.B.

$100,000, the distribution satisfies the compensation
limit of section 415(b)(1)(B).
Example 8. (i) R is a participant in a defined bene-
fit plan maintained by A’s employer. Under the terms
of the plan, R must make contributions to the plan in
a stated amount to accrue benefits derived from em-
ployer contributions.
(ii) R’s contributions are mandatory em-
ployee contributions within the meaning of sec-
tion 411(c)(2)(C) and, thus, the annual benefit
attributable to these contributions does not have to
be taken into account for purposes of testing the
annual benefit derived from employer contribu-
tions against the applicable limitation on benefits.
However, these contributions are treated as contri-
butions to a defined contribution plan maintained by
R’s employer for purposes of section 415(c). See
§1.415(c)–1(a)(2)(ii)(B). Accordingly, with respect
to the current limitation year, the limitation on bene-
fits (as described in paragraph (a)(1) of this section)
is applicable to the annual benefit attributable to em-
ployer contributions to the defined benefit plan, and
the limitation on contributions and other additions
(as described in §1.415(c)–1) is applicable to the
portion of the plan treated as a defined contribution
plan, which consists of R’s mandatory contributions.
These same limitations would also apply if, instead
of providing for mandatory employee contributions,
the plan permitted voluntary employee contributions,
because the portion of the plan attributable to volun-
tary employee contributions and earnings thereon is
treated as a defined contribution plan maintained by
the employer pursuant to section 414(k), and thus is
not subject to the limitations of section 415(b).
(d)Adjustment to section 415(b)(1)(A)
dollar limit for commencement before age
62—(1)General rule. For a distribution
with an annuity starting date that occurs
before the participant attains the age of 62,
the age-adjusted section 415(b)(1)(A) dol-
lar limit is determined as the lesser of—
(i) The section 415(b)(1)(A) dollar
limit (as adjusted pursuant to section
415(d) and §1.415(d)–1(a) for the limi-
tation year) multiplied by the ratio of the
annual amount of the immediately com-
mencing straight life annuity under the
plan (if any) to the annual amount of the
straight life annuity under the plan com-
mencing at age 62, if any (with both annual
amounts determined without applying the
rules of section 415); or
(ii) The annual amount of a straight life
annuity commencingat the annuity start-
ing date that has the same actuarial present
value as a deferred straight life annuity
commencing at age 62, where annual pay-
ments under the straight life annuity com-
mencing at age 62 are equal to the dol-
lar limitation of section 415(b)(1)(A), and
where the actuarially equivalent straight
life annuity is computed using a 5% in-
terest rate and the applicable mortality ta-
ble under §1.417(e)–1(d)(2) that is effec-
tive for that annuity starting date.
(2)Mortality adjustments—(i)In gen-
eral. For purposes of determining the
amount described in paragraph (d)(1)(ii)
of this section, to the extent that a forfei-
ture does not occur upon the participant’s
death, no adjustment is made to reflect
the probability of the participant’s death
between the annuity starting date and the
participant’s attainment of age 62. To the
extent that a forfeiture occurs upon the
participant’s death, an adjustment must
be made to reflect the probability of the
participant’s death between the annuity
starting date and the participant’s attain-
ment of age 62.
(ii)No forfeiture deemed to occur
where QPSA payable. For purposes of
paragraphs (d)(2)(i) and (e)(2)(i) of this
section, a plan is permitted to treat no
forfeiture as occurring upon a partici-
pant’s death if the plan does not charge
participants for providing a qualified pre-
retirement survivor annuity (as defined in
section 417(c)) on the participant’s death,
but only if the plan applies this treatment
both for adjustments before age 62 and
adjustments after age 65. Thus, in such a
case, the plan is permitted to provide that,
in computing the adjusted dollar limitation
under section 415(b)(1)(A), no adjust-
ment is made to reflect the probability of
a participant’s death between the annuity
starting date and the participant’s attain-
ment of age 62 or between the age of 65
and the annuity starting date.
(3)Exception for certain participants
of certain governmental plans.Pursuant
to section 415(b)(2)(G) and (H), no age
adjustment is made to the dollar limit for
commencement before age 62 for any
qualified participant. For this purpose, a
qualified participantis a participant in a
defined benefit planthat is maintained by
a state or local government with respect to
whom the service taken into account in de-
termining the amount of the benefit under
the defined benefit plan includes at least
15 years of service ofthe participant—
(i) As a full-time employee of any po-
lice department or fire department that
is organized and operated by the state
or political subdivision maintaining such
defined benefit plan to provide police
protection, firefighting services, or emer-
gency medical services for any area within
the jurisdiction of such state or political
subdivision; or
(ii) As a member of the Armed Forces
of the United States.
(4)Exception for survivor and disabil-
ity benefits under governmental plans.
Pursuant to section 415(b)(2)(I), no age
adjustment is made to the dollar limit for
commencement before age 62 for a dis-
tribution from a governmental plan (as
defined in section 414(d)) on account of
the participant’s becoming disabled by
reason of personal injuries or sickness, or
as a result of the death of the participant.
(5)Special rule for commercial airline
pilots. Pursuant to section 415(b)(9), no
age adjustment is made to the dollar limit
for early commencement after age 60 for a
participant if—
(i) The participant is a commercial air-
line pilot;
(ii) The participant separates from ser-
vice after attaining age 60; and
(iii) As of the time of the participant’s
retirement, regulations prescribed by the
Federal Aviation Administration require
an individual to separate from service as
a commercial airline pilot after attaining
any age occurring on or after age 60 and
before age 62.
(6)Examples. The following examples
illustrate the application of this paragraph
(d). For purposes of these examples, it
is assumed that the dollar limitation under
section 415(b)(1)(A) for all relevant years
is $180,000, that the normal form of bene-
fit under the plan is a straight life annuity
payable beginning at age 65, and that all
payments other than a payment of a single
sum are made monthly, on the first day of
each calendar month. The examples are as
follows:
Example 1. (i) Plan A provides that early retire-
ment benefits are determined by reducing the accrued
benefit by 4% for each year that the early retirement
age is less than age 65. Participant M retires at age 60
after 30 years of service with a benefit (prior to the ap-
plication of section 415) in the form of a straight life
annuity of $100,000 payable at age 65, and is permit-
ted to elect to commence benefits at any time between
M’s retirement and M’s attainment of age 65. For ex-
ample, M can elect to commence benefits at age 60 in
the amount of $80,000, can wait until age 62 and com-
mence benefits in the amount of $88,000, or can wait
until age 65 and commence benefits in the amount of
$100,000. Plan A provides a QPSA to all married par-
ticipants without charge. Plan A provides (consistent
with paragraph (d)(2)(ii) of this section) that, for pur-
poses of adjusting the dollar limitation under section
415(b)(1)(A) for commencement before age 62 or af-
ter age 65, no forfeiture is treated as occurring upon
2005–27 I.R.B.39July 5, 2005

a participant’s death before retirement and, therefore,
in computing the adjusted dollar limitation under sec-
tion 415(b)(1)(A), no adjustment is made to reflect
the probability of a participant’s death between the
annuity starting date and the participant’s attainment
of age 62 or between the age of 65 and the annuity
starting date.
(ii) The age-adjusted section 415(b)(1)(A) dollar
limit that applies for commencement of M’s benefit
at age 60 is the lesser of the section 415(b)(1)(A)
dollar limit multiplied by the ratio of the annuity
payable at age 60 to the annuity payable at age 62,
or the straight life annuity payable at age 60 that
is actuarially equivalent, using 5% interest and the
applicable mortality table, to the deferred annuity
payable at age 62. In this case, the age-adjusted sec-
tion 415(b)(1)(A) dollar limit at age 60 is $156,229
(the lesser of $163,636 ($180,000* $80,000/$88,000)
and $156,229 (the straight life annuity at age 60 that
is actuarially equivalent to a deferred annuity of
$180,000 commencing at age 62, determined using
5% interest and the applicable mortality table, with-
out a mortality decrement for the period between 60
and 62)).
Example 2. (i) The facts are the same as inExam-
ple 1, except the plan provides that, if a participant
has 30 or more years of service, no reduction applies
for benefits commencing at age 62 and later.
(ii) The age-adjusted section 415(b)(1)(A) dollar
limit that applies for commencement of M’s benefit
at age 60 is the lesser of the section 415(b)(1)(A)
dollar limit multiplied by the ratio of the annuity
payable at age 60 to the annuity payable at age 62,
or the straight life annuity payable at age 60 that
is actuarially equivalent, using 5% interest and the
applicable mortality table, to the deferred annuity
payable at age 62. In this case, because M has
30 years of service and would be eligible for the
unreduced early retirement benefit at age 62, the
age-adjusted section 415(b)(1)(A) dollar limit at age
60 is $144,000 (the lesser of $144,000 ($180,000*
$80,000/$100,000) and $156,229 (the straight life
annuity at age 60 that is actuarially equivalent to a
deferred annuity of $180,000 commencing at age
62, determined using 5% interest and the applicable
mortality table).
Example 3. (i) Participant O is a full-time civilian
employee of the State of X Police Department who
performs clerical services. O is a participant in the
defined benefit plan that is maintained by the State
of X with respect to whom the years of service taken
into account in determining the amount of the benefit
under the plan includes 15 years of service working
for the State of X Police Department.
(ii) For a distribution with an annuity starting date
that occurs before O attains the age of 62, there is
no age adjustment to the section 415(b)(1)(A) dollar
limit.
Example 4. (i) Participant R is a full-time em-
ployee of the Emergency Medical Service Depart-
ment of County Y (which is not a part of a police or
fire department) who performs services as a driver of
an ambulance. R is a participant in the defined bene-
fit plan that is maintained by County Y with respect
to whom the years of service taken into account in
determining the amount of the benefit under the plan
includes 15 years of service working for County Y. R
does not have service credit for time in Armed Forces
of the United States.
(ii) The age adjustments to the limitations of sec-
tion 415(b)(1)(A) pursuant to section 415(b)(2)(C)
and (D) will apply if R commences receiving a distri-
bution at an age to which either of those adjustments
applies.
Example 5. (i)ThefactsarethesameasinEx-
ample 1except that Participant M chooses to receive
benefits in the form of a 10-year certain and life an-
nuity under which payments are 97% of the periodic
payments that would be made under the immediately
commencing straight life annuity. Annual payments
to M are 97% of $80,000, or $77,600. As inExample
1, the age-adjusted section 415(b)(1)(A) dollar limit
at age 60 is $156,229.
(ii) For purposes of this section, the annual ben-
efit is the greater of the annual amount of the plan’s
straight life annuity commencing at the same age
or the annual amount of the actuarially equivalent
straight life annuity commencing at the same age,
determined using a 5% interest rate and the appli-
cable mortality table. In this case, the straight life
annuity payable under the plan commencing at the
same age is $80,000. The annual amount of the ac-
tuarially equivalent straight life annuity determined
by applying the required standardized factors (i.e.,a
5% interest assumption and the applicable mortality
under section 417(e)(3)) is $79,416. With respect to
the 10-year certain and life annuity commencing at
age 62, M’s annual benefit is equal to the greater of
the two resulting amounts ($80,000 and $79,416), or
$80,000.
(e)Adjustment to section 415(b)(1)(A)
dollar limit for commencement after age
65—(1)General rule. For a distribution
with an annuity starting date that occurs
after the participant attains the age of 65,
the age-adjusted section 415(b)(1)(A) dol-
lar limit is determined as the lesser of—
(i) The section 415(b)(1)(A) dollar limit
(as adjusted pursuant to section 415(d) and
§1.415(d)–1 for the limitation year) multi-
plied by the ratio of the annual amount of
the immediately commencing straight life
annuity under the plan (if any) to the an-
nual amount of the straight life annuity that
would be payable under the plan to a hypo-
thetical participant who is 65 years old and
has the same accrued benefit (i.e.,withno
actuarial increases for commencement af-
ter age 65) as the participant receiving the
distribution (with both annual amounts de-
termined without applying the rules of sec-
tion 415); or
(ii) The annual amount of a straight life
annuity commencingat the annuity start-
ing date that has the same actuarial present
value as a straight life annuity commenc-
ing at age 65, where annual payments un-
der the straight life annuity commencing
at age 65 are equal to the dollar limita-
tion of section 415(b)(1)(A), and where
actuarially equivalentstraight life annu-
ity is computed using a 5% interest rate
and the applicable mortality table under
§1.417(e)–1(d)(2) that is effective for that
annuity starting date.
(2)Mortality adjustments—(i)In gen-
eral. For purposes of determining the
amount described in paragraph (e)(1)(ii)
of this section, to the extent that a forfei-
ture does not occur upon the participant’s
death, no adjustment is made to reflect
the probability of the participant’s death
between the participant’s attainment of
age 65 and the annuity starting date. To
the extent that a forfeiture occurs upon the
participant’s death, an adjustment must be
made to reflect the probability of the par-
ticipant’s death between the participant’s
attainment of age 65 and the annuity start-
ing date.
(ii)No forfeiture deemed to occur where
QPSA payable. See paragraph (d)(2)(ii) of
this section for a rule deeming no forfeiture
to occur if the plan does not charge partic-
ipants for providing a qualified preretire-
ment survivor annuity on the participant’s
death.
(3)Example. The following example
illustrates the application of this paragraph
(e):
Example. (i) Plan A provides that monthly ben-
efits payable upon commencement after normal re-
tirement age (which is age 65) are increased by 0.5%
for each month of delay in commencement after at-
tainment of normal retirement age. Plan A provides
a QPSA to all married participants without charge.
Plan A provides (consistent with paragraph (d)(2)(ii)
of this section) that, for purposes of adjusting the
dollar limitation under section 415(b)(1)(A) for com-
mencement before age 62 or after age 65, no adjust-
ment is made to reflect the probability of a partici-
pant’s death between the annuity starting date and the
participant’s attainment of age 62 or between the age
of 65 and the annuity starting date. The normal form
of benefit under Plan A is a straight life annuity com-
mencing at age 65. Participant M retires at age 70
on January 1, 2007, after 30 years of service with a
benefit (prior to the application of section 415) that is
payable monthly in the form of a straight life annuity
of $195,000, which reflects the actuarial increase of
30% applied to the accrued benefit of $150,000.
(ii) The age-adjusted section 415(b)(1)(A) dollar
limit at age 70 is the lesser of the section 415(b)(1)(A)
dollar limit multiplied by the ratio of the annuity
payable at age 70 to the annuity that would be
payable at age 65 based on the same accrued benefit
(both determined before the application of section
415), or the straight life annuity payable at age
70 that is actuarially equivalent, using 5% interest
and the applicable mortality table, to the straight
life annuity payable at age 65. In this case, the
age-adjusted section 415(b)(1)(A) dollar limit at age
70 is $234,000 (the lesser of $234,000 ($180,000*
$195,000/$150,000) and $264,109 (the straight life
annuity at age 70 that is actuarially equivalent to an
annuity of $180,000 commencing at age 65, deter-
July 5, 2005402005–27 I.R.B.

mined using 5% interest and the applicable mortality
table, without a mortality decrement for the period
between 65 and 70)).
(f)Total annual payments not in excess
of $10,000—(1)In general.Pursuantto
section 415(b)(4), the annual benefit (with-
out regard to the age at which benefits
commence) payable with respect to a par-
ticipant under any defined benefit plan is
not considered to exceed the limitations on
benefits described in section 415(b)(1) and
in paragraph (a)(1) of this section if—
(i) The benefits (other than benefits not
taken into account in the computation of
the annual benefit under the rules of para-
graph (b) or (c) of this section) payable
with respect to the participant under the
plan and all other defined benefit plans of
the employer do not in the aggregate ex-
ceed $10,000 (as adjusted under paragraph
(g)) for the limitation year, or for any prior
limitation year; and
(ii)Theemployer(orapredecessorem-
ployer) has not at anytime, either before
or after the effective date of section 415,
maintained a defined contribution plan in
which the participant participated.
(2)Computation of benefits for pur-
poses of applying the $10,000 amount.For
purposes of paragraph (f)(1)(i) of this sec-
tion, the benefits (other than benefits not
taken into account in the computation of
the annual benefit under the rules of para-
graph (b) or (c) of this section) payable
with respect to the participant under a plan
for a limitation year reflect all amounts
payable under the plan for the limitation
year, and are not adjusted for form of ben-
efit or commencement date.
(3)Special rule with respect to partic-
ipants in multiemployer plans.Thespe-
cial $10,000 exception set forth in para-
graph (f)(1) of this section is applicable to
a participant in a multiemployer plan de-
scribed in section 414(f) without regard to
whether that participant ever participated
in one or more other plans maintained by
an employer who also maintains the multi-
employer plan, provided that none of such
other plans were maintained as a result of
collective bargaining involving the same
employee representative as the multiem-
ployer plan.
(4)Special rule with respect to em-
ployee contributions. For purposes of
paragraph (f)(1)(ii) of this section, manda-
tory employee contributions under a de-
fined benefit plan are not considered a sep-
arate defined contribution plan maintained
by the employer. Thus, a contributory
defined benefit plan may utilize the spe-
cial dollar limitation provided for in this
paragraph (f). Similarly, for purposes of
this paragraph (f), an individual medical
account under section 401(h) or an ac-
count for postretirement medical benefits
established pursuant to section 419A(d)(1)
is not considered a separate defined con-
tribution plan maintained by the employer.
(5)Examples. The application of this
paragraph (f) may be illustrated by the fol-
lowing examples. For purposes of these
examples, it is assumed that each partic-
ipant has 10 years of participation in the
plan and service with the employer. The
examples are as follows:
Example 1. (i) B is a participant in a defined bene-
fitplanmaintainedbyXCorporation,whichprovides
for a benefit payable in the form of a straight life an-
nuity beginning at age 65. B’s average compensation
forB’shigh3consecutive years of service while a
participant in the plan is $6,000. The plan does not
provide for employee contributions, and at no time
has B been a participant in a defined contribution plan
maintained by X. With respect to the current limita-
tion year, B’s benefit under the plan (before the ap-
plication of section 415) is $9,500.
(ii) Because annual payments under B’s benefit
do not exceed $10,000, and because B has at no time
participated in a defined contribution plan maintained
by X, the benefits payable under the plan are not con-
sidered to exceed the limitation on benefits otherwise
applicable to B ($6,000).
(iii) This result would remain the same even if,
under the terms of the plan, B’s normal retirement
age was age 60, or if the plan provided for employee
contributions.
Example 2. (i)ThefactsarethesameasinEx-
ample 1, except that the plan provides for a benefit
payable in the form of a life annuity with a 10-year
certain feature with annual payments of $9,500. As-
sume that, after the adjustment described in para-
graph (c) of this section, B’s actuarially equivalent
straight life annuity (which is the annual benefit used
for demonstrating compliance with section 415) for
the current limitation year is $10,400.
(ii) For purposes of applying the special rule pro-
vided in this paragraph for total benefits not in excess
of $10,000, there is no adjustment required if the re-
tirement benefit payable under the plan is not in the
form of a straight life annuity. Therefore, because B’s
retirement benefit does not exceed $10,000, B may
receive the full $9,500 benefit without the otherwise
applicable benefit limitations of this section being ex-
ceeded.
Example 3. (i)ThefactsarethesameasinEx-
ample 1, except that the plan provides for a benefit
payable in the form of a single sum and that the
amount of the single sum that is the actuarial equiv-
alent of the straight life annuity payable to B (i.e.,
$9,500 annually), determined in accordance with
the rules of section 417(e)(3) and §1.417(e)–1(d) is
$95,000.
(ii) Because the amount payable to B for the lim-
itation year would exceed $10,000, the rule of this
paragraph (f) does not provide an exception from the
generally applicable limits of section 415(b)(1) for
the single-sum distribution. Thus, the otherwise ap-
plicable limits apply to the single-sum distribution,
and a single-sum distribution of $95,000 would not
satisfy the requirements of section 415(b). Limiting
the single-sum distribution to $60,000 (the present
value of the annuity that complies with the compen-
sation-based limitation of section 415(b)(1)(B)) in or-
der to satisfy section 415 would be an impermissible
forfeiture under the requirements of section 411(a).
Accordingly, the plan should not provide for a sin-
gle-sum distribution in these circumstances.
(g)Special rule for participation or ser-
vice of less than 10 years—(1)Proration
of dollar limit based on years of partic-
ipation—(i)In general. Pursuant to sec-
tion 415(b)(5)(A), where a participant has
less than 10 years of participation in the
plan, the dollar limit described in para-
graph (a)(1)(i) of thissection (as adjusted
pursuant to section 415(d), §1.415(d)–1,
and paragraphs (d) and (e) of this section)
is to be reduced by multiplying the other-
wise applicable limitation by a fraction—
(A) The numerator of which is the num-
ber of years of participation in the plan (or
1, if greater); and
(B)Thedenominatorofwhichis10.
(ii)Years of participation. The follow-
ing rules apply for purposes of determin-
ing a participant’s years of participation
for purposes of this paragraph (g)(1)—
(A) A participant is credited with a year
of participation (computed to fractional
parts of a year) for each accrual compu-
tation period for which the participant
is credited with at least the number of
hours of service (or period of service if the
elapsed time method is used for benefit
accrual purposes) required under the terms
of the plan in order to accrue a benefit for
the accrual computation period, and the
participant is included as a plan participant
under the eligibility provisions of the plan
for at least one day of the accrual compu-
tation period. If these two conditions are
met, the portion of a year of participation
credited to the participant is equal to the
amount of benefit accrual service credited
to the participant for such accrual com-
putation period. For example, if under
the terms of a plan, a participant receives
1/10 of a year of benefit accrual service
for an accrual computation period for each
200 hours of service, and the participant
is credited with 1,000 hours of service for
the period, the participant is credited with
2005–27 I.R.B.41July 5, 2005

1
/2a year of participation for purposes of
section 415(b)(5)(A).
(B) A participant who is permanently
and totally disabled within the meaning of
section 415(c)(3)(C)(i) for an accrual com-
putation period is credited with a year of
participation with respect to that period for
purposes of section 415(b)(5)(A).
(C) For a participant to receive a year
of participation (or part thereof) for an ac-
crual computation period for purposes of
section 415(b)(5)(A), the plan must be es-
tablished no later than the last day of such
accrual computation period.
(D) No more than one year of participa-
tion may be credited for any 12-month pe-
riod for purposes of section 415(b)(5)(A).
(2)Proration of compensation limit
and special rule for total annual payments
less than $10,000 based on years of ser-
vice—(i)In general. Pursuant to section
415(b)(5)(B), where a participant has less
than 10 years of service with the employer,
the compensation limit described in para-
graph (a)(1)(ii) of this section and the
$10,000 amount under the special rule for
small annual payments under paragraph
(f) of this section are reduced by multiply-
ing the otherwise applicable limitation by
a fraction—
(A) The numerator of which is the num-
ber of years of service with the employer
(or 1, if greater); and
(B) The denominator of which is 10.
(ii)Years of service—(A)In general.
For purposes of applying this paragraph
(g)(2), the termyear of serviceis to be
determined on a reasonable and consistent
basis. A plan is considered to be determin-
ing years of service on a reasonable and
consistent basis for this purpose if, sub-
ject to the limits of paragraph (g)(2)(ii)(B)
of this section, a participant is credited
with a year of service (computed to frac-
tional parts of a year) for each accrual
computation period for which the partici-
pant is credited with at least the number of
hours of service (or period of service if the
elapsed time method is used for benefit ac-
crual purposes) required under the terms of
the plan in order to accrue a benefit for the
accrual computation period.
(B)Rules of application.Nomore
than one year of service may be credited
for any 12-month period for purposes of
section 415(b)(5)(B).In addition, only the
participant’s service with the employer
or a predecessor employer (as defined in
§1.415(f)–1(c)) may be taken into account
in determining the participant’s years of
service for this purpose.
(C)Period of disability. Notwithstand-
ing the rules of paragraph (g)(2)(ii)(B) of
this section, a plan is permitted to provide
that a participant who is permanently and
totally disabled within the meaning of sec-
tion 415(c)(3)(C)(i) for an accrual compu-
tationperiodiscreditedwithayearofser-
vice with respect to that period for pur-
poses of section 415(b)(5)(B).
(3)Exception for survivor and disabil-
ity benefits under governmental plans.The
requirements of this paragraph (g) (regard-
ing participation or service of less than 10
years) do not apply to a distribution from
a governmental plan on account of the par-
ticipant’s becoming disabled by reason of
personal injuries or sickness, or as a result
of the death of the participant.
(4)Examples. The provision of this
paragraph (g) may be illustrated by the fol-
lowing examples:
Example 1. (i) C begins employment with Em-
ployer A on January 1, 2005, at the age of 58. Em-
ployer A maintains only a noncontributory defined
benefit plan which provides for a straight life annuity
beginning at age 65 and uses the calendar year for the
limitation and plan year. Employer A has never main-
tained a defined contribution plan. C becomes a par-
ticipant in Employer A’s plan on January 1, 2006, and
works through December 31, 2011, when C is age 65.
C begins to receive benefits under the plan in 2012.
C’s average compensation for C’s high 3 consecutive
years of service is $40,000. Furthermore, under the
terms of Employer A’s plan, for purposes of comput-
ing C’s nonforfeitable percentage in C’s accrued ben-
efit derived from employer contributions, C has only
7 years of service with Employer A (2005–2011).
(ii) Because C has only 7 years of service with
Employer A at the time he begins to receive bene-
fits under the plan, the maximum permissible annual
benefit payable with respect to C is $28,000 ($40,000
multiplied by 7/10).
Example 2. (i) The facts are the same as inExam-
ple 1, except that C’s average compensation for his
high 3 years is $8,000.
(ii) Because C has only 7 years of service with
Employer A at the time he begins to receive bene-
fits, the maximum benefit payable with respect to C
would be reduced to $5,600 ($8,000 multiplied by
7/10). However, the special rule for total benefits
not in excess of $10,000, provided in paragraph (f) of
this section, is applicable in this case. Accordingly,
C may receive an annual benefit of $7,000 ($10,000
multiplied by 7/10) without the benefit limitations of
this section being exceeded.
Example 3. (i) Employer B maintains a defined
benefit plan. Benefits under the plan are computed
based on months of service rather than years of ser-
vice. Accordingly, for purposes of applying the re-
duction based on years of service less than 10 to the
limitations under section 415(b), the otherwise appli-
cable limitation is multiplied by a fraction, the nu-
merator of which is the number of completed months
of service with the employer (but not less than 12
months), and the denominator of which is 120. The
plan further provides that months of service are com-
puted in the same manner for this purpose as for pur-
poses of computing plan benefits.
(ii) The manner in which the plan applies the re-
duction based on years of service less than 10 to the
limitations under section 415(b) is consistent with the
requirements of this paragraph (g).
Example 4. (i) G begins employment with Em-
ployer D on January 1, 2003, at the age of 58. Em-
ployer D maintains only a noncontributory defined
benefit plan which provides for a straight life annu-
ity beginning at age 65 and uses the calendar year for
the limitation and plan year. Employer D has never
maintained a defined contribution plan. G becomes a
participant in Employer D’s plan on January 1, 2004,
and works through December 31, 2009, when G is age
65. G performs sufficient service to be credited with
a year of service under the plan for each year during
2003 through 2009 (although G is not credited with a
year of service for 2003 because G is not yet a plan
participant). G begins to receive benefits under the
plan during 2010. The plan’s accrual computation pe-
riod is the plan year. The plan provides that, for pur-
poses of applying the rules of section 415(b)(5)(B),
a participant is credited with a year of service (com-
puted to fractional parts of a year) for each plan year
for which the participant is credited with sufficient
service to accrue a benefitfor the plan year. G’s av-
erage compensation for G’s high 3 years of service is
$200,000. It is assumed for purposes of this example
that the dollar limitation of section 415(b)(1)(A) for
limitation years ending in 2010 is $180,000.
(ii) G has 7 years of service and 6 years of
participation in the plan at the time G begins to
receive benefits under theplan. Accordingly, the
limitation under section 415(b)(1)(B) based on G’s
average compensation forG’s high 3 years of ser-
vice that applies pursuant to the adjustment required
under section 415(b)(5)(B) is $140,000 ($200,000
multiplied by 7/10), and the dollar limitation under
section 415(b)(1)(A) that applies to G pursuant to
the adjustment required under section 415(b)(5)(A)
is $108,000 ($180,000 multiplied by 6/10).
(h)RPA ’94 transition rules.Forspe-
cial rules affecting the actuarial adjustment
for form of benefit under paragraph (c) of
this section and the adjustment to the dol-
lar limit for early or late commencement
under paragraphs (d) and (e) of this sec-
tion for certain plans adopted and in ef-
fect before December 8, 1994, see sec-
tion 767(d)(3)(A) of the Retirement Pro-
tection Act of 1994, as amended by section
1449(a) of the Small Business Job Pro-
tection Act of 1996. The Commissioner
may provide guidance regarding these spe-
cial rules in revenue rulings, notices, and
other guidance published in the Internal
Revenue Bulletin. See §601.601(d) of this
chapter.
Par. 8. Section1.415(b)–2isaddedto
read as follows:
July 5, 2005422005–27 I.R.B.

§1.415(b)–2 Multiple annuity starting
dates.
(a)Determination of annual benefit
where distributions have occurred before
the current determination date—(1)In
general. This section provides rules for
determining the annual benefit of a partic-
ipant for purposes of applying the limita-
tions of section 415(b) and §1.415(b)–1 in
cases in which a participant has received
one or more distributions in limitation
years prior to an increase in the accrued
benefit occurring during the current limi-
tation year or prior to the annuity starting
date for a distribution that commences
during the current limitation year. This
section applies, for example, where ben-
efit distributions to a participant have
previously commenced under a plan that
is aggregated for purposes of section 415
with a plan from which the participant
receives current accruals, or where a new
distribution election is effective during
the current limitation year with respect to
a distribution that commenced in a prior
limitation year. This section also applies
where benefit payments are increased as a
result of plan terms applying a cost-of-liv-
ing adjustment pursuant to an increase of
the dollar limit of section 415(b)(1)(A),
if the plan does not provide for applica-
tion of the rules of §1.415(d)–1(a)(5) to
determine the adjusted amount of the ben-
efit. Paragraph (b) of this section provides
rules for computing the annual benefit
in the case of multiple annuity starting
dates as described in this paragraph (a)(1).
Paragraph (c) of this section provides an
additional rule for multiple annuity start-
ing dates that occur when a stream of
annuity payments is modified by a new
distribution election. Paragraph (d) of this
section provides examples to illustrate the
rules of this section.
(2)Annuity starting date. For pur-
poses of this section, the determination
of whether a new annuity starting date
has occurred is made pursuant to the rules
of §1.401(a)–20, Q&A–10, but with-
out regard to the rule of §1.401(a)–20,
Q&A–10(d) (under which the commence-
ment of certain distributions may not give
rise to a new annuity starting date).
(3)Annual benefit—(i)In general.
Where a participant has received one or
more distributions before a current accrual
or before the annuity starting date for a
currently payable distribution, except as
provided in paragraph (a)(3)(iii) of this
section (regarding mandatory employee
contributions and rollover contributions),
the annual benefit that is subject to the lim-
its of section 415(b) and §1.415(b)–1(a) is
equal to the sum of—
(A) The annual benefit determined with
respect to any accrued benefit with respect
to which distribution has not yet com-
menced as of the current determination
date, computed pursuant to the rules of
§1.415(b)–1(b) and (c);
(B) The annual benefit determined with
respect to any distribution with an annuity
starting date that occurs within the current
limitation year and on or before the current
determination date, computed pursuant to
the rules of §1.415(b)–1(b) and (c);
(C) The annual benefit determined with
respect to the remaining amounts payable
under any distribution with an annuity
starting date that occurred during a prior
limitation year, computed pursuant to the
rules of §1.415(b)–1(b) and (c) (subject to
paragraph (a)(3)(ii) of this section); and
(D) The annual benefit attributable to
prior distributions (computed pursuant to
the rules of paragraph (b) of this section).
(ii)Determining actuarial equiva-
lence with respect to remaining amounts
payable. For purposes of computing the
annual benefit determined with respect
to the remaining amounts payable under
any distribution with an annuity starting
date that occurred during a prior limitation
year under paragraph (a)(3)(i)(C) of this
section, §1.415(b)–1(c)(2) is applied by
substituting for the amount described in
§1.415(b)–1(c)(2)(i) the annual amount
of a 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 ac-
tuarial equivalence for the particular form
of benefit payable.
(iii)Mandatory employee contributions
and rollover contributions.Ifmandatory
employee contributions or rollover contri-
butions have been made to the plan with
respect to a distribution that commenced
before the current determination date, the
annual benefit is determined by apply-
ing the rules of paragraph (a)(3)(i)(C)
and (D) of this section and then sub-
tracting the annual benefit attributable to
mandatory employee contributions com-
puted pursuant to §1.415(b)–1(b)(2)(iii)
and the annual benefit attributable to
rollover contributions computed pur-
suant to §1.415(b)–1(b)(2)(v), with both
amounts computed as of the annuity start-
ing date for the distribution.
(iv)Repayments of prior distribu-
tions—(A)Total repayments.Apriordis-
tribution that has been repaid to the plan
with interest does not give rise to an annual
benefit attributable to prior distributions
for purposes of paragraph (a)(3)(i)(D) of
this section (becauseamounts attributable
to those repayments are reflected instead
in amounts included in the annual benefit
pursuant to paragraphs (a)(3)(i)(A), (B),
and (C) of this section).
(B)Partial repayments. Ifapriordis-
tribution was made, and a repayment was
subsequently made that was less than
the amount of the prior distribution (in-
cluding reasonable interest), the annual
benefit attributable to prior distributions is
determined by multiplying the annual ben-
efit attributable to the prior distribution
(computed assuming that no repayment
occurred) by one minus a fraction, the
numeratorofwhichistheamountofthe
repayment and the denominator of which
is the amount of the prior distribution plus
reasonable interest.
(b)Annual benefit attributable to prior
distributions—(1)In general—(i)Adjust-
ment to actuarially equivalent straight life
annuity—(A)Method of adjustment.To
compute the annual benefit attributable to
a prior distribution, the prior distribution
is adjusted to an actuarially equivalent
straight life annuity commencing at the
current determination date in accordance
with the rules of paragraph (b)(2) of this
section (for a prior distribution to which
section 417(e)(3) did not apply) or para-
graph (b)(3) of this section (for a prior
distribution to which section 417(e)(3)
applied).
(B)Current determination date.The
current determination date is the last day of
period for which an increase in the partici-
pant’s benefit accrues if an increase in the
participant’s accrued benefit occurs during
the limitation year. If there is no such in-
crease, the current determination date is
the annuity starting date for the distribu-
tion that commences during the limitation
year.
2005–27 I.R.B.43July 5, 2005

(ii)Rules of application—(A)Amount
of distribution taken into account.Inap-
plying the rules of paragraphs (b)(2) and
(3) of this section to compute the annual
benefit attributable to a prior distribu-
tion, only the actual amount received as a
prior distribution (without regard to either
the form of benefits paid, or the form or
amount of remaining payments under the
prior distribution) is taken into account.
Thus, for example, in determining the
annual benefit attributable to a prior distri-
bution of $100,000 per year over the past
four years, paragraph (b)(2) of this section
will apply if the distribution was part of
a 10-year certain and life annuity, and
paragraph (b)(3) of this section will apply
if the distribution was part of installment
payments over 10 years. However, in both
instances, the amounts taken into account
in determining the annual benefit attribut-
able to the prior distribution are the four
$100,000 payments already made, without
regard to remaining payments.
(B)Application of mortality adjust-
ments—(1)Application of mortality ad-
justments when standardized assumptions
are used. Under the rules of paragraphs
(b)(2)(ii), (b)(3)(i)(B), and (b)(3)(ii)(B)
of this section (under which standardized
actuarial assumptions are applied), a prior
distribution is adjusted to an actuarially
equivalent straight life annuity commenc-
ing at the current determination date using
the specified interest and mortality as-
sumptions to convert the payment stream
to an actuarially equivalent straight life
annuity commencing at the current de-
termination date. For this purpose, the
actuarially equivalent straight life annuity
commencing at the current determination
date must reflect an actuarial increase to
the present value of payments to reflect
that the participant has survived during the
interim period.
(2)Application of mortality adjust-
ments when the plan’s assumptions for
computing offsets are used. Under the
rules of paragraphs (b)(2)(i), (b)(3)(i)(A),
and (b)(3)(ii)(A) of this section (under
which the plan’s assumptions for com-
puting offsets for prior distributions are
applied), the actuarially equivalent straight
life annuity must reflect mortality adjust-
ment in the same manner as those mortal-
ity adjustments are reflected in computing
offsets for prior distributions.
(2)Prior distributions to which section
417(e)(3) did not apply. For a prior distri-
bution to which section 417(e)(3) did not
apply, the actuariallyequivalent straight
life annuity commencing at the current de-
termination date is the greater of—
(i) The annual amount of a straight life
annuity commencing at the current deter-
mination date that is the actuarial equiv-
alent of that prior distribution, computed
using the interest rate and mortality table
specified under the plan that provides for
the current distribution or current accrual
that are used to determine offsets, if any,
for prior distributions; and
(ii) The annual amount of a straight
life annuity commencing at the current
determination date that is the actuarial
equivalent of that prior distribution, com-
puted using a 5% interest assumption and
the applicable mortality table described
in §1.417(e)–1(d)(2) that would apply to
a distribution to which section 417(e) ap-
plies with an annuity starting date of the
current determination date.
(3)Prior distributions to which sec-
tion 417(e)(3) applied—(i)In general.
For a prior distribution to which section
417(e)(3) applied, the actuarially equiv-
alent straight lifeannuity commencing
at the current determination date is the
greater of—
(A) The annual amount of a straight life
annuity commencing at the current deter-
mination date that is the actuarial equiv-
alent of that prior distribution, computed
using the interest rate and mortality table
specified under the plan that provides for
the current distribution or current accrual
that are used to determine offsets, if any,
for prior distributions; and
(B) The annual amount of a straight
life annuity commencing at the current
determination date that is the actuarial
equivalent of that prior distribution, com-
puted using the applicable interest rate un-
der §1.417(e)–1(d)(3) and the applicable
mortality table under §1.417(e)–1(d)(2)
that would apply to a distribution with an
annuity starting date of the current deter-
mination date.
(ii)Special rule for 2004 and 2005.
For a prior distribution to which section
417(e)(3) applied, and for current deter-
mination dates or current accruals in 2004
and 2005, except as provided in section
101(d)(3) of the Pension Funding Equity
Act of 2004, the actuarially equivalent
straight life annuity commencing at the
current determination date is the greater
of—
(A) The annual amount of a straight life
annuity commencing at the current deter-
mination date that is the actuarial equiv-
alent of that prior distribution, computed
using the interest rate and mortality table
specified under the plan that provides for
the current distribution or current accrual
that are used to determine offsets, if any,
for prior distributions; and
(B) The annual amount of a straight
life annuity commencing at the current
determination date that is the actuarial
equivalent of that prior distribution, com-
puted using a 5.5% interest assumption
and the applicable mortality table under
§1.417(e)–1(d)(2) that would apply to a
distribution with an annuity starting date
of the current determination date.
(4)Benefit forms for which no adjust-
ment is required. The annual benefit attrib-
utable to prior distributions is computed
disregarding the portion of prior distribu-
tions described in §1.415(b)–1(c)(4) (re-
garding benefits for which no adjustment
is required). Thus, for example, the annual
benefit attributable to prior distributions
is computed disregarding the payment of
preretirement disability benefits not in ex-
cess of the qualified disability benefit.
(c)Change in distribution form—(1)In
general. If a stream of annuity payments
is modified by a new distribution election,
the requirements of this section are applied
treating the modification as a new annuity
starting date. In addition, in such a case,
the requirements of paragraph (c)(2) of this
section must be satisfied.
(2)Test total annuity stream as of orig-
inal annuity starting date. If a stream of
annuity payments is modified by a new
distribution election, the payments under
the annuity that are paid before the modi-
fication plus the modified payments must
satisfy the requirements of §1.415(b)–1
determined as of the original annuity start-
ing date, using the interest rates and mor-
tality table applicable to such date. A plan
will not fail to satisfy the requirements of
this paragraph (c)(2) merely because pay-
ments reflect cost-of-living adjustments
pursuant to section 415(d) determined in
accordance with §1.415(d)–1(a)(5).
(d)Examples. The following exam-
ples illustrate the application of this sec-
tion. For purposes of these examples, ex-
July 5, 2005442005–27 I.R.B.

cept as otherwise stated, actuarial equiv-
alence under the plan (including for pur-
poses of determining offsets for prior dis-
tributions and for purposes of determining
the amount of annuity distributions com-
mencing after normal retirement age) is
determined using a 6% interest assump-
tion and the mortality table that applies
under section 417(e)(3) as of January 1,
2003, and all payments other than a pay-
ment of a single sum are made monthly,
on the first day of each calendar month.
It is assumed for purposes of these exam-
ples that the interest rate that applies un-
der section 417(e)(3) for relevant time pe-
riods is 5.25% and that the mortality ta-
ble that applies under section 417(e)(3)
for relevant time periods is the mortality
table that applies under section 417(e)(3)
as of January 1, 2003. In addition, it is
assumed that all participants discussed in
these examples have at least ten years of
service with the employer and at least ten
years of participation in the plan at issue,
and that the dollar limitation of section
415(b)(1)(A) as adjusted pursuant to sec-
tion 415(d) for 2008 is equal to $180,000.
It is further assumed that the product of the
annual adjustment factors that apply in ad-
justing the compensation limitation of sec-
tion 415(b)(1)(B) for 2005, 2006, 2007,
and 2008 is 1.1. The examples are as fol-
lows:
Example 1. (i) Employer A previously main-
tained Plan D, a qualified defined benefit plan.
Upon the termination of Plan D on January 1, 1997,
Participant M received a single-sum distribution of
$537,055 at the age of 54. As of January 1, 2008,
Participant M has participated in Plan E (another
defined benefit plan maintained by Employer A) for
more than 10 years. On January 1, 2008, M retires at
the age of 65 and receives a distribution from Plan E.
(ii) Pursuant to section 415(f) and §1.415(f)–1,
distributions to M from Plan D and Plan E are aggre-
gated for purposes of applying section 415(b). Pur-
suant to paragraph (a)(3) of this section, M’s annual
benefit that is subject to the limits of section 415(b)
and §1.415(b)–1(a) is equal to the sum of the an-
nual benefit determined with respect to the distribu-
tion commencing on January 1, 2008, and the annual
benefit attributable to prior distributions (computed
pursuant to the rules of paragraph (b) of this section).
(iii) M’s annual benefit attributable to prior distri-
butions is computed by adjusting the single-sum dis-
tribution made in 1995 to an actuarially equivalent
straight life annuity commencing on January 1, 2008,
in accordance with the rules set forth in paragraph
(b)(3) of this section. Pursuant to those rules, that ac-
tuarially equivalent straight life annuity is computed
using either the plan’s actuarial assumptions for ap-
plying offsets for prior distributions (here, a 6% in-
terest rate and the mortality table that applies under
section 417(e)(3) as of January 1, 2003), or the appli-
cable interest rate and the applicable mortality table
under section 417(e)(3), both determined as of Jan-
uary 1, 2008, whichever set of actuarial assumptions
produces the greater actuarially equivalent annuity.
The actuarially equivalent straight life annuity com-
puted using the plan’s assumptions used for comput-
ing offsets is $100,027 per year, and the actuarially
equivalent straight life annuity computed using the
applicable interest rate and the applicable mortality
table as of January 1, 2008, is $87,035 per year. Thus,
M’s annual benefit attributable to prior distributions
is $100,027.
(iv) To comply with the limitations of section 415,
M’s annual benefit determined with respect to the dis-
tribution commencing on January 1, 2008, must be no
greater than the otherwise applicable limit on the an-
nual benefit (i.e., the lesser of $180,000 or 100% of
M’s average compensation for the period of the par-
ticipant’s high 3 years of service) minus $100,027.
Thus, for example, to comply with the dollar limita-
tion of section 415(b)(1)(A), M’s annual benefit de-
termined with respect to the distribution commencing
on January 1, 2008, must be no greater than $79,973.
Example 2. (i) Employer B maintains Plan F, a
qualified defined benefit plan. On January 1, 2002,
at the age of 59, Participant N separated from service
and commenced receiving a benefit of $80,000 per
year for ten years from Plan F. As of January 1, 2008,
Plan F is amended to increase N’s accrued benefit.
N is offered a new QJSA election with respect to the
new accrual.
(ii) Pursuant to paragraph (a)(3) of this section,
as of January 1, 2008, N’s annual benefit that is sub-
ject to the limits of section 415(b) and §1.415(b)–1(a)
is equal to the sum of the annual benefit determined
with respect to remaining amounts payable under the
distribution that commenced on January 1, 2002, the
annual benefit determined with respect to the accrued
benefit with respect to which distribution has not yet
commenced, and the annual benefit attributable to
prior distributions (computed pursuant to the rules of
paragraph (b) of this section).
(iii) N’s annual benefit determined with respect to
the remaining four annual payments of $80,000 is de-
termined pursuant to §1.415(b)–1(c)(3) as the greater
of the annual amount of a straight life annuity com-
mencing at the annuity starting date that has the same
actuarial present value as the particular form of bene-
fit payable, computed using the interest rate and mor-
tality table, or tabular factor, specified in the plan for
actuarial equivalence for the particular form of ben-
efit payable, or the annual amount of a straight life
annuity commencing at the annuity starting date that
has the same actuarial present value as the particu-
lar form of benefit payable, computed using the ap-
plicable interest rate and the applicable mortality ta-
ble under section 417(e)(3). Using the plan’s factors
for actuarial equivalence, the actuarially equivalent
straight life annuity is $26,334, and using the section
417(e)(3) factors for actuarial equivalence, the actu-
arially equivalent straight life annuity is $25,109. Ac-
cordingly, N’s annual benefit determined with respect
to the remaining four annual payments of $80,000 is
equal to $26,334.
(iv) N’s annual benefit attributable to prior dis-
tributions is computed by adjusting the six annual
payments of $80,000 per year already made before
January 1, 2008, to an actuarially equivalent straight
life annuity commencing on January 1, 2008, in ac-
cordance with the rules set forth in paragraph (b)(3)
of this section. Pursuant to those rules, that actuari-
ally equivalent straight life annuity is computed us-
ing either the plan’s actuarial assumptions for apply-
ing offsets for prior distributions (here, a 6% inter-
est rate and the mortality table that applies under sec-
tion 417(e)(3) as of January 1, 2003), or the applica-
ble interest rate and the applicable mortality table un-
der section 417(e)(3), both determined as of January
1, 2008, whichever set of actuarial assumptions pro-
duces the greater actuarially equivalent annuity. The
actuarially equivalent straight life annuity computed
using the plan’s assumptions used for computing off-
sets is $54,494 per year, and the actuarially equivalent
straight life annuity computed using the applicable in-
terest rate and the applicable mortality table as of Jan-
uary 1, 2006, is $50,103 per year. Thus, N’s annual
benefit attributable to prior distributions is $54,494.
(v) To comply with the limitations of section 415,
N’s annual benefit determined with respect to the ac-
crued benefit with respect to which distribution has
not yet commenced must be no greater than the oth-
erwise applicable limit on the annual benefit (i.e.,the
lesser of $180,000 or 100% of N’s average compen-
sation for period of N’s high 3 years of service) mi-
nus $80,828 (the $26,334 annual benefit attributable
to the remaining payments under the existing form
of distribution, plus the $54,494 annual benefit at-
tributable to prior distributions). Thus, for exam-
ple, to comply with the dollar limitation of section
415(b)(1)(A), N’s annual benefit determined with re-
spect to the accrued benefitwith respect to which dis-
tribution has not yet commenced must be no greater
than $99,172.
Example 3. (i) The facts are the same as inEx-
ample 2, except that, instead of receiving a benefit of
$80,000 per year for ten years from Plan F, N receives
annual payments of $80,000 under a 10-year certain
and life annuity from Plan F.
(ii) Pursuant to paragraph (a)(3) of this section,
as of January 1, 2008, N’s annual benefit that is sub-
ject to the limits of section 415(b) and §1.415(b)–1(a)
is equal to the sum of the annual benefit determined
with respect to remaining amounts payable under the
distribution that commenced on January 1, 2002, the
annual benefit determined with respect to the accrued
benefit with respect to which distribution has not yet
commenced, and the annual benefit attributable to
prior distributions (computed pursuant to the rules of
paragraph (b) of this section).
(iii) N’s annual benefit determined with respect to
the remaining portion of the existing annuity (i.e.,a
four-year certain and life annuity) is determined pur-
suant to §1.415(b)–1(c)(2) as the greater of the an-
nual amount of a straight life annuity commencing
at the annuity starting date that has the same actu-
arial present value as the particular form of benefit
payable, computed using the interest rate and mortal-
ity table, or tabular factor, specified in the plan for
actuarial equivalence for the particular form of ben-
efit payable, or the annual amount of a 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 an interest
rate of 5% and the applicable mortality table under
section 417(e)(3). Using the plan’s factors for actu-
arial equivalence, the actuarially equivalent straight
life annuity is $80,608, and using the statutory fac-
tors for actuarial equivalence, the actuarially equiva-
2005–27 I.R.B.45July 5, 2005

lent straight life annuity is $80,577. Accordingly, N’s
annual benefit determined with respect to the remain-
ing 4-year certain and life annuity is equal to $80,608.
(iv) N’s annual benefit attributable to prior dis-
tributions is computed by adjusting the six annual
payments of $80,000 per year already made before
January 1, 2008, to an actuarially equivalent straight
life annuity commencing on January 1, 2008, in ac-
cordance with the rules set forth in paragraph (b)(3)
of this section. Pursuant to those rules, that actuari-
ally equivalent straight life annuity is computed us-
ing either the plan’s actuarial assumptions for apply-
ing offsets for prior distributions (here, a 6% inter-
est rate and the mortality table that applies under sec-
tion 417(e)(3) as of January 1, 2003), or the applica-
ble interest rate and the applicable mortality table un-
der section 417(e)(3), both determined as of January
1, 2008, whichever set of actuarial assumptions pro-
duces the greater actuarially equivalent annuity. The
actuarially equivalent straight life annuity computed
using the plan’s assumptions used for computing off-
sets is $54,494 per year, and the actuarially equivalent
straight life annuity computed using the applicable in-
terest rate and the applicable mortality table as of Jan-
uary 1, 2008, is $48,689 per year. Thus, N’s annual
benefit attributable to prior distributions is $54,494.
(v) To comply with the limitations of section 415,
N’s annual benefit determined with respect to the ac-
crued benefit with respect to which distribution has
not yet commenced must be no greater than the oth-
erwise applicable limit on the annual benefit (i.e.,the
lesser of $180,000 or 100% of N’s average compen-
sation for the highest 3 years) minus $135,102 (the
$80,608 annual benefit attributable to the remaining
payments under the existing form of distribution, plus
the $54,494 annual benefit attributable to prior dis-
tributions). Thus, for example, to comply with the
dollar limitation of section 415(b)(1)(A), N’s annual
benefit determined with respect to the accrued bene-
fit with respect to which distribution has not yet com-
menced must be no greater than $44,898.
Example 4. (i) Participant P retired on January
1, 2004, at age 65, with average compensation for
the period of P’s high 3 years service of $190,000.
P commenced receiving a straight life annuity of
$165,000 from Plan E as of January 1, 2004. Plan
E adjusts benefit payments to reflect increases in
the applicable limitations of section 415(b) in accor-
dance with the safe harbor methodology set forth in
§1.415(d)–1(a)(5). As of January 1, 2005, pursuant
to an adjustment under section 415(d) that applies
to P’s benefit payments under the terms of the plan,
annual payments to P from Plan E are adjusted to
$170,000, and as of January 1, 2007, pursuant to
another such adjustment (under which the section
415(b)(1)(A) dollar limit is assumed to increase to
$175,000 for 2007), annual payments to P from Plan
E are adjusted to $175,000. On December 1, 2007,
P elected to change the form of the remainder of the
benefit payable to P under Plan E to a single-sum
distribution payable as of January 1, 2008. P re-
ceives a single-sum distribution of $1,769,157 on
January 1, 2008. It is assumed for purposes of this
example that the section 417(e)(3) interest rate that
applies to a distribution from Plan E as of January
1, 2004, is 5.25%, and that the section 417(e)(3)
interest rate that applies to a distribution from Plan
E as of January 1, 2008, is 6%. The normal form of
benefit under Plan E is a straight life annuity. Plan E
provides a QPSA to all married participants without
charge. Plan E provides that, for purposes of adjust-
ing the dollar limitation under section 415(b)(1)(A)
for commencement before age 62 or after age 65,
no adjustment is made to reflect the probability of a
participant’s death between the annuity starting date
and the participant’s attainment of age 62 or between
the participant’s attainment of age 65 and the annuity
starting date. Under Plan E, benefits commencing af-
ter the age of 65 are actuarially adjusted to reflect the
later commencement date using the plan’s generally
applicable assumptions for actuarial equivalence.
(ii) To comply with the limitations of section
415 for the 2008 limitation year, Plan E must satisfy
two requirements. First, under paragraph (c)(1) of
this section, Plan E must limit payments to P so
that the sum of the annual benefit attributable to the
currently commencing distribution plus the annual
benefit attributable to prior distributions is within the
limitations of section 415(b) that apply to a benefit
commencing at the annuity starting date for the dis-
tribution that commences in 2008. Second, under
paragraph (c)(2) of this section, the payments under
the annuity that are paid before January 1, 2008,
plus the single-sum distribution made on January 1,
2008, must satisfy the requirements of §1.415(b)–1
determined as of January 1, 2004, using the interest
rates and mortality table applicable as of January 1,
2004. Pursuant to paragraph (c)(2) of this section,
Plan E does not fail to satisfy this latter require-
ment if payments reflect cost-of-living adjustments
pursuant to section 415(d) for payments no earlier
than the time those adjustments are effective and in
amounts no greater than amounts determined under
§1.415(d)–1(a)(5).
(iii) To satisfy the second requirement described
in paragraph (ii) of thisExample 4, the payments un-
der the annuity that are paid before January 1, 2008
(i.e., $165,000 during 2004, $170,000 during 2005,
$170,000 during 2006, and $175,000 during 2007),
plus the single-sum distribution of $1,769,157 made
on January 1, 2008, must satisfy the requirements of
§1.415(b)–1 determined as of January 1, 2004, us-
ing the interest rates and mortality table applicable as
of January 1, 2004. As of January 1, 2004, the ac-
tuarially equivalent straight life annuity with respect
to those payments is $176,698 using the applicable
interest rate (assumed to be 5.25%) and the applica-
ble mortality table for that date. As of January 1,
2004, the actuarially equivalent straight life annuity
with respect to those payments is $170,239 using the
plan’s actuarial assumptions (a 6% interest rate and
the applicable mortality table as of January 1, 2003).
The annual benefit attributable to those payments is
the greater of the two amounts, or $176,698. This
amount exceeds the applicable dollar limitation as of
January 1, 2004 (i.e., $165,000). Accordingly, with-
out application of the special rule for cost-of-living
adjustments, Plan E would fail to satisfy this second
requirement.
(iv) Pursuant to the special rule for cost-of-liv-
ing adjustments under paragraph (c)(2) of this sec-
tion, Plan E does not fail to satisfy the second re-
quirement described in paragraph (ii) of thisExam-
ple 4if payments reflect cost-of-living adjustments
pursuant to section 415(d) for payments no earlier
than the time those adjustments are effective and in
amounts no greater than amounts determined under
§1.415(d)–1(a)(5). Accordingly, the payment stream
that must satisfy the requirements of §1.415(b)–1 de-
termined as of January 1, 2004, using the interest rates
and mortality table applicable as of January 1, 2004,
is the payment stream consisting of $165,000 paid
each year during 2004 through 2007, and $1,621,727
($1,769,157 multiplied by 165,000/180,000) paid on
January 1, 2008. As of January 1, 2004, the actuar-
ially equivalent straight life annuity with respect to
those payments is $158,930 using the applicable in-
terest rate (assumed to be 5.25%) and the applicable
mortality table for that date. As of January 1, 2004,
the actuarially equivalent straight life annuity with re-
spect to those payments is $165,000 using the plan’s
actuarial assumptions (a 6% interest rate and the ap-
plicable mortality table as of January 1, 2003). The
annual benefit attributable to those payments is the
greater of the two amounts, or $165,000, which satis-
fies the applicable limitations as of January 1, 2004.
Accordingly, Plan E satisfies the second requirement
described in paragraph (ii) of thisExample 4using
the special rule for cost-of-living adjustments under
paragraph (c)(2) of this section.
(v) For purposes of determining compliance
with the first requirement described in paragraph (ii)
of thisExample 4, P’s annual benefit attributable
to prior distributions is computed by adjusting the
annual payments already received ($165,000 for
2004, $170,000 for 2005, $170,000 for 2006, and
$175,000 for 2007) already made before January
1, 2008, to an actuarially equivalent straight life
annuity commencing on January 1, 2008, in accor-
dance with the rules set forth in paragraph (b)(3) of
this section. Pursuant to those rules, that actuarially
equivalent straight life annuity is computed using
either the plan’s actuarial assumptions for applying
offsets for prior distributions (here, a 6% interest
rate and the mortality table that applies under section
417(e)(3) as of January 1, 2003), or an interest rate of
5% and the applicable mortality table under section
417(e)(3), both determined as of January 1, 2008,
whichever set of actuarial assumptions produces the
greater actuarially equivalent annuity. The actuari-
ally equivalent straight life annuity computed using
the plan’s assumptions used for computing offsets
is $80,453 per year, and the actuarially equivalent
straight life annuity computed using a 5% interest
rate and the applicable mortality table as of January
1, 2008, is $75,046 per year. Thus, P’s annual benefit
attributable to prior distributions is $80,453.
(vi) P’s annual benefit attributable to the single-
sum distribution made on January 1, 2008, is deter-
mined as the greater of the annual amount of the ac-
tuarially equivalent straight life annuity commencing
at the same age (determined using the plan’s actu-
arial factors), and the annual amount of the actuar-
ially equivalent straight life annuity commencing at
the same age (determined using the applicable inter-
est rate and applicable mortality table). Based on the
factors used in the plan to determine the actuarially
equivalent lump sum (in this case, an interest rate of
6% and the applicable mortality table as of January 1,
2003), $1,769,157 payable as a single sum at age 69
is actuarially equivalent to an immediate straight life
annuity at age 69 of $180,000. Based on the appli-
cable interest rate and the applicable mortality table,
$1,769,157 payable as a single sum at age 69 is ac-
tuarially equivalent to an immediate straight life an-
nuity at age 69 of $170,451. With respect to the sin-
July 5, 2005462005–27 I.R.B.

gle-sum distribution, P’s annual benefit is equal to the
greater of the two resulting amounts, or $180,000.
(vii) To satisfy the first requirement described in
paragraph (ii) of thisExample 4, P’s annual benefit
attributable to prior distributions plus P’s annual ben-
efit attributable to the single-sum distribution, deter-
mined as of January 1, 2008, must not exceed the ap-
plicable limitations. The sum of those annual bene-
fits is $260,453. The age-adjusted dollar limitation
as of January 1, 2008, is determined as the lesser of
the section 415(b)(1)(A) dollar limit multiplied by the
ratio of the annuity payable at age 69 to the annuity
that would be payable at age 65 based on the same ac-
crued benefit (both determined before the application
of section 415), or the straight life annuity payable at
age 69 that is actuarially equivalent, using 5% interest
and the applicable mortality table, to the straight life
annuity payable at age 65. In this case, the age-ad-
justed section 415(b)(1)(A) dollar limit at age 69 is
$244,013, which is the lesser of 265,320 (the straight
life annuity at age 69 that is actuarially equivalent to
an annuity of $180,000 commencing at age 65, de-
termined using the plan’s interest rate of 6% and the
applicable mortality table that applies as of January
1, 2003, without a mortality decrement for the pe-
riod between 65 and 69) and $244,013 (the straight
life annuity at age 69 that is actuarially equivalent to
an annuity of $180,000 commencing at age 65, de-
termined using 5% interest and the applicable mor-
tality table, without a mortality decrement for the pe-
riod between 65 and 69)). The compensation-based
limitation of section 415(b)(1)(B) for P in 2008 is
$209,000 ($190,000 multiplied by the product of the
annual adjustment factors for 2005 through 2008, or
1.1). Accordingly, the limitation under section 415(b)
for P as of January 1, 2008, is $209,000 (the lesser of
the dollar limitation and the compensation limitation
as of that date).
(viii) Because the sum of P’s annual benefit
attributable to prior distributions plus P’s annual
benefit attributable to the single-sum distribution
($260,453) exceeds the limitation under section
415(b) determined as of January 1, 2008 ($209,000),
the plan fails to satisfy the requirements of section
415(b). In addition, if the plan limits the amount
of the single-sum distribution in order to satisfy the
requirements of section 415(b) in this case, there
may be a forfeiture of a participant’s accrued benefit
in violation of section 411(a) in some cases where
a participant converts annuity payments to a sin-
gle-sum distribution.
Par. 9. Section 1.415(c)–1 is added to
read as follows:
§1.415(c)–1 Limitations for defined
contribution plans.
(a)General rules—(1)Maximum limi-
tations. Under section 415(c) and this sec-
tion, to satisfy the provisions of section
415(a) for any limitation year, except as
provided by paragraph (a)(3) of this sec-
tion, the annual additions (as defined in
paragraph (b) of this section) credited to
the account of a participant in a defined
contribution plan for the limitation year
must not exceed the lesser of—
(i) $40,000 (adjusted pursuant to sec-
tion 415(d) and §1.415(d)–1(b)); or
(ii) 100% of the participant’s compen-
sation (as defined in §1.415(c)–2) for the
limitation year.
(2)Defined contribution plan—(i)Def-
inition. For purposes of section 415 and
regulations thereunder, adefined contri-
bution planmeans a defined contribution
plan within the meaning of section 414(i)
(including the portion of a plan treated as
a defined contribution plan under the rules
of section 414(k)) that is—
(A)Aplandescribedinsection401(a)
which includes a trust which is exempt
from tax under section 501(a);
(B)Anannuityplandescribedinsec-
tion 403(a); or
(C) A simplified employee pension de-
scribedinsection408(k).
(ii)Additional plans treated as defined
contribution plans—(A)In general.Con-
tributions to the types of arrangements de-
scribed in paragraphs (a)(2)(ii)(B) through
(D) of this section are treated as contribu-
tions to defined contribution plans for pur-
poses of section 415 and regulations there-
under.
(B)Employee contributions to a defined
benefit plan. Mandatory employee contri-
butions to a defined benefit plan are treated
as contributions to a defined contribution
plan. For this purpose, contributions that
are picked up by the employer as described
in section 414(h)(2) are not considered em-
ployee contributions.
(C)Individual medical accounts un-
der section 401(h). Pursuant to section
415(l)(1), contributions allocated to any
individual medical account which is part
of a pension or annuity plan established
pursuant to section 401(h) are treated as
contributions to a defined contribution
plan.
(D)Post-retirement medical accounts
for key employees. Pursuant to section
419A(d)(2), amounts attributable to med-
ical benefits allocated to an account estab-
lished for a key employee (i.e.,anyem-
ployee who, at any time during the plan
year or any preceding plan year, is or was a
key employee as defined in section 416(i))
pursuant to section 419A(d)(1) are treated
as contributions to a defined contribution
plan.
(iii)Section 403(b) annuity contracts.
Annual additions under an annuity con-
tract described in section 403(b) are treated
as annual additions under a defined contri-
bution plan for purposes of this section.
(3)Alternative contribution limita-
tions—(i)Church plans. For alternative
contribution limitations relating to church
plans, see paragraph (d) of this section.
(ii)Special rules for medical benefits.
For alternative contribution limitations re-
lating to certain medical benefits, see para-
graph (e) of this section.
(iii)Employee stock ownership plans.
For additional rules relating to employee
stock ownership plans, see paragraph (f) of
this section.
(b)Annual additions—(1)In gen-
eral—(i)General definition.Theterm
annual additionmeans, for purposes of
this section, the sum, credited to a par-
ticipant’s account for any limitation year,
of—
(A) Employer contributions;
(B) Employee contributions; and
(C) Forfeitures.
(ii)Certain excess amounts treated as
annual additions. Contributions do not
fail to be annual additions merely because
they are excess contributions (as described
in section 401(k)(8)(B)) or excess aggre-
gate contributions (as described in section
401(m)(6)(B)), or merely because excess
contributions or excess aggregate contri-
butions are corrected through distribution.
(iii)Direct transfers between defined
contribution plans. The direct transfer of
funds or employee contributions from one
defined contribution plan to another de-
fined contribution plan does not give rise
to an annual addition.
(iv)Reinvested ESOP dividends.
The reinvestment of dividends on em-
ployer securities under an employee
stock ownership plan pursuant to sec-
tion 404(k)(2)(A)(iii)(II) does not give
rise to an annual addition.
(2)Employer contributions—(i)
Amounts treated as annual additions.
For purposes of paragraph (b)(1)(i)(A) of
this section, the termannual additions
includes employer contributions credited
to the participant’s account for the limita-
tion year and other allocations described
in paragraph (b)(4) of this section that
are made during the limitation year. See
paragraph (b)(6) of this section for timing
rules applicable to annual additions with
respect to employer contributions.
(ii)Amounts not treated as annual addi-
tions—(A)Certain restorations of accrued
2005–27 I.R.B.47July 5, 2005

benefits. The restoration of an employee’s
accrued benefits by the employer in ac-
cordance with section 411(a)(3)(D) or sec-
tion 411(a)(7)(C) or resulting from the re-
payment of cashouts under a governmental
plan (as described in section 415(k)(3)) is
not considered an annual addition for the
limitation year in which the restoration oc-
curs. (See §1.411(a)–7(d)(6)(iii)(B).)
(B)Catch-up contributions. Catch-up
contributions made in accordance with
section 414(v) and §1.414(v)–1 do not
give rise to annual additions.
(C)Restorative payments.Arestora-
tive payment that is allocated to a partic-
ipant’s account does not give rise to an an-
nual addition for any limitation year. For
this purpose, restorative payments are pay-
ments made to restore losses to a plan
resulting from actions by a fiduciary for
which there is reasonable risk of liability
for breach of a fiduciary duty under Title I
of ERISA, where plan participants who are
similarly situated are treated similarly with
respect to the payments. Generally, pay-
ments to a defined contribution plan are
restorative payments only if the payments
are made in order to restore some or all
of the plan’s losses due to an action (or
a failure to act) that creates a reasonable
risk of liability for such a breach of fidu-
ciary duty (other than a breach of fiduciary
duty arising from failure to remit contribu-
tions to the plan). This includes payments
to a plan made pursuant to a Department
of Labor order, the Department of Labor’s
Voluntary Fiduciary Correction Program,
or a court-approved settlement, to restore
losses to a qualified defined contribution
plan on account of the breach of fiduciary
duty (other than a breach of fiduciary duty
arising from failure to remit contributions
to the plan). However, payments made to
a plan to make up for losses due merely
to market fluctuations and other payments
that are not made on account of a reason-
able risk of liability for breach of a fidu-
ciary duty under Title I of ERISA are con-
tributions that give rise to annual additions
and are not restorative payments.
(D)Excess deferrals. Excess defer-
rals that are distributed in accordance with
§1.402(g)–1(e)(2) or (3) do not give rise to
annual additions.
(3)Employee contributions.For pur-
poses of paragraph (b)(1)(i)(B) of this sec-
tion, the termannual additionsincludes
mandatory employee contributions (as de-
fined in section 411(c)(2)(C) and the reg-
ulations thereunder) as well as voluntary
employee contributions. The term “annual
additions” does not include—
(i) Rollover contributions (as de-
scribed in sections 401(a)(31), 402(c)(1),
403(a)(4), 403(b)(8), 408(d)(3), and
457(e)(16)).
(ii) Repayments of loans made to a par-
ticipant from the plan;
(iii) Repayments of amounts de-
scribedinsection411(a)(7)(B)(inac-
cordance with section 411(a)(7)(C))
and section 411(a)(3)(D) (see
§1.411(a)–7(d)(6)(iii)(B)) or repay-
ment of contributions to a governmental
plan as described in section 415(k)(3); or
(iv) Employee contributions to a quali-
fied cost of living arrangement within the
meaning of section 415(k)(2)(B).
(4)Transactions with plan.TheCom-
missioner may in an appropriate case, con-
sidering all of the facts and circumstances,
treat transactions between the plan and the
employer, transactions between the plan
and the employee, or certain allocations
to participants’ accounts as giving rise to
annual additions. Further, the Commis-
sioner will treat a sale or exchange by the
employee or the employer that transfers
assets to a plan where the consideration
paid by the plan is less than the fair mar-
ket value of the assets transferred to the
plan as giving rise to an annual addition in
the amount of the difference between the
value of the assets transferred and the con-
sideration. A transaction described in this
paragraph (b)(4) may constitute a prohib-
ited transaction with the meaning of sec-
tion 4975(c)(1).
(5)Contributions other than cash.For
purposes of this paragraph (b), a contribu-
tion by the employer or employee of prop-
erty rather than cash is considered to be a
contributioninanamountequaltothefair
market value of the property on the date
the contribution is made. For this purpose,
the fair market value is the price at which
the property would change hands between
a willing buyer and a willing seller, neither
being under any compulsion to buy or to
sell and both having reasonable knowledge
of relevant facts. In addition, the contribu-
tion described in this paragraph (b)(5) may
constitute a prohibited transaction within
the meaning of section 4975(c)(1).
(6)Timing rules—(i)In general—(A)
Date of allocation. For purposes of this
paragraph (b), an annual addition is cred-
ited to the account of a participant for a par-
ticular limitation year if it is allocated to
the participant’s account under the terms
of the plan as of any date within that limi-
tation year. However, if the allocation is
dependent upon participation in the plan
as of any date subsequent to the date as of
which it is allocated, it is considered allo-
cated only at the end of the period of par-
ticipation upon which the allocation is con-
ditioned.
(B)Date of employer contributions.
For purposes of this paragraph (b), em-
ployer contributions are not treated as
credited to a participant’s account for a
particular limitation year unless the con-
tributions are actually made to the plan
no later than 30 days after the end of the
period described in section 404(a)(6) ap-
plicable to the taxable year with or within
which the particular limitation year ends.
If, however, contributions are made by an
employer exempt from Federal income tax
(including a governmental employer), the
contributions must be made to the plan no
later than the 15
th
day of the tenth calendar
month following the close of the taxable
year with or within which the particular
limitation year ends. If contributions are
made to a plan after the end of the pe-
riod during which contributions can be
made and treated as credited to a partici-
pant’s account for a particular limitation
year, allocations attributable to those con-
tributions are treated as credited to the
participant’s account for the limitation
year during which those contributions are
made.
(C)Date of employee contributions.
For purposes of this paragraph (b), em-
ployee contributions, whether voluntary
or mandatory, are not treated as credited
to a participant’s account for a particular
limitation year unless the contributions are
actually made to the plan no later than 30
days after the close of that limitation year.
(D)Date for forfeitures. A forfeiture is
treated as an annual addition for the limita-
tion year that contains the date as of which
it is allocated to a participant’s account as
a forfeiture.
(E)Treatment of elective contributions
as plan assets. The extent to which elec-
tive contributions constitute plan assets
for purposes of the prohibited transaction
provisions of section 4975 and Title I of
the Employee Retirement Income Security
July 5, 2005482005–27 I.R.B.

Act of 1974 (88 Stat. 829), Public Law
93–406 (ERISA), is determined in accor-
dance with regulations and rulings issued
by the Department of Labor. See 29 CFR
2510.3–102.
(ii)Special timing rules—(A)Correc-
tive contributions. For purposes of this
section, if, in a particular limitation year,
an employer allocates an amount to a par-
ticipant’s account because of an erroneous
forfeiture in a prior limitation year, or be-
cause of an erroneous failure to allocate
amounts in a prior limitation year, the al-
location will not be considered an annual
addition with respect to the participant
for that particular limitation year, but will
be considered an annual addition for the
prior limitation year to which it relates.
An example of a situation in which an
employer contribution might occur under
the circumstances described in the pre-
ceding sentence is a retroactive crediting
of service for an employee under 29 CFR
2530.200b–2(a)(3) in accordance with an
award of back pay. For purposes of this
paragraph (b)(6)(ii), if the amount so con-
tributed in the particular limitation year
takes into account actual investment gains
attributable to the period subsequent to
the year to which the contribution relates,
the portion of the total contribution that
consists of such gains is not considered as
an annual addition for any limitation year.
(B)Contributions for accumulated
funding deficiencies and previously waived
contributions—(1)Accumulated funding
deficiency. In the case of a defined contri-
bution plan to which the rules of section
412 apply, a contribution made to reduce
an accumulated funding deficiency will
be treated as if it were timely made for
purposes of determining the limitation
year in which the annual additions arising
from the contribution are made, but only
if the contribution is allocated to those
participants who would have received an
annual addition if the contribution had
been timely made.
(2)Previously waived contributions.In
the case of a defined contribution plan
to which the rules of section 412 apply
and for which there has been a waiver of
the minimum funding standard in a prior
limitation year in accordance with section
412(d), that portion of an employer con-
tribution in a subsequent limitation year
which, if not for the waiver, would have
otherwise been required in the prior lim-
itation year under section 412(a) will be
treated as if it were timely made (without
regard to the funding waiver) for purposes
of determining the limitation year in which
the annual additions arising from the con-
tribution are made, but only if the contribu-
tion is allocated to those participants who
would have received an annual addition
if the contribution had been timely made
(without regard to the funding waiver).
(3)Interest. For purposes of determin-
ing the amount of the annual addition un-
der paragraphs (b)(6)(ii)(B)(1)and(2), a
reasonable amount of interest paid by the
employer is disregarded. However, any in-
terest paid by the employer that is in excess
of a reasonable amount, as determined by
the Commissioner, is taken into account as
an annual addition for the limitation year
during which the contribution is made.
(C)Simplified employee pensions
(SEPs). For purposes of this paragraph
(b), amounts contributed to a simplified
employee pension described in section
408(k) are treated as allocated to the indi-
vidual’s account as of the last day of the
limitation year ending with or within the
taxable year for which the contribution is
made.
(D)Treatment of certain contributions
made pursuant to veterans’ reemployment
rights. If, in a particular limitation year,
an employer contributes an amount to an
employee’s account with respect to a prior
limitation year and such contribution is re-
quired by reason of such employee’s rights
under chapter 43 of title 38, United States
Code, resulting from qualified military ser-
vice, as specified in section 414(u)(1), then
such contribution is not considered an an-
nual addition with respect to the employee
for that particular limitation year in which
the contribution is made, but, in accor-
dance with section 414(u)(1)(B), is consid-
ered an annual addition for the limitation
year to which the contribution relates.
(c)Examples. The following examples
illustrate the rules of paragraphs (a) and (b)
of this section:
Example 1. (i) P is a participant in a qualified
profit-sharing plan maintained by his employer,
ABC Corporation. The limitation year for the plan
is the calendar year. P’s compensation (as defined
in §1.415(c)–2) for the current limitation year is
$30,000.
(ii) Because the compensation limitation de-
scribed in section 415(c)(1)(B) applicable to P for
the current limitation year is lower than the dollar
limitation described in section 415(c)(1)(A), the
maximum annual addition which can be allocated to
P’s account for the current limitation year is $30,000
(100% of $30,000).
Example 2. (i) Assume the same facts as inEx-
ample 1, except that P’s compensation for the current
limitation year is $140,000.
(ii) The maximum amount of annual additions
that may be allocated to P’s account in the current
limitation year is the lesser of $140,000 (100% of
P’s compensation) or the dollar limitation of sec-
tion 415(c)(1)(A) as in effect as of January 1 of the
calendar year in which the current limitation year
ends. If, for example, the dollar limitation of section
415(c)(1)(A) in effect as of January 1 of the calendar
year in which the current limitation year ends is
$44,000, then the maximum annual addition that can
be allocated to P’s account for the current limitation
year is $44,000.
Example 3. (i) Employer N maintains a qualified
profit-sharing plan that uses the calendar year as its
plan year and its limitation year. N’s taxable year is
a fiscal year beginning June 1 and ending May 31.
Under the terms of the profit-sharing plan maintained
by N, employer contributions are made to the plan
two months after the close of N’s taxable year and
are allocated as of the last day of the plan year ending
within the taxable year (and are not conditioned on
future participation). Thus, employer contributions
for the 2007 calendar year limitation year are made
on July 31, 2008 (the date that is two months after
the close of N’s taxable year ending May 31, 2008)
and are allocated as of December 31, 2007.
(ii) Because the employer contributions are actu-
ally made to the plan no later than 30 days after the
end of the period described in section 404(a)(6) with
respect to N’s taxable year ending May 31, 2008, the
contributions will be considered annual additions for
the 2007 calendar year limitation year.
Example 4. (i) Assume the same facts as inExam-
ple 3, except that the plan year for the profit-sharing
plan maintained by N is the 12-month period begin-
ning on February 1 and ending on January 31. The
limitation year continues to be the calendar year. Un-
der the terms of the plan, an employer contribution
which is made to the plan on July 31, 2008, is allo-
cated to participants’ accounts as of January 31, 2008.
(ii) Because the last day of the plan year is in
the 2008 calendar year limitation year, and because,
under the terms of the plan, employer contributions
are allocated to participants’ accounts as of the last
day of the plan year, the contributions are considered
annual additions for the 2008 calendar year limitation
year.
Example 5. (i) XYZ Corporation maintains a
profit-sharing plan to which a participant may make
voluntary employee contributions for any year not
to exceed 10% of the participant’s compensation
for the year. The plan permits a participant to make
retroactive make-up contributions for any year for
which the participant contributed less than 10% of
compensation. XYZ uses the calendar year as the
plan year and the limitation year. Under the terms
of the plan, voluntary employee contributions are
credited to a participant’s account for a particular
limitation year if such contributions are allocated to
the participant’s account as of any date within that
limitation year. Participant A’s compensation is as
follows—
2005–27 I.R.B.49July 5, 2005

Limitation yearCompensation
2007
$30,000
2008
$32,000
2009
$34,000
2010
$36,000
(ii) Participant A makes no voluntary employee
contributions during limitation years 2007, 2008,
and 2009. On October 1, 2010, participant A makes
a voluntary employee contribution of $13,200 (10%
of A’s aggregate compensation for limitation years
2007, 2008, 2009, and 2010 of $132,000). Under
the terms of the plan, $3,000 of this 2010 contribu-
tion is allocated to A’s account as of limitation year
2007; $3,200 is allocated to A’s account of limitation
year 2008; $3,400 is allocated to A’s account as of
limitation year 2009, and $3,600 is allocated to A’s
account as of limitation year 2010.
(iii) Under the rule set forth in paragraph
(c)(6)(ii)(C) of this section, employee contributions
will not be considered credited to a participant’s
account for a particular limitation year for section
415 purposes unless the contributions are actually
made to the plan no later than 30 days after the close
of that limitation year. Thus, A’s voluntary employee
contribution of $13,200 made on October 1, 2010,
would be considered as credited to A’s account only
for the 2010 calendar year limitation year, notwith-
standing the plan provisions.
(d)Special rules relating to church
plans—(1)Alternative contribution limi-
tation—(i)In general. Pursuant to section
415(c)(7)(A), notwithstanding the general
rule of paragraph (a)(1) of this section,
additions for a section 403(b) annuity
contract for a year with respect to a partic-
ipant who is an employee of a church or
a convention or association of churches,
including an organization described in
section 414(e)(3)(B)(ii), when expressed
as an annual addition to such participant’s
account, are treated as not exceeding the
limitation of paragraph (a)(1) of this sec-
tion if such annual additions for the year
are not in excess of $10,000.
(ii)$40,000 aggregate limitation.The
total amount of annual additions with re-
spect to any participant that are treated as
not exceeding the limitation of paragraph
(a)(1) of this section (taking into account
the rule of paragraph (d)(3) of this section)
pursuant to the rule of paragraph (d)(1)(i)
of this section even though those annual
additions would otherwise exceed that
limitation cannot exceed $40,000. Thus,
the aggregate of amounts for all limitation
years that would exceed the limitation of
this section but for this paragraph (d)(1) is
limited to $40,000.
(2)Years of service taken into account
for duly ordained, commissioned, or li-
censed ministers or lay employees.For
purposes of this paragraph (d)—
(i) All years of service by an individ-
ual as an employee of a church, or a con-
vention or association of churches, includ-
ing an organization described in section
414(e)(3)(B)(ii), areconsidered as years of
service for one employer; and
(ii) All amounts contributed for annu-
ity contracts by each such church (or con-
vention or association of churches) during
such years for the employee are considered
to have been contributed by one employer.
(3)Foreign missionaries.Pursuantto
section 415(c)(7)(C), in the case of any in-
dividual described in paragraph (d)(1) of
this section performing any services for the
church outside the United States during the
limitation year, additions for an annuity
contract under section 403(b) for any year
are not treated as exceeding the limitation
of paragraph (a)(1) of this section if such
annual additions for the year do not exceed
the greater of $3,000 or the employee’s in-
cludible compensation with respect to ser-
vices for the church performed outside the
United States during the limitation year.
(4)Church, convention or association
of churches. For purposes of this para-
graph (d), the termschurchandconvention
or association of churcheshave the same
meaning as when used in section 414(e).
(5)Examples. The following examples
illustrate the rules of this paragraph (d).
Example 1. (i) E is an employee of ABC Church
earning $7,000 during each calendar year. E partici-
pates in a section 403(b) annuity contract maintained
by ABC Church beginning in 2007. The limitation
year for the plan coincides with the calendar year.
ABC Church contributes $10,000 to be allocated to
E’s account under the plan for 2007.
(ii) Under paragraph (d)(1) of this section, this
allocation is treated as not violating the limits es-
tablished in paragraph (a)(1) of this section because
it does not exceed $10,000. Moreover, since an
annual addition of $10,000 would otherwise exceed
the limitation of paragraph (a)(1) of this section by
$3,000, $3,000 is counted toward the aggregate limi-
tation specified in paragraph (d)(1)(ii) of this section
for 2007. Accordingly, ABC Church may make
such allocations for 13 years (e.g., for 2007 through
2019) without exceeding theaggregate limitation of
$40,000 specified in paragraph (d) of this section.
For the fourteenth year, ABC Church could allocate
only $8,000 to E’s account (i.e., the $7,000 limitation
computed under paragraph (a)(1)(ii) of this section,
plus the remaining $1,000 of the $40,000 aggregate
limitation under paragraph (d)(1)(ii) of this section
on annual additions in excess of the limits under
paragraph (a)(1) of this section).
Example 2. (i) F is an employee of XYZ Church.
F earns $2,000 during each calendar year for ser-
vices he provides to XYZ Church, all of which are
performed outside the United States during each cal-
endar year. F participates in a section 403(b) annu-
ity contract maintained by ABC Church beginning in
2007. The limitation year for the plan coincides with
the calendar year. ABC Church contributes $10,000
to be allocated to F’s account under the plan for 2007.
(ii) Under paragraph (d)(1) of this section, this
allocation is treated as not violating the limits es-
tablished in paragraph (a)(1) of this section because
it does not exceed $10,000. Moreover, since an
annual addition of $10,000 would otherwise exceed
the limitation of paragraph (a)(1) of this section by
$7,000 (i.e., the excess of $10,000 over the greater
of the $2,000 compensation limitation under section
415(c)(1)(B) or the $3,000 section 415(c)(7)(C)
amount), XYZ Church may make such allocations
for 5 years (e.g., for 2006 through 2010) without
exceeding the aggregate limitation of $40,000 spec-
ified in paragraph (d) of this section. In 2012, XYZ
Church may contribute $8,000 to be allocated to F’s
account under the plan (i.e., the $3,000 limitation
computed under paragraph (d)(3) of this section,
plus the remaining $5,000 of the $40,000 aggregate
limitation under paragraph (d)(1)(ii) of this section
on annual additions in excess of the limits under
paragraph (a)(1) of this section). For years after
2012, pursuant to paragraph (d)(3) of this section,
XYZ Church could allocate $3,000 per year to F’s
account.
(e)Special rules for medical benefits.
The limit under paragraph (a)(1)(ii) of
this section (i.e., 100% of the participant’s
compensation for the limitation year) does
not apply to—
(1) An individual medical account (as
defined in section 415(l)); or
(2) A post-retirement medical benefits
account for key employees (as defined in
section 419A(d)(1)).
(f)Special rules for employee stock
ownership plans—(1)In general. Special
rules apply to employee stock ownership
July 5, 2005502005–27 I.R.B.

plans, as provided in paragraphs (f)(2)
through (f)(4) of this section.
(2)Determination of annual additions
for leveraged ESOP—(i)In general.Ex-
cept as provided in this paragraph (f), in the
case of an employee stock ownership plan
to which an exempt loan as described in
§54.4975–7(b) has been made, the amount
of employer contributions that is consid-
ered an annual addition for the limitation
year is calculated with respect to employer
contributions of both principal and interest
used to repay that exempt loan for the lim-
itation year.
(ii)Employer stock that has decreased
in value. A plan may provide that, in lieu
of computing annual additions in accor-
dance with paragraph (f)(2)(i) of this sec-
tion, annual additions with respect to a loan
repayment described in paragraph (f)(2)(i)
of this section are determined as the fair
market value of shares released from the
suspense account on account of the repay-
ment and allocated to participants for the
limitation year if that amount is less than
the amount determined in accordance with
paragraph (f)(2)(i) of this section.
(3)Exclusions from annual additions
for certain ESOPs that allocate to a broad
range of participants—(i)General rule.
Pursuant to section 415(c)(6), in the case
of an employee stock ownership plan (as
described in section 4975(e)(7)) that meets
the requirements of paragraph (f)(3)(ii) of
this section for a limitation year, the limita-
tions imposed by this section do not apply
to—
(A) Forfeitures of employer securities
(within the meaning of section 409(l))
under such an employee stock ownership
plan if such securities were acquired with
the proceeds of a loan (as described in
section 404(a)(9)(A)); or
(B) Employer contributions to such an
employee stock ownership plan which are
deductible under section 404(a)(9)(B) and
charged against the participant’s account.
(ii)Employee stock ownership plans to
which the special exclusion applies.An
employee stock ownership plan meets the
requirements of this paragraph (f)(3)(ii)
for a limitation year if no more than one-
third of the employer contributions for the
limitation year that are deductible under
section 404(a)(9) are allocated to highly
compensated employees (within the mean-
ingofsection414(q)).
(4)Gratuitous transfers under section
664(g)(1). The amount of any qualified
gratuitous transfer (as defined in section
664(g)(1)) allocated to a participant for
any limitation year is not taken into ac-
count in determining whether any other
annual addition exceeds the limitations
imposed by this section, but only if the
amount of the qualified gratuitous transfer
does not exceed the limitations imposed
by section 415.
Par. 10. Section 1.415(c)–2 is added to
read as follows:
§1.415(c)–2 Compensation.
(a)General definition. Except as oth-
erwise provided in this section, compensa-
tion from the employer within the mean-
ing of section 415(c)(3), which is applied
for purposes of section 415 and regulations
thereunder, means all items of remunera-
tion described in paragraph (b) of this sec-
tion, but excludes the items of remunera-
tion described in paragraph (c) of this sec-
tion. Paragraph (d) of this section pro-
vides safe harbor definitions of compen-
sation that are permitted to be provided in
a plan in lieu of the generally applicable
definition of compensation. Paragraph (e)
of this section provides timing rules relat-
ing to compensation. Paragraph (f) of this
section provides rules regarding the appli-
cation of the rules of section 401(a)(17)
to the definition of compensation for pur-
poses of section 415. Paragraph (g) of
this section provides special rules relating
to the determination of compensation, in-
cluding rules for determining compensa-
tion for a section 403(b) annuity contract,
rules for determining the compensation of
employees of controlled groups or affili-
ated service groups, rules for disabled em-
ployees, rules relating to foreign compen-
sation, rules regarding deemed section 125
compensation, and rules for employees in
qualified military service.
(b)Items includible as compensation.
For purposes of applying the limitations
of section 415, except as otherwise pro-
vided in this section, the termcompensa-
tionmeans remuneration for services of
the following types—
(1) The employee’s wages, salaries,
fees for professional services, and other
amounts received (without regard to
whether or not an amount is paid in cash)
for personal services actually rendered in
the course of employment with the em-
ployer maintaining the plan, to the extent
that the amounts are includible in gross
income (or to the extent amounts deferred
at the election of the employee would
be includible in gross income but for the
rules of section 402(e)(3), 402(h)(1)(B),
402(k), 125(a), 132(f)(4), or 457(b)).
These amounts include, but are not lim-
ited to, commissions paid to salespersons,
compensation for services on the basis of
a percentage of profits, commissions on
insurance premiums, tips, bonuses, fringe
benefits, and reimbursements or other ex-
pense allowances under a nonaccountable
plan as described in §1.62–2(c).
(2)Inthecaseofanemployeewhois
an employee within the meaning of sec-
tion 401(c)(1) and the regulations thereun-
der, the employee’s earned income (as de-
scribed in section 401(c)(2) and the regula-
tions thereunder), plus amounts deferred at
the election of the employee that would be
includible in gross income but for the rules
of section 402(e)(3), 402(h)(1)(B), 402(k),
or 457(b).
(3) Amounts described in section
104(a)(3), 105(a), or 105(h), but only to
the extent that these amounts are includi-
ble in the gross income of the employee.
(4) Amounts paid or reimbursed by the
employer for moving expenses incurred by
an employee, but only to the extent that
at the time of the payment it is reason-
able to believe that these amounts are not
deductible by the employee under section
217.
(5) The value of a nonqualified option
granted to an employee by the employer,
but only to the extent that the value of the
option is includible in the gross income of
the employee for the taxable year in which
granted.
(6) The amount includible in the gross
income of an employee upon making the
election described in section 83(b).
(c)Items not includible as compensa-
tion.Thetermcompensationdoes not in-
clude—
(1) Contributions (other than elec-
tive contributions described in section
402(e)(3), section 408(k)(6), section
408(p)(2)(A)(i), or section 457(b)) made
by the employer to a plan of deferred
compensation (including a simplified em-
ployee pension described in section 408(k)
or a simple retirement account described
in section 408(p), and whether or not qual-
2005–27 I.R.B.51July 5, 2005

ified) to the extent that the contributions
are not includible in the gross income of
the employee for the taxable year in which
contributed. Additionally, any distribu-
tions from a plan of deferred compen-
sation (whether or not qualified) are not
considered as compensation for section
415 purposes, regardless of whether such
amounts are includible in the gross income
of the employee when distributed. How-
ever, if the plan so provides, any amounts
received by an employee pursuant to an
unfunded nonqualified plan are permitted
to be considered as compensation for sec-
tion 415 purposes in the year the amounts
are actually received.
(2) Amounts realized from the exercise
of a nonqualified option, or when restricted
stock or other property held by an em-
ployee either becomes freely transferable
or is no longer subject to a substantial risk
of forfeiture (see section 83 and the regu-
lations thereunder).
(3) Amounts realized from the sale, ex-
change, or other disposition of stock ac-
quired under a qualified stock option.
(4) Other amounts that receive special
tax benefits, such as premiums for group-
term life insurance (but only to the ex-
tent that the premiums are not includible
in the gross income of the employee and
are not salary reduction amounts that are
describedinsection125).
(5) Other items of remuneration that are
similar to any of the items listed in para-
graphs (c)(1) through (c)(4) of this section.
(d)Safe harbor rules with respect to
plan’s definition of compensation—(1)In
general. Paragraphs (d)(2) through (4) of
this section contain safe harbor definitions
of compensation that are automatically
considered to satisfy section 415(c)(3) if
specified in the plan. The Commissioner
may, in revenue rulings, notices, and other
guidance of general applicability pub-
lished in the Internal Revenue Bulletin
(see §601.601(d) of this chapter), provide
additional definitions of compensation that
are treated as satisfying section 415(c)(3).
(2)Simplified compensation.Thesafe
harbor definition of compensation under
this paragraph (d)(2) includes only those
items specified in paragraph (b)(1) or (2)
of this section and excludes all those items
listed in paragraph (c) of this section.
(3)Section 3401(a) wages.Thesafe
harbor definition of compensation un-
der this paragraph (d)(3) includes wages
within the meaning of section 3401(a)
(for purposes of income tax withholding
at the source), plus amounts deferred at
the election of the employee that would
be included in wages if not deferred pur-
suant to the rules of section 402(e)(3),
402(h)(1)(B), 402(k), or 457(b). How-
ever, any rules that limit the remuneration
included in wages based on the nature or
location of the employment or the services
performed (such as the exception for agri-
cultural labor in section 3401(a)(2)) are
disregarded for this purpose.
(4)Information required to be reported
under sections 6041, 6051 and 6052.
The safe harbor definition of compensa-
tion under this paragraph (d)(4) includes
amounts that are compensation under the
safe harbor definition of paragraph (d)(3)
of this section, plus all other payments
of compensation to an employee by his
employer (in the course of the employer’s
trade or business) for which the employer
is required to furnish the employee a
written statement under sections 6041(d),
6051(a)(3), and 6052. See §§1.6041–1(a),
1.6041–2(a)(1), 1.6052–1, and 1.6052–2,
and also see §31.6051–1(a)(1)(i)(C) of
this chapter. This safe harbor definition of
compensation may be modified to exclude
amounts paid or reimbursed by the em-
ployer for moving expenses incurred by
an employee, but only to the extent that, at
the time of the payment, it is reasonable to
believe that these amounts are deductible
by the employee under section 217.
(e)Timing rules—(1)In general—(i)
Payment during the limitation year.Ex-
cept as otherwise provided in this para-
graph (e), in order to be taken into account
for a limitation year, compensation within
the meaning of section 415(c)(3) must be
actually paid or made available to an em-
ployee (or, if earlier, includible in the gross
income of the employee) within the limi-
tation year. For this purpose, compensa-
tion is treated as paid on a date if it is ac-
tually paid on that date or it would have
been paid on that date but for an elec-
tion under section 401(k), 403(b), 408(k),
408(p)(2)(A)(i), 457(b), 132(f), or 125.
(ii)Payment prior to severance from
employment. In order to be taken into ac-
count for a limitation year, compensation
within the meaning of section 415(c)(3)
must be paid or treated as paid to the em-
ployee (in accordance with the rules of
paragraph (e)(1)(i) of this section) prior
to severance from employment (within
the meaning of section 401(k)(2)(B)(i)(I))
with the employer maintaining the plan.
(2)Certain de minimis timing differ-
ences. Notwithstanding the provisions of
paragraph (e)(1) of this section, a plan may
provide that compensation for a limitation
year includes amounts earned during that
limitation year but not paid during that lim-
itation year solely because of the timing of
pay periods and pay dates if—
(i) These amounts are paid during the
first few weeks of the next limitation year;
(ii) The amounts are included on a uni-
form and consistent basis with respect to
all similarly situated employees; and
(iii) No compensation is included in
more than one limitation year.
(3)Compensation paid after sever-
ance from employment—(i)In general.
Any compensation described in paragraph
(e)(3)(ii) of this section that is paid within
2
1
/2months after an employee’s sever-
ance from employment does not fail to
be compensation (within the meaning of
section 415(c)(3)) pursuant to the rule of
paragraph (e)(1)(ii) of this section merely
because it is paid after the employee’s
severance from employment.
(ii)Certain payments made within 2
1
/2
months after severance from employment.
The following are types of post-severance
payments that are not excluded from com-
pensation because of timing if they are
paid within 2
1
/2months following sever-
ance from employment—
(A) Payments that, absent a severance
from employment, would have been paid
to the employee while the employee con-
tinued in employment with the employer
and are regular compensation for services
during the employee’s regular working
hours, compensation for services outside
the employee’s regular working hours
(such as overtime or shift differential),
commissions, bonuses, or other similar
compensation; and
(B) Payments for accruedbona fide
sick, vacation, or other leave, but only if
the employee would have been able to use
the leave if employment had continued.
(iii)Other post-severance payments
are not compensation. Any payment that
is not described in paragraph (e)(3)(ii) of
this section is not considered compensa-
tion if paid after severance from employ-
ment, even if it is paid within 2
1
/2months
following severance from employment.
July 5, 2005522005–27 I.R.B.

Thus, for example, compensation does
not include amounts paid after severance
from employment that are severance pay,
unfunded nonqualified deferred compen-
sation, or parachute payments within the
meaning of section 280G(b)(2).
(4)Certain military service.Therule
of paragraph (e)(1)(ii) of this section does
not apply to payments to an individual who
does not currently perform services for the
employer by reason of qualified military
service (as that term is used in section
414(u)(1)) to the extent those payments
do not exceed the amounts the individual
would have received if the individual had
continued to perform services for the em-
ployer rather than entering qualified mili-
tary service.
(f)Interaction with section 401(a)(17).
Because a plan may not base allocations
(in the case of a defined contribution plan)
or benefit accruals (in the case of a defined
benefit plan) on compensation in excess
of the limitation under section 401(a)(17),
a plan’s definition of compensation for a
limitation year that is used for purposes of
applying the limitations of section 415 is
not permitted to reflect compensation for
a plan year that is in excess of the limita-
tion under section 401(a)(17) that applies
to that plan year.
(g)Special rules—(1)Compensation
for section 403(b) annuity contract.In
the case of an annuity contract described
in section 403(b), the termparticipant’s
compensationmeans the participant’s in-
cludible compensation determined under
section 403(b)(3) and §1.403(b)–2(a)(11).
Accordingly, the rules for determining
a participant’s compensation pursuant
to section 415(c)(3) (other than section
415(c)(3)(E)) and this section do not apply
to a section 403(b) annuity contract.
(2)Employees of controlled groups of
corporations, etc. Inthecaseofanem-
ployee of two or more corporations which
are members of a controlled group of cor-
porations (as defined in section 414(b)
as modified by section 415(h)), the term
“compensation” for such employee in-
cludes compensation from all employers
that are members of the group, regardless
of whether the employee’s particular em-
ployer has a qualified plan. This special
rule is also applicable to an employee of
two or more trades or businesses (whether
or not incorporated) that are under com-
mon control (as defined in section 414(c)
as modified by section 415(h)), to an em-
ployee of two or more members of an
affiliated service group as defined in sec-
tion 414(m), and to an employee of two or
more members of any group of employers
who must be aggregated and treated as one
employer pursuant to section 414(o).
(3)Aggregation of section 403(b) an-
nuity with qualified plan of controlled em-
ployer. If a section 403(b) annuity contract
is combined or aggregated with a quali-
fied plan of a controlled employer in accor-
dance with §1.415(f)–1(f)(2), then, in ap-
plying the limitations of section 415(c) in
connection with the combining of the sec-
tion 403(b) annuity with a qualified plan,
the total compensation from both employ-
ers is permitted to be taken into account.
(4)Permanent and total disability of de-
fined contribution plan participant—(i)In
general. Pursuant to section 415(c)(3)(C),
if the conditions set forth in paragraph
(g)(4)(ii) of this section are satisfied, then,
in the case of a participant in any defined
contribution plan who is permanently and
totallydisabled(asdefinedinsection
22(e)(3)), theparticipant’s compensation
means the compensation the participant
would have received for the year if the
participant was paid at the rate of compen-
sation paid immediately before becoming
permanently and totally disabled, if such
compensation is greater than the partici-
pant’s compensation determined without
regard to this paragraph (g)(4).
(ii)Conditions for deemed disability
compensation. The rule of paragraph
(g)(4)(i) of this section applies only if the
following conditions are satisfied—
(A) Either the participant is not a highly
compensated employee (as defined in sec-
tion 414(q)) immediately before becoming
disabled, or the plan provides for the con-
tinuation of contributions on behalf of all
participants who are permanently and to-
tally disabled for a fixed or determinable
period;
(B) The plan provides that the rule
of this paragraph (g)(4) (treating certain
amounts as compensation for a disabled
participant) applies with respect to the
participant; and
(C) Contributions made with respect
to amounts treated as compensation under
this paragraph (g)(4) are nonforfeitable
when made.
(5)Foreign compensation. Compen-
sation described in paragraphs (b)(1) and
(2) of this section includes foreign earned
income (as defined in section 911(b)),
whether or not excludable from gross
income under section 911. Compensa-
tion described in paragraph (b)(1) of this
section is to be determined without re-
gard to the exclusions from gross income
in sections 931 and 933. Similar prin-
ciples are to be applied with respect to
income subject to sections 931 and 933
in determining compensation described in
paragraph (b)(2) of this section.
(6)Deemed section 125 compensa-
tion—(i)General rule. A plan is permit-
ted to provide that deemed section 125
compensation (as defined in paragraph
(g)(6)(ii) of this section) is compensation
within the meaning of section 415(c)(3),
provided that the plan applies this rule
uniformly to all employees with respect to
whom amounts subject to section 125 are
included in compensation.
(ii)Definition of deemed section 125
compensation. Deemed section 125 com-
pensation is an amount that is excludable
from the income of the participant under
section 106 that is not available to the
participant in cash in lieu of group health
coverage under a section 125 arrangement
solely because that participant is not able
to certify that the participant has other
health coverage. Under this definition,
amounts are deemed section 125 com-
pensation only if the employer does not
otherwise request or collect information
regarding the participant’s other health
coverage as part of the enrollment process
for the health plan.
(7)Employees in qualified military ser-
vice. See section 414(u)(7) for special
rules regarding compensation of employ-
ees who are in qualified military service
within the meaning of section 414(u)(5).
Par. 11. Section 1.415(d)–1 is added to
read as follows:
§1.415(d)–1 Cost of living adjustments.
(a)Defined benefit plans—(1)Dol-
lar limitation—(i)Determination of ad-
justed limit. Under section 415(d)(1)(A),
the dollar limitation described in section
415(b)(1)(A) applicable to defined bene-
fit plans is adjusted annually to take into
account increases in the cost of living.
The adjustment of the dollar limitation is
made by multiplying the adjustment factor
for the year, as described in paragraph
2005–27 I.R.B.53July 5, 2005

(a)(1)(ii)(A) of this section, by $160,000,
and rounding the result in accordance with
paragraph (a)(1)(iii) of this section. The
adjusted dollar limitation is prescribed by
the Commissioner and published in the In-
ternal Revenue Bulletin. See §601.601(d)
of this chapter.
(ii)Determination of adjustment fac-
tor—(A)Adjustment factor.Theadjust-
ment factor for a calendar year is equal to
a fraction, the numerator of which is the
value of the applicable index for the cal-
endar quarter ending September 30 of the
preceding calendar year, and the denomi-
nator of which is the value of such index
for the base period. The applicable index
is determined consistent with the proce-
dures used to adjust benefit amounts under
section 215(i)(2)(A) of the Social Security
Act, Public Law 92–336 (86 Stat. 406),
as amended. If, however, the value of that
fraction is less than one for a calendar year,
then the adjustment factor for the calendar
year is equal to one.
(B)Base period. For the purpose of
adjusting the dollar limitation pursuant to
paragraph (a)(1)(ii)(A) of this section, the
base period is the calendar quarter begin-
ning July 1, 2001.
(iii)Rounding. Any increase in the
$160,000 amount specified in section
415(b)(1)(A) which is not a multiple of
$5,000 is rounded to the next lowest mul-
tiple of $5,000.
(2)Average compensation for high 3
years of service limitation—(i)Determi-
nation of adjusted limit. Under section
415(d)(1)(B), with regard to participants
who have separated from service with a
nonforfeitable right to an accrued benefit,
the compensation limitation described in
section 415(b)(1)(B)is adjusted annually
to take into account increases in the cost of
living. For any limitation year beginning
after the separation occurs, the adjustment
of the compensation limitation is made
by multiplying the annual adjustment fac-
tor (as defined in paragraph (a)(2)(ii) of
this section) by the compensation limita-
tion applicable to the participant in the
prior limitation year. The annual adjust-
ment factor is prescribed by the Commis-
sioner and published in the Internal Rev-
enue Bulletin. See §601.601(d) of this
chapter.
(ii)Annual adjustment factor.Thean-
nual adjustment factor for a calendar year
is equal to a fraction, the numerator of
which is the value of the applicable index
for the calendar quarter ending Septem-
ber 30 of the preceding calendar year, and
the denominator of which is the value of
such index for the calendar quarter ending
September 30 of the calendar year prior
to that calendar year. The applicable in-
dex is determined consistent with the pro-
cedures used to adjust benefit amounts un-
der section 215(i)(2)(A) of the Social Se-
curity Act. If the value of the fraction de-
scribed in the first sentence of this para-
graph (a)(2)(ii) is less than one for a cal-
endar year, then the adjustment factor for
the calendar year is equal to one. In such
a case, the annual adjustment factor for fu-
ture calendar years will be determined in
accordance with revenue rulings, notices,
or other published guidance prescribed by
the Commissioner and published in the In-
ternal Revenue Bulletin. See §601.601(d)
of this chapter.
(3)Effective date of adjustment.The
adjusted dollar limitation applicable to
defined benefit plans is effective as of Jan-
uary 1 of each calendar year and applies
with respect to limitation years ending
with or within that calendar year. Benefit
payments and accrued benefits for a lim-
itation year cannot exceed the currently
applicable dollar limitation (as in effect
before the January 1 adjustment) prior to
January 1.
(4)Application of adjusted figure—(i)
In general. If the dollar limitation of sec-
tion 415(b)(1)(A) or the compensation
limitation of section 415(b)(1)(B) is ad-
justed pursuant to section 415(d) for a
limitation year, the adjustment is applied
as provided in this paragraph (a)(4).
(ii)Application of adjusted limitations
to benefits that have not commenced.
An adjustment to the dollar limitation of
section 415(b)(1)(A) applies to any dis-
tribution of accrued benefits that did not
commence before the beginning of the
limitation year for which the adjustment is
effective. Annual adjustments to the com-
pensation limit of section 415(b)(1)(B)
as described in paragraph (a)(2) of this
section are made for all limitation years
that begin after the participant’s severance
from employment, and apply to distribu-
tions that commence after the effective
dates of such adjustments. However, no
adjustment to the compensation limit of
section 415(b)(1)(B) is made for any lim-
itation year that begins on or before the
date of the participant’s severance from
employment with the employer maintain-
ing the plan.
(iii)Application of adjusted dollar lim-
itation to benefits that have commenced.
With respect to a distribution of accrued
benefits that commenced before the begin-
ning of the limitation year, a plan is per-
mitted to apply the adjusted limitations to
that distribution, but only to the extent that
benefits have not been paid. Thus, for ex-
ample, a plan cannot provide that the ad-
justed dollar limitation applies to a partic-
ipant who has previously received the en-
tire plan benefit in a single-sum distribu-
tion. However, a plan can provide for an
increase in benefits to a participant who
accrues additional benefits under the plan
that could have been accrued without re-
gard to the adjustment of the dollar limi-
tation (including benefits that accrue as a
result of a plan amendment) on or after the
effective date of the adjusted limitation.
(iv)Manner of adjustment for benefits
that have commenced. If a plan adjusts
benefits to reflect increases in the applica-
ble limitations pursuant to section 415(d)
for a limitation year after the limitation
year during which payment of the benefit
commenced using the safe harbor method-
ology described in paragraph (a)(5) of this
section, the distribution will be treated as
continuing to satisfy the requirements of
section 415(b). If a plan adjusts benefits
to reflect increases in the applicable limi-
tations pursuant to section 415(d) for a lim-
itation year after the limitation year during
which payment of the benefit commenced
in a manner other than the manner de-
scribed in paragraph (a)(5) of this section,
the plan must satisfy the requirements of
§1.415(b)–2, treating the commencement
of the additional benefit as the commence-
ment of a new distribution that gives rise
to a new annuity starting date.
(5)Safe harbor for adjustments to ben-
efit payments resulting from cost-of-living
adjustments. An adjustment to a distri-
bution that is made on account of an in-
crease to the applicable limits pursuant to
section 415(d) is made using the safe har-
bor methodology of this paragraph (a)(5)
if—
(i) The participant has received one or
more distributions that satisfy the require-
ments of section 415(b) before the date the
increase to the applicable limits is effec-
tive;
July 5, 2005542005–27 I.R.B.

(ii) The adjusted distribution is solely as
a result of the application of the increase
to the applicable limits pursuant to section
415(d); and
(iii) The amount payable to the em-
ployee for the limitation year and sub-
sequent limitation years is not greater
than the amounts that would otherwise
be payable without regard to the ad-
justment, multiplied by a fraction, the
numerator of which is the limitation un-
der section 415(b) (i.e., the lesser of the
applicable dollar limitation under sec-
tion 415(b)(1)(A), as adjusted for age at
commencement, and the applicable com-
pensation-based limitation under section
415(b)(1)(B)) in effect for the distribution
following the section 415(d) increase, and
the denominator of which is such limi-
tation under section 415(b) in effect for
the distribution immediately before the
increase.
(6)Examples. The following examples
illustrate the application of this paragraph
(a):
Example 1. (i) X is a participant in a qualified de-
fined benefit plan maintained by X’s employer. The
plan has a calendar year limitation year. Under the
terms of the plan, X is entitled to a benefit consist-
ing of a straight life annuity equal to 100% of X’s
average compensation for the period of X’s high 3
years of service, adjusted as of January 1 of each cal-
endar year for increases in the consumer price index.
The plan provides that the annual increases in both
the dollar limit of section 415(b)(1)(A) and the com-
pensation limit under section 415(b)(1)(B) pursuant
to section 415(d) apply to participants who have com-
menced receiving benefits under the plan at the earli-
est time at which that increase is permitted to become
effective. X’s average compensation for X’s high 3
years is $50,000. X separates from the service of his
employer on October 3, 2006, at age 65 with a non-
forfeitable right to the accrued benefit after more than
10 years of service with the employer and more than
10 years of participation in the plan. X begins to re-
ceive annual benefit payments (payable monthly) of
$50,000, commencing on November 1, 2006. It is
assumed for purposes of thisExample 1that the dol-
lar limitation for 2006 (as adjusted pursuant to sec-
tion 415(d)) is $170,000, that the dollar limitation
for 2007 (as adjusted pursuant to section 415(d)) is
$175,000, and that the annual adjustment factor for
adjusting the limitation of section 415(b)(1)(B) for
2007 is 1.0220.
(ii) For the limitation year beginning January 1,
2007, the dollar limit applicable to X under section
415(b)(1)(A) is $175,000, and the compensation limit
applicable to X under section 415(b)(1)(B) is $51,100
($50,000 multiplied by the annual adjustment factor
of 1.0220). Accordingly, the adjustment to X’s bene-
fit satisfies the safe harbor for cost-of-living adjust-
ments under paragraph (a)(5) of this section if, af-
ter the adjustment, X’s benefit payable in 2007 is no
greater than $50,000 multiplied by $51,100 (X’s sec-
tion 415(b) limitation for 2006)/$50,000 (X’s section
415(b) limitation for 2007).
Example 2. (i)ThefactsarethesameasinEx-
ample 1except that X’s average compensation for
the period of X’s high 3 consecutive years of service
is $200,000. Consequently, X’s annual benefit pay-
ments commencing on November 1, 2006, are limited
to $170,000.
(ii) For the limitation year beginning January 1,
2007, the dollar limit applicable to X under section
415(b)(1)(A) is $175,000, and the compensation
limit applicable to X under section 415(b)(1)(B) is
$204,400 ($200,000 multiplied by the annual adjust-
ment factor of 1.0220). Accordingly, the adjustment
to X’s benefit satisfies the safe harbor for cost-of-liv-
ing adjustments under paragraph (a)(5) of this section
if, after the adjustment, X’s benefit payable in 2007
is no greater than $170,000 multiplied by $175,000
(X’s section 415(b) limitation for 2006)/$170,000
(X’s section 415(b) limitation for 2007).
(b)Defined contribution plans—(1)
In general. Under section 415(d)(1)(C),
the dollar limitation described in sec-
tion 415(c)(1)(A) isadjusted annually to
take into account increases in the cost of
living. The adjusted dollar limitation is
prescribed by the Commissioner and pub-
lished in the Internal Revenue Bulletin.
See §601.601(d) of this chapter.
(2)Determination of adjusted limit—(i)
Base period. The base period taken into
account for purposes of adjusting the
dollar limitation pursuant to paragraph
(b)(2)(ii) of this section is the calendar
quarter beginning July 1, 2001.
(ii)Method of adjustment—(A)In gen-
eral. The dollar limitation is adjusted
with respect to a calendar year based on
the increase in the applicable index for
the calendar quarter ending September 30
of the preceding calendar year over such
index for the base period. Adjustment
procedures similar to the procedures used
to adjust benefit amounts under section
215(i)(2)(A) of the Social Security Act
will be used.
(B)Rounding. Any increase in the
$40,000 amount specified in section
415(c)(1)(A) which is not a multiple of
$1,000 shall be rounded to the next lowest
multiple of $1,000.
(iii)Effective date of adjustment.The
adjusted dollar limitation applicable to de-
fined contribution plans is effective as of
January 1 of each calendar year and ap-
plies with respect to limitation years end-
ing with or within that calendar year. An-
nual additions for a limitation year cannot
exceed the currently applicable dollar lim-
itation (as in effect before the January 1 ad-
justment) prior to January 1. However, af-
ter a January 1 adjustment is made, annual
additions for the entire limitation year are
permitted to reflect the dollar limitation as
adjusted on January 1.
(c)Application of rounding rules to
other cost-of-living adjustments.Pursuant
to section 415(d)(4)(A), the $5,000 round-
ing methodology of paragraph (a)(1)(iii)
of this section is used for purposes of any
provision of chapter 1 of subtitle A of the
Internal Revenue Code that provides for
adjustments in accordance with section
415(d), except to the extent provided by
that provision. Thus, the $5,000 rounding
methodology of paragraph (a)(1)(iii) of
this section is used for purposes of—
(1) Determining the level of compensa-
tion specified in section 414(q)(1)(B) that
is used to determine whether an employee
is a highly compensated employee;
(2) Calculating the amounts used pur-
suant to section 409(o)(1)(C) to determine
the maximum period over which distribu-
tions from an employee stock ownership
plan may be made without participant con-
sent; and
(3) Determining the levels of com-
pensation specified in §1.61–21(f)(5)(i)
and (iii) used in determining whether
an employee is a control employee of
a nongovernmental employer for pur-
poses of the commuting valuation rule of
§1.61–21(f).
(d)Implementation ofcost-of-living
adjustments. A plan is permitted to be
amended to reflect any of the adjustments
described in this section at any time af-
ter those limitations become applicable.
Alternatively, a plan is permitted to incor-
porate any of the adjustments described
in this section by reference in accordance
with the rules of §1.415(a)–1(d)(3)(v).
Because the accrued benefit of a partici-
pant can reflect increases in the applicable
limitations only afterthose increases be-
come effective, a pattern of repeated plan
amendments increasing annual benefits to
reflect the increases in the section 415(b)
limitations pursuantto section 415(d) does
not result in any protection under section
411(d)(6) for future increases to reflect
increases in the section 415(b) limitations
pursuant to §1.411(d)–4, Q&A–1(c)(1).
Thus, a plan does not violate the require-
ments of section 411(d)(6) merely because
the plan has been amended annually for a
number of years to increase annual bene-
fits to reflect the increases in the section
2005–27 I.R.B.55July 5, 2005

415(b) limitations pursuant to section
415(d) and subsequently is not amended
to reflect later increases in the section
415(b) limitations.
Par. 12. Section 1.415(f)–1 is added to
read as follows:
§1.415(f)–1 Combining and aggregating
plans.
(a)In general. Under section 415(f) and
this section, except as provided in para-
graph (g) of this section (regarding mul-
tiemployer plans), for purposes of apply-
ing the limitations of section 415(b) and (c)
applicable to a participant for a particular
limitation year—
(1) All defined benefit plans (without
regard to whether a plan has been termi-
nated) ever maintained by the employer (or
a predecessor employer within the mean-
ing of paragraph (c) of this section) under
which the participant has ever accrued a
benefit are treated as one defined benefit
plan,
(2) All defined contribution plans
(without regard to whether a plan has
been terminated) ever maintained by the
employer (or a predecessor employer
within the meaning of paragraph (c) of
this section) under which the participant
receives annual additions are treated as
one defined contribution plan; and
(3) All section 403(b) annuity contracts
purchasedbyanemployer(includingplans
purchased through salary reduction contri-
butions) for the participant are treated as
one section 403(b) annuity contract.
(b)Affiliated employers, affiliated ser-
vice groups, and leased employees.See
§1.415(a)–1(f)(1) and (2) for rules regard-
ing aggregation of employers in the case of
affiliated employers and affiliated service
groups. See §1.415(a)–1(f)(3) for rules re-
garding the treatment of leased employees.
(c)Predecessor employer. For pur-
poses of section 415 and the regulations
thereunder, a former employer is a prede-
cessor employer with respect to a partici-
pantinaplanmaintainedbyanemployer
if the employer maintains a plan under
which the participant had accrued a ben-
efit while performing services for the
former employer, but only if that bene-
fit is provided under the plan maintained
by the employer. In addition, with re-
spect to an employer of a participant, a
former entity that antedates the employer
is a predecessor employer with respect
to the participant if, under the facts and
circumstances, the employer constitutes a
continuation of all or a portion of the trade
or business of the former entity. This will
occur, for example, where formation of
the employer constitutes a mere formal or
technical change in the employment rela-
tionship and continuity otherwise exists
in the substance and administration of the
business operations of the former entity
and the employer.
(d)Annual compensation taken into
account where employer maintains more
than one defined benefit plan—(1)Deter-
mination of high 3 years of compensation.
If two or more defined benefit plans are
aggregated under section 415(f) and this
section for a particular limitation year,
in applying the defined benefit compen-
sation limitation (as described in section
415(b)(1)(B)) to the annual benefit of a
participant under the aggregated plans,
the participant’s average compensation
for the participant’s high 3 years of ser-
vice is determined in accordance with
§1.415(c)–2(g)(2), and includes compen-
sation for all years in which the participant
was an active participant in any of the
aggregated plans.
(2)Requirement of independent satis-
faction of compensation limit.Iftwoor
more defined benefitplans are aggregated
under section 415(f) and this section for a
particular limitation year, then, pursuant to
section 415(f)(1)(B), each such plan must
also satisfy the compensation limit of sec-
tion 415(b)(1)(B) on a separate basis, de-
termining each participant’s average com-
pensation for the participant’s high 3 years
of service using only compensation with
respect to periods of active participation in
that separate plan.
(e)Years of participation and service
taken into account where employer main-
tains more than one defined benefit plan
at different times—(1)Determination of
years of participation.Iftwoormore
defined benefit plans are aggregated un-
der section 415(f) and this section for
a particular limitation year, in applying
the reduction for participation of less
than ten years (as described in section
415(b)(5)(A)) to the dollar limitation un-
der section 415(b)(1)(A), time periods that
are counted as years of participation under
any of the plans are counted in computing
the limitation of the combined plans under
this section.
(2)Determination of years of service.
If two or more defined benefit plans are
aggregated under section 415(f) and this
section for a particular limitation year, in
applying the reduction for service of less
than ten years (as described in section
415(b)(5)(B)) to the compensation lim-
itation under section 415(b)(1)(B), time
periods that are counted as years of ser-
vice under any of the plans are counted in
computing the limitation of the combined
plans under this section.
(f)Previously unaggregated plans—(1)
In general. This paragraph (f) provides
rules for those situations in which two
or more existing plans, which previously
werenotrequiredtobeaggregatedpur-
suant to section 415(f) and this section,
are aggregated during a particular limita-
tion year and, as a result, the limitations
of section 415(b) or (c) are exceeded for
that limitation year. Paragraph (f)(2) of
this section provides rules for defined
contribution plans that are first required to
be aggregated pursuant to section 415(f)
and this section in a plan year. Paragraph
(f)(3) of this section provides rules for
defined benefit plans that are first required
to be aggregated pursuant to section 415(f)
and this section, and for defined benefit
plans under which a participant’s benefit
is frozen following aggregation.
(2)Defined contribution plans.Twoor
more defined contribution plans that are
not required to be aggregated pursuant to
section 415(f) and this section as of the
first day of a limitation year do not fail
to satisfy the requirements of section 415
with respect to a participant for the lim-
itation year merely because they are ag-
gregated later in that limitation year, pro-
vided that no annual additions are credited
to the participant’s account after the date
on which the plans are required to be ag-
gregated.
(3)Defined benefit plans—(i)First year
of aggregation. Two or more defined ben-
efit plans that are not required to be ag-
gregated pursuant to section 415(f) and
this section as of the first day of a limita-
tion year do not fail to satisfy the require-
ments of section 415 for the limitation year
merely because they are aggregated later in
that limitation year, provided that no plan
amendments increasing benefits with re-
spect to the participant under either plan
July 5, 2005562005–27 I.R.B.

are made after the occurrence of the event
causing the plan to be aggregated.
(ii)All years of aggregation in which
accrued benefits are frozen.Twoormore
defined benefit plans that are required to
be aggregated pursuant to section 415(f)
and this section during a limitation year
subsequent to the limitation year during
which the plans were first aggregated do
not fail to satisfy the requirements of sec-
tion 415 with respect to a participant for
the limitation year merely because they
are aggregated if there have been no in-
creases in the participant’s accrued benefit
derived from employer contributions (in-
cluding increases as a result of increased
compensation or service) under any of the
plans within the period during which the
plans have been aggregated.
(g)Section 403(b) annuity con-
tracts—(1)In general. In the case of a
section 403(b) annuity contract, except
as provided in paragraph (g)(2) of this
section, the participant on whose behalf
the annuity contract is purchased is con-
sidered for purposes of section 415 to
have exclusive control of the annuity con-
tract. Accordingly, except as provided in
paragraph (g)(2) of this section, the partic-
ipant, and not the participant’s employer
who purchased the section 403(b) annuity
contract, is deemed to maintain the an-
nuity contract, and such a section 403(b)
annuity contract is not aggregated with a
qualified plan that is maintained by the
participant’s employer.
(2)Special rules under which the em-
ployer is deemed to maintain the annuity
contract—(i)In general. Where a partici-
pant on whose behalf a section 403(b) an-
nuity contract is purchased is in control of
any employer for a limitation year as de-
fined in paragraph (g)(2)(ii) of this sec-
tion (regardless of whether the employer
controlled by the participant is the em-
ployer maintaining the section 403(b) an-
nuity contract), the annuity contract for the
benefit of the participant is treated as a de-
fined contribution plan maintained by both
the controlled employer and the partici-
pant for that limitation year. Accordingly,
where a participant on whose behalf a sec-
tion 403(b) annuity contract is purchased is
in control of any employer for a limitation
year, the section 403(b) annuity contract
is aggregated with all other defined contri-
bution plans maintained by that employer.
In addition, in such a case, the section
403(b) annuity contract is aggregated with
all other defined contribution plans main-
tained by the employee or any other em-
ployer that is controlled by the employee.
Thus, for example, if a doctor is employed
by a non-profit hospital to which section
501(c)(3) applies and which provides him
with a section 403(b) annuity contract, and
the doctor also maintains a private prac-
tice as a shareholder owning more than
50% of a professional corporation, then
any qualified defined contribution plan of
the professional corporation must be com-
bined with the section 403(b) annuity con-
tract for purposes of applying the limita-
tions of section 415(c) and §1.415(c)–1.
For purposes of this paragraph (g)(2), it is
immaterial whether the section 403(b) an-
nuity contract is purchased as a result of
a salary reduction agreement between the
employer and the participant.
(ii)Definition of control. For purposes
of paragraph (g)(2)(i) of this section, a par-
ticipant is in control of an employer for
a limitation year if, pursuant to paragraph
(b) of this section, a plan maintained by
that employer would have to be aggregated
with a plan maintained by an employer that
is 100% owned by the participant. Thus,
for example, if a participant owns 60% of
the common stock of a corporation, the
participantisconsideredtobeincontrol
of that employer for purposes of applying
paragraph (g)(2)(i) of this section.
(3)Aggregation of section 403(b) an-
nuity with qualified plan of controlled em-
ployer. If a section 403(b) annuity con-
tract is combined or aggregated with a
qualified plan of a controlled employer in
accordance with paragraph (g)(2) of this
section, the plans must satisfy the limi-
tations of section 415(c) both separately
and in combination. In applying separately
the limitations of section 415 to the qual-
ified plan and to the section 403(b) annu-
ity, compensation from the controlled em-
ployer may not be aggregated with com-
pensation from the employer purchasing
the section 403(b) annuity (i.e., without re-
gard to §1.415(c)–2(g)(3)).
(h)Multiemployer plans—(1)Multi-
employer plan combined with another
multiemployer plan. Pursuant to section
415(f)(3)(B), multiemployer plans, as de-
fined in section 414(f), are not aggregated
with other multiemployer plans for pur-
poses of applying the limits of section 415.
(2)Multiemployer plan combined with
other plan—(i)Aggregation only for ben-
efits provided by the employer.Notwith-
standing the rule of §1.415(a)–1(e), a mul-
tiemployer plan is permitted to provide
that only the benefits under that multiem-
ployer plan that are provided by an em-
ployer are aggregated with benefits under
plans maintained by that employer that are
not multiemployer plans. If the multiem-
ployer plan so provides then, where an em-
ployer maintains both a plan which is not
a multiemployer plan and a multiemployer
plan, only the benefits under the multiem-
ployer plan that are provided by the em-
ployer are aggregated with benefits under
the employer’s plans other than multiem-
ployer plans (in lieu of including benefits
provided by all employers under the mul-
tiemployer plan pursuant to the generally
applicable rule of §1.415(a)–1(e)).
(ii)Nonapplication of aggregation for
purposes of applying section 415(b)(1)(B)
compensation limit. Pursuant to section
415(f)(3)(A), a multiemployer plan is not
combined or aggregated with any other
plan that is not a multiemployer plan
for purposes of applying the compen-
sation limit of section 415(b)(1)(B) and
§1.415(b)–1(a)(1)(ii).
(i) [Reserved.]
(j)Special rules for combining certain
plans, etc. If a plan, annuity contract or
arrangement is subject to a special limita-
tion in addition to, or instead of, the regu-
lar limitations described in section 415(b)
or (c), and is combined under this section
with a plan which is subject only to the reg-
ular section 415(b) or (c) limitations, the
following rules apply—
(1) Each plan, annuity contract or ar-
rangement which is subject to a special
limitation must meet its own applicable
limitation and each plan subject to the reg-
ular limitations of section 415 must meet
its applicable limitation.
(2) The combined limitation is the
larger of the applicable limitations.
(k)Examples. The following examples
illustrate the rules of this section:
Example 1. (i) M is an employee of ABC Cor-
poration and XYZ Corporation. ABC maintains a
qualified defined benefit plan and a qualified defined
contribution plan in which M participates and XYZ
maintains a qualified defined benefit plan and a qual-
ified defined contribution plan in which M partici-
pates. ABC Corporation owns 60% of XYZ Corpo-
ration.
2005–27 I.R.B.57July 5, 2005

(ii) ABC Corporation and XYZ Corporation are
members of a controlled group of corporations within
the meaning of section 414(b) as modified by section
415(h). Because ABC Corporation and XYZ Corpo-
ration are members of a controlled group of corpora-
tions within the meaning of section 414(b) as mod-
ified by section 415(h), M is treated as being em-
ployed by a single employer.
(iii) The sum of M’s annual benefit under the
defined benefit plan maintained by ABC and M’s
annual benefit under the defined benefit plan main-
tained by XYZ is not permitted to exceed the lim-
itations of section 415(b) and §1.415(b)–1; and the
sum of the annual additions to M’s account under the
defined contribution plans maintained by ABC and
XYZ may not exceed the limitations of section 415(c)
and §1.415–(c)–1. For purposes of satisfying the re-
quirements of section 415 on this aggregated basis,
M’s compensation from both ABC and XYZ is taken
into account and years of service and participation un-
der either defined benefit plan are used.
(iv) M’s annual benefit under the defined benefit
plan maintained by ABC andM’s annual benefit un-
der the defined benefit plan maintained by XYZ also
must be within the limitations of section 415(b) and
§1.415(b)–1, determined without regard to the aggre-
gation of employers (i.e., by taking into account only
compensation and years of service and participation
for the respective employers).
Example 2. (i) N is employed by a hospital which
purchases an annuity contract described in section
403(b) on N’s behalf for the current limitation year. N
is in control of the hospital within the meaning of sec-
tion 414(b) or (c), as modified by section 415(h). The
hospital also maintains a qualified defined contribu-
tion plan during the current limitation year in which
N participates.
(ii) Under section 415(k)(4), the hospital, as well
as N, is considered to maintain the annuity contract.
Accordingly, the sum of the annual additions under
the qualified defined contribution plan and the an-
nuity contract must satisfy the limitations of section
415(c) and §1.415(c)–1.
Example 3. (i)ThefactsarethesameasinEx-
ample 2, except that instead of being in control of the
hospital, N is the 100% owner of a professional cor-
poration P, which maintains a qualified defined con-
tribution plan in which N participates.
(ii) Under section 415(k)(4), the hospital, as well
as N, is considered to maintain the annuity contract.
Accordingly, the sum of the annual additions under
the qualified defined contribution plan maintained by
professional corporation P and the annuity contract
must satisfy the limitations of section 415(c) and
§1.415(c)–1. See §1.415(g)–1(c)(2) for an exam-
ple of the treatment of a contribution to an annuity
contract that exceeds the limits of section 415(c) by
reason of the aggregation required by this section.
Example 4. (i) J is an employee of two corpo-
rations, N and M, each of which has employed J for
more than 10 years. N and M are not required to be
aggregated pursuant to section 415(f) and this section.
Each corporation has a qualified defined benefit plan
in which J has participated for more than 10 years.
Each plan provides a benefit which is equal to 75%
of a participant’s average compensation for his high 3
years of service and is payable in the form of a straight
life annuity beginning at age 65. J’s average com-
pensation (within the meaning of §1.415(c)–2) for his
high three years of service from each corporation is
$160,000. Each plan uses the calendar year for the
limitation and plan year. In July 2007, N Corporation
becomes a wholly owned subsidiary of M Corpora-
tion.
(ii) As a result of the acquisition of N Corporation
by M Corporation, J is treated as being employed by
a single employer under section 414(b). Therefore,
because section 415(f)(1)(A) requires that all defined
benefit plans of an employer be treated as one defined
benefit plan, the two plans must be aggregated for
purposes of applying the limitations of section 415.
However, under paragraph (f)(3)(i) of this section,
since the plans were not aggregated as of the first day
of the 2007 limitation year (January 1, 2007), they
will not be considered aggregated until the limitation
year beginning January 1, 2008.)
(iii) As a result of such aggregation, J becomes
entitled to a combined benefit which is equal to
$240,000, which is in excess of the section 415(b)
dollar limitation for 2005 of $170,000. However,
under paragraph (f)(3)(ii) of this section, the limita-
tions of section 415(b) and §1.415(b)–1 applicable
to J may be exceeded in this situation without plan
disqualification so long as J’s accrued benefit derived
from employer contributions is not increased (i.e.,
does not increase on account of increased compen-
sation, service, or other accruals) during the period
within which the limitations are being exceeded.
Example 5. (i) A, age 30, owns all of the stock of
X Corporation and also owns 10% of the stock of Z
Corporation. F, A’s father, directly owns 75% of the
stock of Z Corporation. Both corporations have qual-
ified defined contribution plans in which A partici-
pates and both plans use the calendar year for the lim-
itation and plan year. A’s compensation (within the
meaning of §1.415(c)–2) for 2007 is $20,000 from Z
Corporation and $150,000 from X Corporation. Dur-
ing the period January 1, 2007 through June 30, 2007,
annual additions of $20,000 are credited to A’s ac-
count under the plan of Z Corporation, while annual
additions of $40,000 are credited to A’s account un-
der the plan of X Corporation. In both instances, the
amount of annual additions represent the maximum
allowable under section 415(c) and §1.415(c)–1. On
July 15, 2007, F dies, and A inherits all of F’s stock
in Z in 2007.
(ii) As of July 15
th
2007, A is considered to be in
control of X and Z Corporations, and the two plans
must be aggregated for purposes of applying the lim-
itations of section 415. However, even though A’s
total annual additions for 2007 are $60,000, the limi-
tations of section 415(c) and §1.415(c)–1 are not vio-
lated for 2007, provided no annual additions are cred-
ited to A’s accounts after July 15, 2007 (the date that
A is first in control of Z).
Example 6. (i) P is a key employee of employer
XYZ who participates in a qualified defined contri-
bution plan with (Plan X) a calendar year limitation
year. P is also provided post-retirement medical ben-
efits, and XYZ has taken into account a reserve for
those benefits under section 419A(c)(2). In 2007, P’s
compensation is $30,000 and P’s annual additions un-
der Plan X are $5,000. Pursuant to section 419A(d), a
separate account is maintained for P and that account
is credited with an allocation of $32,000 for 2007.
(ii) Under paragraph (j)(1) of this section, Plan X
and the individual medical account must separately
satisfy the requirements of section 415(c), taking into
account any special limit applicable to that arrange-
ment. In this case, the contributions to Plan X sep-
arately satisfy the limitations of section 415(c). The
individual medical account is not subject to the 100%
of compensation limit of section 415(c), so the contri-
butions to that account satisfy the limitations of sec-
tion 415(c).
(iii) The sum of the annual additions under Plan X
and the amounts contributed to the separate account
on P’s behalf must satisfy the requirements of sec-
tion 415(c). Under paragraph (j)(2) of this section, the
limit applicable to the combined plan is equal to the
greater of the limits applicable to the separate plan.
In this case, the limit applicable to the medical ac-
count is $40,000 (which is greater than the limit of
$30,000 applicable to the qualified plan), so the limit
that applies to the aggregated plan is $40,000 and the
aggregated plans satisfy the requirements of section
415.
Par. 13. Section 1.415(g)–1 is added to
read as follows:
§1.415(g)–1 Disqualification of plans and
trusts.
(a)Disqualification of plans—(1)In
general. Under section 415(g) and this
section, with respect to a particular limita-
tion year, a plan (and the trust forming part
of the plan) is disqualified in accordance
with the rules provided in paragraph (b)
of this section, if the conditions described
in paragraph (a)(2) or (a)(3) of this sec-
tion apply. For purposes of this paragraph
(a), the determination of whether a plan
or a combination of plans exceeds the
limitations imposed by section 415 for
a particular limitation year is, except as
otherwise provided, made by taking into
account the aggregation of plan rules pro-
vided in sections 415(f) and §1.414(f)–1.
(2)Defined contribution plans.Aplan
is disqualified in accordance with the
rules provided in paragraph (b) of this
section if annual additions (as defined
in §1.415(c)–1(b)) with respect to the
account of any participant in a defined
contribution plan maintained by the em-
ployer exceed the limitations of section
415(c) and §1.415(c)–1.
(3)Defined benefit plans.Aplanis
disqualified in accordance with the rules
provided in paragraph (b) of this sec-
tion if the annual benefit (as defined in
§1.415(b)–1(b)(1), taking into account the
rules of §1.415(b)–2) of a participant in
a defined benefit plan maintained by the
employer exceeds the limitations of sec-
tion 415(b) and §1.415(b)–1.
(b)Rules for disqualification of plans
and trusts—(1)In general. If any plan (in-
July 5, 2005582005–27 I.R.B.

cluding a trust which forms part of such
plan) is disqualified for a particular limi-
tation year under the rules set forth in this
paragraph (b), then the disqualification is
effective as of the first day of the first plan
year containing any portion of the particu-
lar limitation year.
(2)Single plan. In the case of a sin-
gle qualified defined benefit plan (deter-
mined without regard to section 415(f)
and §1.415(f)–1) maintained by the em-
ployer that provides an annual benefit (as
defined in §1.415(b)–1(b)(1), taking into
account the rules of §1.415(b)–2) in ex-
cess of the limitations of section 415(b)
and §1.415(b)–1 for any particular lim-
itation year, such plan is disqualified in
that limitation year. Similarly, if the em-
ployer only maintains a single defined
contribution plan (determined without re-
gard to section 415(f) and §1.415(f)–1)
under which annual additions (as defined
in §1.415(c)–1(b)) allocated to the account
of any participant exceed the limitations
of section 415(c) and §1.415(c)–1 for any
particular limitation year, such plan is also
disqualified in that limitation year.
(3)Multiple plans—(i)In general.
If the limitations of section 415(b) and
§1.415(b)–1 (taking into account the rules
of §1.415(b)–2), or section 415(c) and
§1.415(c)–1 are exceeded for a particular
limitation year with respect to any partic-
ipant solely because of the application of
the aggregation rules of section 415(f)(1)
and §1.415(f)–1 or section 414(b) or (c),
as modified by section 415(h), then one
or more of the plans is disqualified in ac-
cordance with the ordering rules set forth
in paragraphs (b)(3)(ii) of this section,
applied in accordance with the rules of ap-
plication set forth in paragraph (b)(3)(iii)
of this section, subject to the special rules
set forth in paragraph (b)(3)(iv) of this
section, until, without regard to annual
benefits or annual additions under the
disqualified plan or plans, the remaining
plans satisfy the applicable limitations of
section 415.
(ii)Ordering rules—(A)Disqualifica-
tion of ongoing plans other than multiem-
ployer plans. If there are two or more
plans that have not been terminated at any
time including the last day of the partic-
ular limitation year, and if one or more
of those plans is a multiemployer plan de-
scribed in section 414(f), then one or more
of the plans (as needed to satisfy the lim-
itations of section 415) that has not been
terminated and is nota multiemployer plan
is disqualified in that limitation year. For
purposes of the preceding sentence, the de-
termination of whether a plan is a multi-
employer plan described in section 414(f)
is made as of the last day of the particular
limitation year.
(B)Disqualification of ongoing multi-
employer plans. If, after the application
of paragraph (b)(3)(ii)(A) of this section,
there are two or more plans and one or
more of the plans has been terminated at
any time including the last day of the par-
ticular limitation year, then one or more of
the plans (as needed to satisfy the applica-
ble limitations of section 415) that has not
been so terminated (regardless of whether
the plan is a multiemployer plan described
in section 414(f)) is disqualified in that
limitation year.
(iii)Rules of application—(A)Em-
ployer elects which plan is disqualified.
If there are two or more plans of an em-
ployer within a group of plans one or more
of which is to be disqualified pursuant
to paragraph (b)(3)(ii)(A) or (B) of this
section, then the employer may elect, in a
manner determined by the Commissioner,
which plan or plans are disqualified. If
those two or more plans are involved be-
cause of the application of section 414(b)
or (c), as modified by section 415(h),
the employers of the controlled group
may elect, in a manner determined by the
Commissioner, which plan or plans are
disqualified. However, the election de-
scribed in the preceding sentence is not
effective unless made by all of the em-
ployers within the controlled group.
(B)Commissioner determines which
plan is disqualified. If the election de-
scribed in paragraph (b)(3)(iii)(A) of this
section is not made with respect to the two
plans described in paragraph (b)(3)(iii)(A)
of this section, then the Commissioner,
taking into account all of the facts and
circumstances, has the discretion to de-
termine the plan that is disqualified in the
particular limitation year. In making this
determination, some of the factors that will
be taken into account include, but are not
limited to, the number of participants in
each plan, the amount of benefits provided
on an overall basis by each plan, and the
extent to which benefits are distributed or
retained in each plan.
(iv)Special rules—(A)Simplified em-
ployee pensions (SEPs).Iftherearetwo
or more plans one or more of which is
to be disqualified pursuant to paragraph
(b)(3)(ii)(A) or (B) of this section, and if
one of the plans is a simplified employee
pension (as defined in section 408(k)), then
the simplified employee pension is not dis-
qualified until all of the other plans have
been disqualified. However, if one of the
plans has been terminated, then the simpli-
fied employee pension is disqualified be-
fore the terminated plan. For purposes of
this paragraph (b)(3)(iv)(A), the disquali-
fication of a simplified employee pension
means that the simplified employee pen-
sion is no longer described under section
408(k).
(B)Combining medical accounts with
defined contribution plans. In the event
that combining a medical account de-
scribed in §1.415(c)–1(a)(2)(ii)(C) or (D)
and a defined contribution plan other than
such a medical account causes the limi-
tations of section 415(c) and §1.415(c)–1
applicable to a participant to be exceeded
for a particular limitation year, the defined
contribution plan other than the medical
account is disqualified for the limitation
year.
(C)Combining section 403(b) annuity
contract and qualified defined contribu-
tion plan—(1)In general. In the event
that combining a section 403(b) annuity
contract and a qualified defined contribu-
tion plan under the provisions of section
415(f)(1)(B) causes the limitations of sec-
tion 415(c) and §1.415(c)–1 applicable to
a participant under the combined defined
contribution plans tobe exceeded for a par-
ticular limitation year, the excess of the
contributions to the annuity contract plus
the annual additions to the plan over such
limitations is treated as a disqualified con-
tribution to the annuity contract and there-
fore includable in the gross income of the
participant for the taxable year with or
within which that limitation year ends. See
§1.415(a)–1(b)(2) and §1.403(b)–3(b)(2)
for rules regarding the treatment of a con-
tribution to a section 403(b) annuity con-
tract that exceeds the limitations of section
415.
(2)Example. The following example il-
lustrates the application of this paragraph
(b)(3)(iv)(C). It is assumed for purposes of
this example that the dollar limitation un-
der section 415(c)(1)(A) that applies for all
2005–27 I.R.B.59July 5, 2005

relevant limitation years is $42,000. The
example is as follows:
Example. (i) N is employed by a hospital which
purchases an annuity contract described in section
403(b) on N’s behalf for the current limitation year.
N is also the 100% owner of a professional corpora-
tion P that maintains a qualified defined contribution
plan during the current limitation year in which N par-
ticipates. (The facts of this example are the same as
inExample 3of §1.415(f)–1(k)). N’s compensation
(within the meaning of §1.415(c)–2) from the hospi-
tal for the current limitation year is $150,000. For
the current limitation year, the hospital contributes
$30,000 for the section 403(b) annuity contract on
N’s behalf, which is within the limitations applicable
to N under the annuity contract (i.e., $42,000)). Pro-
fessional corporation P also contributes $30,000 to
the qualified defined contribution plan on N’s behalf
for the current limitation year (which represents the
only annual additions allocated to N’s account under
the plan for such year), which is within the $42,000
limitation of section 415(c)(1) applicable to N under
the plan.
(ii) Under section 415(k)(4), the hospital, as well
as N, is considered to maintain the annuity contract.
Accordingly, the sum of the annual additions under
the qualified defined contribution plan maintained by
professional corporation P and the annuity contract
must satisfy the limitations of section 415(c) and
§1.415(c)–1.
(iii) Because the total combined contributions
($60,000) exceed the section 415(c) limitation appli-
cable to N under the plan ($42,000), under the spe-
cial rules contained in this paragraph (b)(3)(iv)(C),
$20,000 of the $30,000 contributed to the section
403(b) annuity contract is considered a disqualified
contribution and therefore currently includable in N’s
gross income. The contract continues to be a section
403(b) annuity contract only if, for the current limi-
tation year and all years thereafter, the issuer of the
contract maintains separate accounts for each portion
attributable to such disqualified contributions. See
§§1.415(a)–1(b)(2) and 1.403(b)–3(c)(3).
(c)Plan year for certain annuity con-
tracts and individual retirement plans.For
purposes of this section, unless the plan
under which the annuity contract or indi-
vidual retirement plan is provided speci-
fies that a different twelve-month period is
considered to be the plan year—
(1) An annuity contract described in
section 403(b) is considered to have a plan
year coinciding withthe taxable year of
the individual on whose behalf the contract
has been purchased; and
(2) A simplified employee pension de-
scribed in section 408(k) is considered to
have a plan year coinciding with the year
under the plan that is used pursuant to sec-
tion 408(k)(7)(C).
Par. 14. Section 1.415(j)–1 is added to
read as follows:
§1.415(j)–1 Limitation year.
(a)In general. Unless the terms of a
plan provide otherwise, the limitation year,
with respect to any qualified plan main-
tained by the employer, is the calendar
year.
(b)Alternative limitation year election.
The terms of a plan may provide for the
use of any other consecutive twelve month
period as the limitation year. This includes
a fiscal year with an annual period varying
from 52 to 53 weeks, so long as the fiscal
year satisfies the requirements of section
441(f). A plan may only provide for one
limitation year regardless of the number or
identity of the employers maintaining the
plan.
(c)Multiple limitation years—(1)In
general. Where an employer maintains
more than one qualified plan, those plans
may provide for different limitation years.
The rule described in this paragraph (c)
also applies to a controlled group of em-
ployers (within the meaning of section
414(b) or (c), as modified by section
415(h)). If the plans of an employer (or
a controlled group of employers whose
plans are aggregated) have different lim-
itation years, section 415 is applied in
accordance with the rule of paragraphs
(c)(2) and (3) of this section.
(2)Testing rule for defined contribution
plans. If a participant is credited with an-
nual additions in only one defined contri-
bution plan, in determining whether the
requirements of section 415(c) are satis-
fied, only the limitation year applicable
to that plan is considered. However, if
a participant is credited with annual addi-
tions in more than one defined contribution
plan, each such plan satisfies the require-
ments of section 415(c) only if the limita-
tions of section 415(c) are satisfied with re-
spect to amounts that are annual additions
for the limitation year with respect to the
participant under the plan, plus amounts
credited to the participant’s account under
all other plans required to be aggregated
with the plan pursuant to section 415(f)
and §1.415(f)–1 that would have been con-
sidered annual additions for the limitation
year under the plan if they had been cred-
ited under the plan rather than an aggre-
gated plan.
(3)Testing rule for defined benefit
plans. If a participant accrues a benefit or
receives a distribution under only one de-
fined benefit plan, in determining whether
the requirements of section 415(b) are sat-
isfied, only the limitation year applicable
to that plan is considered. However, if a
participant accrues a benefit or receives a
distribution under more than one defined
benefit plan, a plan satisfies the require-
ments of section 415(b) only if the annual
benefit under all plans required to be ag-
gregated pursuant to section 415(f) and
§1.415(f)–1 for the limitation year of that
plan with respect to the participant sat-
isfy the applicable limitations of section
415(b). Thus, for example, the dollar lim-
itation of section 415(b)(1)(A) applicable
to the limitation year for each plan must
be applied to annual benefits under all
aggregated plans to determine whether the
plan satisfies the requirements of section
415(b).
(d)Change of limitation year—(1)In
general. Once established, the limitation
year may be changed only by amending
the plan. Any change in the limitation year
must be a change to a twelve-month period
commencing with any day within the cur-
rent limitation year. For purposes of this
section, the limitations of section 415 are
to be applied in the normal manner to the
new limitation year.
(2)Application to short limitation pe-
riod. Where there is a change of limitation
year, the limitations of section 415 are to
be separately applied to a “limitation pe-
riod” which begins with the first day of
the current limitation year and which ends
on the day before the first day of the first
limitation year for which the change is ef-
fective. In the case of a defined contribu-
tion plan, the dollar limitation with respect
to this limitation period is determined by
multiplying the applicable dollar limita-
tion for the calendar year in which the lim-
itation period ends by a fraction, the nu-
merator of which is the number of months
(including any fractional parts of a month)
in the limitation period, and the denomina-
torofwhichis12.
(e)Limitation year for individuals on
whose behalf section 403(b) annuity con-
tracts have been purchased. The limita-
tion year of an individual on whose behalf
a section 403(b) annuity contract has been
purchased by an employer is determined in
the following manner.
(1) If the individual is not in
control (within the meaning of
§1.415(f)–1(g)(2)(ii)) of any employer,
July 5, 2005602005–27 I.R.B.

the limitation year is the calendar year.
However, the individual may elect to
change the limitation year to another
twelve-month period. To do this, the in-
dividual must attach a statement to his or
her income tax return filed for the taxable
year in which the change is made. Any
change in the limitation year must comply
with the rules set forth in paragraph (d) of
this section.
(2) If the individual is in control (within
the meaning of §1.415(f)–1(g)(2)(ii)) of an
employer, the limitation year is to be the
limitation year of that employer.
(f)Limitation year for individuals on
whose behalf individual retirement plans
are maintained. The limitation year of
an individual on whose behalf an individ-
ual retirement plan (within the meaning
of section 7701(a)(37)) is maintained shall
be determined in the manner described in
paragraph (e) of this section.
(g)Examples. The following examples
illustrate the application of this section:
Example 1. (i) Participant M is employed by both
Employer A and Employer B, each of which main-
tains a qualified defined contribution plan. M partic-
ipates in both of these plans. The limitation year for
Employer A’s plan is January 1 through December 31,
and the limitation year for Employer B’s plan is April
1 through March 31. Employer A and Employer B are
both corporations, and Corporation X owns 100% of
the stock of Employer A and Employer B.
(ii) The two plans in which M participates are re-
quired under section 415(f) to be aggregated for pur-
poses of applying the limitations of section 415(c) to
annual additions made with respect to M. Thus, for
example, for the limitation year of Employer A’s plan
that begins January 1, 2008, annual additions with re-
spect to M that are subject to the limitations of sec-
tion 415(c) include both amounts that are annual ad-
ditions with respect to M under Employer A’s plan
for the period beginning January 1, 2008, and end-
ing December 31, 2008, and amounts contributed to
Employer B’s plan with respect to M that would have
been considered annual additions for the period be-
ginning January 1, 2008, and ending December 31,
2008, under Employer A’s plan if those amounts had
instead been contributed to Employer A’s plan.
Example 2. In 2007, an employer with a qualified
defined contribution plan using the calendar year as
the limitation year elects to change the limitation year
to a period beginning July 1 and ending June 30. Be-
cause of this change, the plan must satisfy the limi-
tations of section 415(c) for the limitation period be-
ginning January 1, 2007, and ending June 30, 2007.
In applying the limitations of section 415(c) to this
limitation period, the amount of compensation taken
into account may only include compensation for this
period. Furthermore, the dollar limitation for this pe-
riod is the otherwise applicable dollar limitation for
calendar year 2007, multiplied by 6/12.
Par. 15. Section 1.457–4 is amended by
revising paragraph (d) to read as follows:
§1.457–4 Annual deferrals, deferral
limitations, and deferral agreement under
eligible plans.
*****
(d)Deferrals after severance from em-
ployment, including sick, vacation, and
back pay under an eligible plan—(1)In
general. An eligible plan may provide that
a participant who has not had a severance
from employment may elect to defer ac-
cumulated sick pay,accumulated vacation
pay, and back pay under an eligible plan
if the requirements of section 457(b) are
satisfied. For example, the plan must pro-
vide, in accordance with paragraph (b) of
this section, that these amounts may be
deferred for any calendar month only if
an agreement providing for the deferral is
entered into before the beginning of the
month in which the amounts would oth-
erwise be paid or made available and the
participant is an employee on the date the
amounts would otherwise be paid or made
available. For purposes of section 457,
compensation that would otherwise be
paid for a payroll period that begins before
severance from employment is treated as
an amount that would otherwise be paid
or made available before an employee has
a severance from employment. In addi-
tion, deferrals may be made for former
employees with respect to compensation
described in §1.415(c)–2(e)(3)(ii) (relat-
ing to certain compensationpaidwithin
2
1
/2months following severance from
employment), compensation described
in §1.415(c)–2(g)(4) (relating to com-
pensation paid to participants who are
permanently and totally disabled), and
compensation relating to qualified mili-
tary service under section 414(u).
(2)Examples. The provisions of this
paragraph (d) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. Participant G, who is age
62 in 2006, is an employee who participates in an el-
igible plan providing a normal retirement age of 65
and abona fidesick leave and vacation pay program
of the eligible employer. Under the terms of G’s em-
ployer’s eligible plan and the sick leave and vacation
pay program, G is permitted make a one-time elec-
tion to contribute amounts representing accumulated
sick pay to the eligible plan. G has a severance from
employment on January 12, 2007, at which time G’s
accumulated sick and vacation pay that is payable on
March 15, 2007, total $12,000. G elects, on February
4, 2007, to have the $12,000 of accumulated sick and
vacation pay contributed to the eligible plan.
(ii)Conclusion. Under the terms of the eligi-
ble plan and the sick and vacation pay program,
G may elect before March 1, 2007, to defer the
accumulated sick and vacation pay because the
agreement providing for the deferral is entered into
before the beginning of the month in which the
amount is currently available and the amount isbona
fideaccumulated sick and vacation pay that would
otherwise be payable within 2
1
/2months after G
has a severance from employment, as described in
§1.415(c)–2(e)(3)(ii). Thus, under this section and
§1.415(c)–2(e)(3)(ii), the $12,000 is included in G’s
includible compensation for purposes of determining
G’s includible compensation in 2007.
Example 2.(i)Facts. Same facts as inExample
1,exceptthatG’sseverancefromemploymentison
December 1, 2006, G’s $12,000 of accumulated sick
and vacation pay is payable on February 15, 2007
(which is within 2
1
/2months after G’s severance from
employment), and G’s election to defer the accumu-
lated sick and vacation pay is made before February
1, 2007.
(ii) Conclusion.Under this section and
§1.415(c)–2(e)(3)(ii), the $12,000 is included in
G’s includible compensation for purposes of deter-
mining G’s includible compensation in 2007.
Example 3.(i)Facts. Employer X maintains an
eligible plan and a vacation leave plan. Under the
terms of the vacation leave plan, employees gener-
ally accrue three weeks of vacation per year. Up to
one week’s unused vacation may be carried over from
one year to the next, so that in any single year an em-
ployee may have a maximum of four weeks vacation
time. At the beginning of each calendar year, under
the terms of the eligible plan (which constitutes an
agreement providing for the deferral), the value of
any unused vacation time from the prior year in ex-
cess of one week is automatically contributed to the
eligible plan, to the extent of the employee’s maxi-
mum deferral limitations. Amounts in excess of the
maximum deferral limitations are forfeited.
(ii)Conclusion. The value of the unused vacation
pay contributed to X’s eligible plan pursuant to the
terms of the plan and the terms of the vacation leave
plan is treated as an annual deferral to the eligible plan
for January of the calendar year. No amounts con-
tributed to the eligible plan will be considered made
available to a participant in X’s eligible plan.
*****
Par. 16. Section 1.457–5 is amended
by revisingExample 2of paragraph (d) to
read as follows:
§1.45
7–5 Individual limitation for
combi
ned annual deferrals under multiple
eligi
ble plans.
*****
(d)Examples.***
Example (2).(i)Facts. Participant E, who will
turn 63 on April 1, 2006, participates in four eligible
plans during 2006, Plan W which is an eligible gov-
ernmental plan; and Plans X, Y, and Z which are each
eligible plans of three different tax-exempt entities.
For 2006, the limitation that applies to Participant
E under all four plans under §1.457–4(c)(1)(i)(A) is
$15,000. For 2006, the additional age 50 catch-up
limitation that applies to Participant E under Plan
W under §1.457–4(c)(2) is $5,000. Further, for
2005–27 I.R.B.61July 5, 2005

2006, different limitations under §1.457–4(c)(3)
and (c)(3)(ii)(B) apply to Participant E under each
of these plans, as follows: under Plan W, the un-
derutilized limitation under §1.457–4(c)(3)(ii)(B) is
$7,000; under Plan X, the underutilized limitation un-
der §1.457–4(c)(3)(ii)(B) is $2,000; under Plan Y, the
underutilized limitation under §1.457–4(c)(3)(ii)(B)
is $8,000; and under Plan Z, §1.457–4(c)(3) is not
applicable since normal retirement age is age 62 un-
der Plan Z. Participant E’s includible compensation
is in each case in excess of any applicable deferral.
(ii)Conclusion. For purposes of applying this
section to Participant E for 2006, Participant E could
elect to defer $23,000 under Plan Y, which is the
maximum deferral limitation under §1.457–4(c)(1)
through (3), and to defer no amount under Plans W,
X, and Z. The $23,000 maximum amount is equal to
the sum of $15,000 plus $8,000, which is the catch-up
amount applicable to Participant E under Plan Y and
which is the largest catch-up amount applicable to
Participant E under any of the four plans for 2006. Al-
ternatively, Participant E could instead elect to defer
the following combination of amounts: an aggregate
totalof$15,000toPlansX,Y,andZ,ifnocontribu-
tion is made to Plan W; an aggregate total of $20,000
to any of the four plans, assuming at least $5,000 is
contributedtoPlanW;or$22,000toPlanWandnone
to any of the other three plans.
(iii) If the underutilized amount under Plans W, X,
and Y for 2006 were in each case zero (because E had
always contributed the maximum amount or E was a
new participant) or an amount not in excess of $5,000,
the maximum exclusion under this section would be
$20,000 for Participant E for 2006 ($15,000 plus the
$5,000 age 50 catch-up amount), which Participant E
could contribute to any of the plans assuming at least
$5,000 is contributed to Plan W.
Par. 17. Section 1.457–6 is amended
by revising paragraphs (a) and (c) to read
as follows:
§1.457–6 Timing of distributions under
eligible plans.
(a)In general. Except as provided in
paragraph (c) of this section (relating to
distributions on account of an unforesee-
able emergency), paragraph (e) of this sec-
tion (relating to distributions of small ac-
counts), §1.457–10(a) (relating to plan ter-
minations), or §1.457–10(c) (relating to
domestic relations orders), amounts de-
ferred under an eligible plan may not be
paid to a participant or beneficiary before
the participant has a severance from em-
ployment with the eligible employer or
when the participant attains age 70
1
/2,if
earlier. For rules relating to loans, see
paragraph (f) of this section. This section
does not apply to distributions of excess
amounts under §1.457–4(e). However, ex-
cept to the extent set forth by the Com-
missioner in revenue rulings, notices, and
other guidance published in the Internal
Revenue Bulletin, this section applies to
amounts held in a separate account for el-
igible rollover distributions maintained by
an eligible governmental plan as described
in §1.457–10(e)(2).
*****
(c)Rules applicable to distributions
for unforeseeable emergencies—(1)In
general. An eligible plan may permit a
distribution to a participant or beneficiary
faced with an unforeseeable emergency.
The distribution must satisfy the require-
ments of paragraph (c)(2) of this section.
(2)Requirements—(i)Unforeseeable
emergency defined. An unforeseeable
emergency must be defined in the plan as a
severe financial hardship of the participant
or beneficiary resulting from an illness or
accident of the participant or beneficiary,
the participant’s or beneficiary’s spouse,
or the participant’s or beneficiary’s de-
pendent (as defined in section 152, and,
for taxable years beginning on or after
January 1, 2005, without regard to section
152(b)(1), (b)(2), and (d)(1)(B)); loss of
the participant’s or beneficiary’s property
due to casualty (including the need to re-
build a home following damage to a home
not otherwise covered by homeowner’s
insurance,e.g., as a result of a natural
disaster); or other similar extraordinary
and unforeseeable circumstances arising
as a result of events beyond the control
of the participant or the beneficiary. For
example, the imminent foreclosure of or
eviction from the participant’s or benefi-
ciary’s primary residence may constitute
an unforeseeable emergency. In addition,
the need to pay for medical expenses,
including non-refundable deductibles, as
well as for the cost ofprescription drug
medication, may constitute an unforesee-
able emergency. Finally, the need to pay
for the funeral expenses of a spouse or a
dependent (as defined in section 152, and,
for taxable years beginning on or after
January 1, 2005, without regard to section
152(b)(1), (b)(2), and (d)(1)(B)) may also
constitute an unforeseeable emergency.
Except as otherwise specifically provided
in this paragraph (c)(2)(i), the purchase of
a home and the payment of college tuition
are not unforeseeable emergencies under
this paragraph (c)(2)(i).
(ii)Unforeseeable emergency distribu-
tion standard. Whether a participant or
beneficiary is faced with an unforeseeable
emergency permitting a distribution un-
der this paragraph (c) is to be determined
based on the relevant facts and circum-
stances of each case, but, in any case, a
distribution on account of unforeseeable
emergency may not be made to the ex-
tent that such emergency is or may be re-
lieved through reimbursement or compen-
sation from insurance or otherwise, by liq-
uidation of the participant’s assets, to the
extent the liquidation of such assets would
not itself cause severe financial hardship,
or by cessation of deferrals under the plan.
(iii)Distribution necessary to satisfy
emergency need. Distributions because of
an unforeseeable emergency must be lim-
ited to the amount reasonably necessary to
satisfy the emergency need (which may in-
clude any amounts necessary to pay any
federal, state, or local income taxes or
penalties reasonably anticipated to result
from the distribution).
*****
Par. 18. Section 1.457–10 is amended
by revising paragraph (b)(8) to read as fol-
lows:
§1.457–10 Miscellaneous provisions.
*****
(b)Plan-to-plan transfers.***
(8)Purchase of permissive service
credit by plan-to-plan transfers from an
eligible governmental plan to a qualified
plan—(i)General rule. An eligible gov-
ernmental plan of a State may provide
for the transfer of amounts deferred by
a participant or beneficiary to a defined
benefit governmental plan (as defined in
section 414(d)), and no amount shall be
includible in gross income by reason of
the transfer, if the conditions in paragraph
(b)(8)(ii) of this section are met. A transfer
under this paragraph (b)(8) is not treated
as a distribution for purposes of §1.457–6.
Therefore, such a transfer may be made
before severance from employment.
(ii)Conditions for plan-to-plan trans-
fers from an eligible governmental plan
to a qualified plan. A transfer may be
made under this paragraph (b)(8) only if
the transfer is either—
(A) For the purchase of permissive
service credit (as defined in section
415(n)(3)(A)) under the receiving de-
fined benefit governmental plan; or
July 5, 2005622005–27 I.R.B.

(B) A repayment to which section
415 does not apply by reason of section
415(k)(3).
(iii)Example. The provisions of this
paragraph (b)(8) are illustrated by the fol-
lowing example:
Example.(i)Facts. Plan X is an eligible gov-
ernmental plan maintained by County Y for its em-
ployees. Plan X provides for distributions only in the
event of death, an unforeseeable emergency, or sev-
erance from employment with County Y (including
retirement from County Y). Plan S is a qualified de-
fined benefit plan maintained by State T for its em-
ployees. County Y is within State T. Employee A is
an employee of County Y and is a participant in Plan
X. Employee A previously was an employee of State
T and is still entitled to benefits under Plan S. Plan
S includes provisions allowing participants in certain
plans, including Plan X, to transfer assets to Plan S
for the purchase of service credit under Plan S and
does not permit the amount transferred to exceed the
amount necessary to fund the benefit resulting from
the service credit. Although not required to do so,
Plan X allows Employee A to transfer assets to Plan
S to provide a service benefit under Plan S.
(ii)Conclusion. The transfer is permit-
ted under this paragraph (b)(8).
PART 11—EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974
Par. 19. The authority citation for part
11 is amended to read, in part, as follows:
Authority: 26 U.S.C. 7805. * * *
*****
Part 11.415(c)(4)–1 [Removed]
Par. 20. Section 11.415(c)(4)–1 is re-
moved.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on May 25, 2005,
8:45 a.m., and published in the issue of the Federal Register
for May 31, 2005, 70 F.R. 31214)
Foundations Status of Certain
Organizations
Announcement 2005–46
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations
in the Cumulative List of Organizations
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations thatare not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
Abundant Life in Christ Ministries, Inc.,
Lake City, FL
Additude Foundation, Houston, TX
Aiken Association of Christian Education,
Aiken, SC
Alan Abele Research Laboratory
Foundation, Marblehead, OH
Alliance for Global Celebration, Inc.,
Windsor, CT
Alliance for Good Government Education
Foundation, Raleigh, NC
Alternatives in Day Care and Skill
Acquisition, Tucson, AZ
Altha Church of God, Altha, FL
Amateur Hockey of Pensacola, Inc.,
Gulf Breeze, FL
American Children Foundation, Inc.,
Roswell, GA
American Corporation of the Care &
Treatment of Intersexed Persons,
Santa Rose, CA
American Indian Women Keepers of the
Circle, Inc., Kanapolis, NC
Angels for Orphans, Inc., Richardson, TX
Arizona Episcopal Schools Foundation,
Tucson, AZ
Arlington Community Action Program
Community Development Corp., Inc.,
Arlington, VA
Arlington Elementary School Parent
Teacher Organization, Gastonia, NC
Atlanta African American Museum, Inc.,
Atlanta, GA
Attitude Recovery Center, Detroit, MI
Bainbridge High School Choral Boosters,
Inc., Bainbridge, GA
Bay High School Basketball Booster
Club, Inc., Panama City, FL
Beacon Hill Housing Corporation,
Atlanta, GA
Bethany Christian Radio Fund, Inc.,
New Hartford, NY
Boy Scouts of America National Council
— Cub Scout Pack 700, Titusville, FL
BrainInjuryAssociationofAlabama,
Inc., Hoover, AL
Brians Place, Inc., Douglasville, GA
Bridges to Leadership, Inc.,
Milwaukee, WI
Bridging the Rift, Inc., New York, NY
Burlington-AlamanceSister Cities, Inc.,
Burlington, NC
Business 2000 Foundation,
Owatonna, MN
Camp Ashbell Run, Inc., New York, NY
Career Development & Technology, Inc.,
Winton, CA
Caring Foundation, Kansas City, MO
Caro Research Institute, Inc.,
Concord, MA
Casa Kirk, Inc., Chicago, IL
Center for Women’s Reproductive Health,
Inc., Philadelphia, PA
Central Florida Holiday Gold Classic
Toys for Tots, Inc., Orlando, FL
Chapel Hill High School,
Douglasville, GA
Chapel Hill High School Boosters, Inc.,
Douglasville, GA
Charles Town Health Right, Inc.,
Charlestown, WV
Charles Whittingham Foundation,
Arcadia, CA
Charlotte Mecklenburg Public Access
Corporation, Charlotte, NC
Chase Mackellar Troxell Foundation, Inc.,
Leesburg, VA
Chemo-Care, Inc., Hockessin, DE
Chets Charities, Inc., Boulder City, NV
Citizen Review Panels for Hillsborough
Children, Inc., Tampa, FL
Clays Day Care Center, Incorporated,
Baton Rouge, LA
Clover Housing & Redevelopment
Services, Clover, SC
Columbus Housing Initiative, Inc.,
Columbus, GA
Communitas, Inc., Marietta, GA
Community Development Advisors, Inc.,
Atlanta, GA
Community Help Now, Inc., Arnold, MD
Computer Literacy Resources, Inc.,
Prescott, AZ
Conservatory for the Arts at Tampa Bay,
Inc., Tampa, FL
Coop-D-Ville, St. Louis, MO
Cotton Charitable Trust, Loudonville, NY
Council on Egyptian-American Relations,
Washington, DC
Counseling Center of Central Oregon,
Bend, OR
2005–27 I.R.B.63July 5, 2005

County Line Riders of Catalina, Inc.,
Tucson, AZ
Crayton Educational Foundation, Inc.,
Columbia, SC
Crio Ministries Evangelistic Association,
Inc., Poteau, OK
Dare to Care Development Corporation,
Atoka, TN
Deems May Foundation, Lexington, NC
Del Rio Baseball Club, Del Rio, TX
Delaware River Steamboat Floating
Classroom, Inc., Princeton, NJ
Denison Sister Cities, Denison, TX
Denver Press Club, Denver, CO
District 7710 Charitable Foundation,
Holly Springs, NC
Downtown Burgaw Association, Inc.,
Burgaw, NC
Dr. Jorge Bocobo Philippine American
Cultural Center Archives & Museum,
San Francisco, CA
Drugs Don’t Work Camden-Glynn, Inc.,
Kingsland, GA
East Mesa Friends, Inc., Organ, NM
East Wake Warrior Club, Zebulon, NC
Eastlake Neighbors Development Corp.,
Atlanta, GA
Ed-Ventures, Inc., Lakeland, FL
Edison PTO, Centralia, WA
Educational Resource Center, Inc.,
Lithonia, GA
Educational Welding Corporation,
New Orleans, LA
Effingham County Council for the Arts,
Inc., Guyton, GA
Elshaddai Charitable Organizations, Inc.,
Alpharetta, GA
Enduring Faith Ministries, Inc.,
Houston, TX
Engelhard Volunteer Fire Department,
Inc., Engelhard, NC
Fair Haven Homeless Foundation,
Shreveport, LA
Faith of Our Fathers Radio Broadcast,
Miranda, CA
Final Harvest Ministries International,
Inc., Riverview, FL
Firehouse Foundation, Inc., Chicago, IL
Florida Business Partners for Juvenile
Justice, Inc., Tallahassee, FL
Florida EMT and Paramedic Foundation,
Inc., Coral Springs, FL
Florida Institute of Hyperbaric and Dive
Medicine, Inc., Melbourne, FL
Foolery, Inc., Charlottesville, VA
Foundation for Environmental
Technology, Inc., Baton Rouge, LA
Franklin County Volunteer Center, Inc.,
Louisburg, NC
Frederick Baxter Foundation, Inc.,
Atlanta, GA
Free Spirit Equine Rescue Shelter,
Chesterfield, VA
Friends of Honduras, Portland, OR
Friends of Hospice, Girard, OH
Friends Stopping Aids, Inc.,
Jonesboro, GA
Full Time for Jesus Ministries,
Inglewood, CA
Gateway Center, Inc., Cordele, GA
Gibbs Procurement Group, Pamplico, SC
Good and Faithful Servants, Inc.,
Tallahassee, FL
Greater La Crosse Area Chamber
of Commerce Foundation, Inc.,
La Crosse, WI
Greenpoint Nursing Home, Inc.,
Brooklyn, NY
Greenwich Agora, Inc., Greenwich, CT
Halifax County Crimestoppers, Inc.,
Roanoke Rapids, NC
Harbor House, Inc., Tequesta, FL
Harold C. Enloe Lodge No. 1 of the
Fraternal Order ofPolice Foundation,
Ashevill, NC
Harriet Tubman Cultural Center,
Louisville, KY
Health for Youth Foundation,
Washington, DC
Health Resource Corporation,
Williamston, NC
Heavens Heroes Foundation,
Rockport, TX
Heights Interneighborhood Council
Housing Development Fund Corp.,
Bronx, NY
Help is Here, Inc., Miami, FL
Higher Level Ministries Social and
Community Development Agency,
E. Saint Louis, IL
Hillsborough County United SC, Inc.,
Tampa, FL
Historic Downtown North Wilkesboro,
Inc., N. Wilkesboro, NC
Historic St. Augustine Research Institute,
Inc., St. Augustine, FL
Historical and Cultural Association at
Nahunta, Inc., Pikeville, NC
Hogar Infantil, San Ysidro, CA
Homage,Inc.,Austin,TX
Home Planet, Inc., Red Feather Lakes, CO
Howard Jones Wilson OIC Scholarship
Foundation, Wilson, NC
Inner Spaces Network, Inc.,
Pittsburgh, PA
Instruments of Love, Inc., Los Gatos, CA
International Association of Lions Clubs,
Avon Park, FL
International Centre for Eyecare
Education Foundation, Washington, DC
International Youth Development
Foundation, Inc., Miami Beach, FL
Jazz Array Performing Arts Society,
Purcellville, VA
Johnson Equestrian Foundation,
Omaha, NE
Junior Service League of Thomasville
Georgia, Thomasville, GA
Kidsville Preschool & Daycare Center,
Jackson, MS
Kwan-S-Temple,Inc., Milford, MA
Laredo Independent School District
Educational Foundation, Laredo, TX
Latin American Festival, Incorporated,
Charlotte, NC
LincolnParkYouthinTouch,
Incorporated, Hampton, VA
Long-Term Enrichment and Growth
of Assets in Children and Youths,
Greenwood, SC
Lusitania Institute, Inc., Ludlow, MA
Macon County-Tuskegee Public Library,
Tuskegee, AL
Main Street 21st Century, Inc.,
Douglas, GA
Marie Able Youth Center, Inc.,
Paw Creek, NC
Mattamuskeet Indian Tribe, Incorporated,
Jamesville, NC
Mayo High School Athletic Hall of Fame,
Darlington, SC
Maywood Baseball League, Inc.,
Hammond, IN
McDonough Ministries, Newport
News, VA
McDowell Street Center for Family Law,
Inc., Charlotte, NC
Messiah Nutrition Assistance
& Human Development
Foundation, Los Angeles, CA
Mid-America Economic Development
Foundation, St. Paul, MN
Milford Rotary Club Educational
Foundation, Milford, DE
Military Housing of America, Inc.,
Atlanta, GA
Miracle Caregivers for Needy Children,
Atlanta, GA
Miramonte Visual and Performing Arts
Club, Orinda, CA
Mission New Life, Inc., Anniston, AL
Mooresville Lions Charities, Inc.,
Mooresville, NC
July 5, 2005642005–27 I.R.B.

Mountaineer Health Foundation,
Paw Paw, WV
Mozaic Institute, Inc., Savannah, GA
MPIB Parents Advisory Council, Inc.,
Charlotte, NC
Myers Foundation, Big Fork, MT
National Sportsmans Council for Outdoor
Awareness, Freeport, PA
NE Registry, Inc., Wayne, NJ
Net Family News, Salt Lake City, UT
New Millenium Club, Inc., Houston, TX
Next Charity Organization, Inc.,
Alpharetta, GA
Nonprofit Resource Center of Tampa Bay,
Inc., Tampa, FL
North Davidson Enrichment Center, Inc.,
Welcome, NC
Northeast Florida Leadership Council,
Lake City, FL
Northern Arizona Soccer League,
Flagstaff, AZ
Oakboro Elementary Parent/Teacher
Organization, Oakboro, NC
Officeplease Foundation, Glen Ellen, CA
Old Town Community Development
Corporation, Alexandria, VA
On Our Own of Carroll County, Inc.,
Westminster, MD
Operation Lifeforce, Inc., Atlanta, GA
Options Properties, Inc.,
Marlborough, MA
Parenting International Institute,
Springfield, VA
Parker Sayles Foundation,
N. Charleston, SC
Partnerships in Housing, Inc.,
Short Hills, NJ
Phern, Inc., Beckley, WV
Phlex Diversified Services, Inc.,
Memphis, TN
Phoebe Community Development
Corporation, Clarkston, GA
PIH Associates, Inc., Athens, GA
Pool of Shiloam Outreach Ministries,
Champaign, IL
Powerup Bridging the Digital Divide,
Inc., Washington, DC
Priority Insight, Inc., Savannah, GA
Professionals & Entrepreneurs
of America, Inc., PROESA,
West Palm Beach, FL
Providence Community Center,
Inglewood, CA
Quest Music Ministry, Inc., Fairfax, VA
Renaissance Community Development
Corporation, Washington, DC
Repairer of the Breach Ministries,
Incorporated, Griffith, IN
Reverend Vincent Robert Capodanno
Foundation, Inc., Burke, VA
Rites of Passage Youth Empowerment
Foundation, Durham, NC
R.J.S. Community Outreach, Inc.,
Westland, MI
Robinson Elementary School PTO,
Dawsonville, GA
Ron Krause Ministries,
Broken Arrow, OK
R.U.T.H. Resources United to Help
Fellowship Corporation, Flint, MI
Rutherford High School Soccer Booster
Club, Panama City, FL
Saluda River Elementary PTO,
West Columbia, SC
Senior Citizens Club of Willow Springs,
Willow Springs, MO
Seniors & Technology, Inc., Matawan, NJ
Shasta Works, Inc., Redding, CA
Sheila Rosenzweig Memorial Scholarship
Fund, Inc., Lakewood, NJ
Shiloh Development for Community
Home Care, Inc., Fayetteville, NC
Simmons Transportation Service, Inc.,
Jefferson, GA
Sinai Center for Advancement, Inc.,
Murfreesboro, NC
Sister for Sister Foundation, Inc.,
Nashville, TN
SMP Retreat Center, St. Paul, MN
Society for the Advancement of
African-Americans, Detroit, MI
South Carolina Awareness and Rescue for
Equines, Inc., Lexington, SC
South Carolina Human and Community
Relations Association, Greenville, SC
South Carolina Pain Initiative,
West Columbia, SC
South Coastal Area Health Education
Center, Corpus Christi, TX
South East Convention Fandom, Inc.,
Roswell, GA
Southside Recreation and Education
Center, Homewood, IL
Southwest Georgia Child Development
Council, Inc., Albany, GA
Southwestern Ohio Double Dutch League,
Cincinnati, OH
Special Technical Aquatic Rescue Team,
Inc., Greenwich, CT
St. Augustine Group Home, Inc.,
St. Augustine, FL
St. Augustine Lions Foundation, Inc.,
St. Augustine, FL
St. Peters Community Development
Corporation, Miami, FL
Street Heat, Inc., Virginia Beach, VA
Strength Through Empowering People,
Inc., Fairborn, OH
Student Business Incubator, Inc.,
Moscow, ID
Sumter-Shaw AFB Highway
Beautification Committee, Dalzell, SC
SunRise Ecopolis Foundation, Inc.,
St. George, UT
Sunrise to Sunset Educational
Development Center, Charlotte, NC
Tao Guan Harmony, Inc., Chamblee, GA
Tap Tap Tap Vehicle for Communication,
Pasadena, CA
TCB Florida Affordable Housing, Inc.,
Boston, MA
Technology Institute of Teamwork, Inc.,
Annadale, NJ
Texoma Critical Incident Stress
Management Team, Wichita Falls, TX
Therapeutic Spiral International,
Charlottesville, VA
Third Planet, Inc., Fort Lauderdale, FL
Three Angels Educational Broadcasting,
Inc., Flagstaff, AZ
Threshold House of Genesis, Inc.,
Charlotte, NC
Thunderbolt Ministries, Inc.,
Jacksonville, FL
Total Family Care, Greensboro, NC
Touch of Love Adult Day Health Center,
Hickory, NC
Transglobal Communications Foundation,
New York, NY
Ukrainian Relief Fund Rochester NY,
Inc., Rochester, NY
Umoja Kwest Action Agency, Inc.,
Baltimore, MD
Upward Bound Recovery Center,
Indianapolis, IN
Urban M-Pact, Inc., Wilmington, NC
Vision Mortgage Training Center, Inc.,
Charlotte, NC
Vision Team, Dallas, TX
Vista Youth Sports Fields Foundation,
Inc., Vista, CA
Walton Oconee Morgan Environmental
Group, Inc., High Shoals, GA
Wednesdays Woman Foundation, Inc.,
New York, NY
West St. Paul Hockey Hall of Fame,
West St. Paul, MN
Western Wisconsin Workforce
Development Board, Inc.,
La Crosse, WI
Westminster Services, Inc., Orlando, FL
Weston Lakes Women’s Association
Community Foundation, Inc.,
Fulshear, TX
2005–27 I.R.B.65July 5, 2005

Wildplaces Foundation,
Beverly Hills, CA
Willow Towers, Inc., New Rochelle, NY
Winter Haven Concert Band, Inc.,
Lake Alfred, FL
With Open Arms, Incorporated,
Raeford, NC
Womens Resource Center of Clay County,
Orange Park, FL
World Evangelical Mission Team of New
England, Inc., Mattapan, MA
Youth & Family Transitional Center, Inc.,
High Point, NC
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nal Revenue Service will issue a ruling or
determination letter with the revised clas-
sification as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
videdinsection1.509(a)–7oftheIncome
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
July 5, 2005662005–27 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2005–27 I.R.B.iJuly 5, 2005

Numerical Finding List
1
Bulletin 2005–27
Announcements:
2005-46, 2005-27 I.R.B.63
Notices:
2005-48, 2005-27 I.R.B.9
2005-49, 2005-27 I.R.B.14
2005-50, 2005-27 I.R.B.14
Proposed Regulations:
REG-130241-04, 2005-27 I.R.B.18
Revenue Rulings:
2005-38, 2005-27 I.R.B.6
2005-39, 2005-27 I.R.B.1
2005-40, 2005-27 I.R.B.4
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2005–1 through 2005–26 is in Internal Revenue Bulletin
2005–26, dated June 27, 2005.
July 5, 2005ii2005–27 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2005–27
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–1 through 2005–26 is in Internal Revenue Bulletin 2005–26, dated June 27, 2005.
2005–27 I.R.B.iiiJuly 5, 2005
*U.S.Government PrintingOffice:2005—314–048/20012