Back to Qualification

Nondiscrimination

  • 3848. When is a plan nondiscriminatory?

    • Editor’s Note: See below for information on the relief provided by the IRS for closed defined benefit plans. See Q 3860 for a discussion of the relief provided to closed defined benefit plans under the SECURE Act.

      The IRC has established requirements that prohibit a plan from providing benefits that discriminate in favor of highly compensated employees. A plan will demonstrate that it is not discriminatory by passing certain annual nondiscrimination testing under IRC Section 401(a)(4) or through using a plan that has a safe harbor design. A plan demonstrates that it does not discriminate in favor of highly compensated employees by satisfying, on an annual basis, three basic requirements:

      (1) contributions or benefits must not discriminate in favor of “highly compensated employees” as defined in IRC Section 414(q) (Q 3930); the annual testing to meet this requirement is described in Q 3850;

      (2) benefits, rights, and features available to employees do not discriminate in favor of highly compensated employees (Q 3860); and

      (3) the effect of plan amendments, including grants of past service credit, and plan terminations cannot discriminate in favor of highly compensated employees (Q 3861).1

      Employees not included in the plan but who are covered by a collective bargaining agreement can be excluded from consideration in meeting the nondiscrimination requirement if there is evidence that retirement benefits were the subject of good faith bargaining between the employee representatives and the employer. If union employees are covered under the plan, benefits or contributions must be provided for them on a nondiscriminatory basis.2 Nonresident aliens with no U.S. earned income also may be excluded.

      Governmental plans generally are not subject to the requirements of IRC Section 401(a)(4).3

      Regulations under IRC Section 401(a)(4) provide the exclusive rules for determining whether a plan satisfies the nondiscrimination requirements of IRC Section 401(a)(4).4 A plan may satisfy the nondiscrimination requirement on the basis of either measuring the employer’s contributions or the benefits attributable to those contributions (benefits testing). Both options are available regardless of whether the plan is a defined benefit plan or a defined contribution plan. The process of testing defined benefit plans on the basis of contributions or defined contribution plans on the basis of benefits is referred to as “cross testing” (Q 3862).

      A plan will not be considered discriminatory merely because contributions or benefits bear a uniform relationship to the employees’ compensation (Q 3867).5 A plan will satisfy IRC Section 401(a)(4) only if it complies both in form and in actual operation with the regulations that provide for nondiscrimination testing methods and safe harbor designs. Intent is irrelevant in making this determination.6

      A plan also will not be treated as discriminatory merely on account of the making of, or the right to make, catch-up contributions (Q 3761) by participants age 50 or over under the provisions of IRC Section 414(v), so long as a universal availability requirement is met.7

      There are two basic options for satisfying the IRC’s nondiscrimination requirements. The plan can use one of the safe harbor formulas (Q 3849, Q 3851) stated in the regulations or it can satisfy certain testing annually. Thus, plans that do not meet the requirements for one of the safe harbors must use the general nondiscrimination test. The safe harbor compliance methods are design-based. Essentially, they require the plan to have uniform provisions that reduce the potential for prohibited discrimination and, therefore, annual testing is unnecessary. As a result, the safe harbors avoid costly testing, which focuses on actual plan results and requires annual review.


      Planning Point: Whether an employer decides to structure its plan to meet a safe harbor or to favor owners and higher paid employees often depends on whether the employer expects to satisfy the general non-discrimination test and if it wants the simpler administration offered by a safe harbor plan.


      Nondiscrimination Relief for Closed Plans

      Many employers who have closed defined benefit plans to new participants have continued to allow groups of “grandfathered” employees to earn benefits under the closed defined benefit plans. Because of this, many of these plans have had difficulties meeting the applicable nondiscrimination requirements as more of these grandfathered employees become “highly compensated” over time. Proposed regulations published in 2016 contain special rules to make it easier for these plans to satisfy the nondiscrimination requirements and Notice 2014-5 was released to provide temporary relief if certain conditions are satisfied.

      The proposed regulations modify the rules applicable to defined benefit replacement allocations (DBRAs) that allow some allocations to be disregarded when determining whether a defined contribution plan has a broadly available allocation rate in order to allow more allocations to satisfy the rules. Further, the regulations provide a special nondiscrimination testing rule that can apply if a benefit or plan feature is only made available to grandfathered employees in a closed plan. In anticipation of the finalization of these regulations, Notice 2019-49 expands the nondiscrimination relief to plan years beginning before 2021, so long as the conditions in Notice 2014-5 are satisfied.

      Although the IRS has previously extended the nondiscrimination relief for closed DB plans in Notice 2014-5, newly released Notice 2019-60 also expands the relief to include relief from benefits, rights and features testing for closed plans. To qualify, the plan must have closed via amendments adopted before December 13, 2013. Notice 2019-60 does not change prior relief, but adds additional relief. Closed plans’ benefits, rights and features are treated as satisfying testing if the benefits, rights and features were provided at the time of the amendment closing the plan and one of two conditions are satisfied: (1) no amendments were adopted after January 29, 2016 that expanded or restricted eligibility for the benefits, rights and features or (2) if there was such an amendment, the benefit, right or feature does not benefit a relatively larger proportion of highly compensated employees (measured using the plan’s ratio percentage) than before the amendment. This relief was made permanent by the SECURE Act (see Q 3860).


      1. Treas. Reg. § 1.401(a)(4)-1(b)(1).

      2. IRC §§ 401(a)(4), 410(b)(3). See, e.g., Let. Rul. 8419001.

      3. See IRC § 401(a)(5)(G).

      4. Treas. Reg. § 1.401(a)(4)-1(a).

      5. IRC § 401(a)(5)(B).

      6. Treas. Reg. § 1.401(a)(4)-1(a).

      7. IRC § 414(v)(3)(B).

  • 3849. What safe harbor designs allow a defined contribution plan to satisfy the nondiscrimination requirements?

    • The regulations set forth two safe harbor designs for defined contribution plans.

      Under the first safe harbor, referred to as a uniform allocation formula, a defined contribution plan will be nondiscriminatory if it allocates employer contributions and forfeitures for the year under an allocation formula that allocates to each employee the same percentage of plan year compensation, the same dollar amount, or the same dollar amount for each uniform unit of service (not exceeding one week) performed by the employee during the year.1

      The second safe harbor design is referred to as a uniform points allocation formula. This formula allows a defined contribution plan other than an ESOP to be nondiscriminatory even though contributions are weighted for age, service, or compensation.2 It unfortunately imposes restrictions that limit its ability to favor higher paid employees with larger contributions and for that reason is seldom found outside the not-for-profit world.

      A plan with a non-uniform allocation formula may retain its safe harbor status if the effect of the non-uniform allocation is to provide lower benefits to highly compensated employees.3


      1. Treas. Reg. § 1.401(a)(4)-2(b)(2).

      2. See Treas. Reg. § 1.401(a)(4)-2(b)(3).

      3. Treas. Reg. § 1.401(a)(4)-2(b)(4)(v).

  • 3850. How can a defined contribution plan that does not satisfy one of the safe harbor designs show that it does not discriminate in favor of highly compensated employees?

    • A defined contribution plan other than plans subject to IRC Section 401(k) or 401(m) that does not satisfy one of the safe harbor designs will meet the “nondiscrimination in amount” requirement if it meets a general test. First, the employer calculates a benefit percentage ratio for each employee and sets up rate groups based upon these benefit percentages.

      The next step is to compare the rate groups for highly compensated employees to the rate groups for non-highly compensated employees. It is such a complicated process that this discussion is just an overview of the process. If each “rate group” satisfies the minimum coverage requirements of IRC Section 410(b), the plan will have passed the general test. For this purpose, a “rate group” exists for each highly compensated employee in the plan, and consists of highly compensated employees (“HCEs”) and all other employees in the plan (whether highly compensated or non-highly compensated) who have an allocation rate greater than or equal to the highly compensated employee’s allocation rate. An employee’s allocation ratio equals the sum of the allocations to the employee’s account for the plan year, expressed either as a percentage of plan year compensation or as a dollar amount.1 In other words, each employee, regardless of compensation level, is included in the rate group for every HCE who has an allocation rate less than or equal to that employee’s allocation rate.2


      1. Treas. Reg. § 1.401(a)(4)-2(c)(2).

      2. Treas. Reg. § 1.401(a)(4)-2(c)(1).

  • 3851. What safe harbors exist that allow a defined benefit plan to satisfy the nondiscrimination requirements?

    • The final regulations provide a set of uniformity requirements that apply to all defined benefit safe harbors. A plan generally must provide a uniform normal retirement benefit in the same form for all employees, using a uniform normal retirement age. For purposes of this requirement, Social Security retirement age will be treated as a uniform retirement age.1 The regulations provide for three safe harbors: one for unit credit plans, one for fractional accrual plans (including flat benefit plans), and one for insurance contract plans.2


      1. IRC § 401(a)(5)(F).

      2. Treas. Reg. § 1.401(a)(4)-3(b).

  • 3852. How can a defined benefit plan that does not satisfy one of the safe harbors show that it does not discriminate in favor of highly compensated employees?

    • Defined benefit plans that do not satisfy any of the safe harbors will satisfy the “nondiscriminatory in amount” requirement only if they satisfy the general test, which requires the calculation of accrual rates and an analysis of their distribution. The general test will be satisfied if each “rate group” satisfies the minimum coverage requirements of IRC Section 410(b). For this purpose, a “rate group” exists for each highly compensated employee in the plan, and consists of the highly compensated employee and all other employees in the plan (whether highly compensated or non-highly compensated) who have a normal accrual rate greater than or equal to the highly compensated employee’s normal accrual rate, and who also have a most valuable accrual rate greater than or equal to the highly compensated employee’s most valuable accrual rate.


      Planning Point: In other words, an employee is in the rate group for each highly compensated employee who has a normal accrual rate less than or equal to the employee’s normal accrual rate and who also has a most valuable accrual rate less than or equal to the employee’s most valuable accrual rate.1


      The regulations provide a facts and circumstances “safety valve” for certain defined benefit plans that would pass the general test if no more than 5 percent of the highly compensated employees were disregarded. If the IRS determines on the basis of all the relevant facts and circumstances that such a plan does not discriminate with respect to the amount of employer-provided benefits, the plan will pass the general test. For purposes of calculating the 5 percent, the number of highly compensated employees may be rounded to the nearest whole number.2


      1. Treas. Reg. § 1.401(a)(4)-3(c)(1).

      2. Treas. Reg. § 1.401(a)(4)-3(c)(3).

  • 3853. Can a plan satisfy the nondiscrimination requirements by limiting participation to highly compensated employees and nonhighly compensated employees with very short periods of service?

    • The IRS released guidance expressing disapproval of plans that attempt to satisfy the nondiscrimination requirements by limiting participation to highly compensated employees and to rank and file employees with very short periods of service. The IRS noted that sponsors of such plans use “plan designs and hiring practices that limit who receives a benefit to the nonhighly compensated employees and to other employees with very small amounts of compensation” and whose tenure with the company never results in their benefits being vested. These plans are targeted for adverse rulings, possible disqualification, or other actions.1

      1. Memorandum dated October 22, 2004, Carol D. Gold, Director Employee Plans.

  • 3854. What safe harbor designs allow a target benefit plan to satisfy the nondiscrimination requirements?

    • The regulations provide a safe harbor testing method for target benefit plans. Because target benefit plans are defined contribution plans that determine allocations based on a defined benefit funding approach, the safe harbor is included in the rules for cross testing.A target benefit plan generally will be deemed to meet the “nondiscrimination in amount” requirement if:

      (1) it satisfies uniformity requirements with respect to normal retirement age and the allocation formula (the Social Security retirement age will be treated as a uniform retirement age);1

      (2) it provides a stated benefit formula that complies with one of the defined benefit plan safe harbors that uses the fractional accrual rule;

      (3) employer contributions are determined under an individual level premium funding method specified in the regulations, based on an employee’s stated benefit and “theoretical reserve;”

      (4) employee contributions, if any, are not used to fund the stated benefit; and

      (5) the stated benefit formula satisfies Treasury Regulation Section 1.401(l)-3, if permitted disparity is taken into account.2


      1. IRC § 401(a)(5)(F).

      2. Treas. Reg. § 1.401(a)(4)-8(b)(3).

  • 3855. How do 401(k) plans satisfy the IRC nondiscrimination requirements?

    • These plans may not use the general test of IRC Section 401(a)(4). The plans must satisfy the IRC’s nondiscrimination requirements following the requirements that are specified under IRC Sections 401(k) and 401(m). Those sections also allow several safe harbor designs that can eliminate a requirement to complete a mathematical test for deferrals and matching contributions (Q 3802 to Q 3808).1


      1. IRC §§ 401(k), 401(m); Treas. Reg. § 1.401(a)(4)-1(b)(2)(ii)(B).

  • 3856. Can a plan satisfy the IRC nondiscrimination requirements through aggregating multiple plans or restructuring the plan?

    • Under certain circumstances, a plan may be aggregated or combined with other plans or restructured (i.e., treated as two or more separate plans) for purposes of meeting the nondiscrimination in amount requirement. Where plans are restructured, each component plan must separately satisfy the nondiscrimination requirements and the coverage requirements (Q 3842).1

      If two or more plans are permissively aggregated and treated as a single plan for purposes of satisfying the minimum coverage requirements (Q 3842), the aggregated plans also must be treated as a single plan for purposes of meeting the nondiscrimination requirements.2 The regulations include guidelines for determining whether several of these plans, when considered as a unit, provide contributions and benefits that discriminate in favor of highly compensated employees.

      A disability plan that is not a pension, profit sharing, stock bonus, or annuity plan may not be aggregated with these plans for this purpose.3

      Special rules are provided for applying the nondiscrimination requirements to an aggregated plan that includes both a defined benefit plan and a defined contribution plan.4 Special rules apply where an aggregated plan includes a new comparability plan (Q 3862).5


      1. See Treas. Reg. § 1.401(a)(4)-9(c).

      2. Treas. Reg. § 1.401(a)(4)-9(a).

      3. See Rev. Rul. 81-33, 1981-1 CB 173.

      4. See Treas. Reg. § 1.401(a)(4)-9(b).

      5. See Treas. Reg. § 1.401(a)(4)-9(c)(3)(ii).

  • 3857. Will a plan be considered discriminatory if it is integrated with Social Security?

    • An integrated plan will not be considered discriminatory merely because the plan is integrated with Social Security (i.e., the plan uses the permitted disparity rules).1 As a result, if a plan is integrated in a way that satisfies the permitted disparity rules, the disparity is disregarded in determining whether the plan satisfies the applicable defined contribution or defined benefit safe harbor.2 For details on Social Security integration, see Q 3863.

      1. See IRC § 401(a)(5)(D).

      2. See Treas. Reg. § 1.401(l)-1(a)(1).

  • 3858. What substantiation requirements must an employer follow to show compliance with the IRC nondiscrimination requirement?

    • Employers may demonstrate compliance with the “nondiscrimination in amount” requirement by using “snapshot” testing on a single day during the plan year, provided that that day is representative of the employer’s work force and the plan’s coverage throughout the plan year.1

      1. Rev. Proc. 93-42, 1993-2 CB 540, modified by Rev. Proc. 95-34, 1995-2 CB 385.

  • 3859. Is a plan that offers credits for past service considered discriminatory?

    • The effect of plan provisions with respect to grants of past service must be non-discriminatory. The determination of whether credit for past service causes discrimination is made on a facts and circumstances basis. A plan provision that credits pre-participation service or imputed service to any highly compensated employee will be considered non-discriminatory if, based on all the facts and circumstances, the provision applies on the same terms to all similarly-situated non-highly compensated employees, there is a legitimate business purpose for crediting the service, and the crediting of the service does not by design or operation discriminate significantly in favor of highly compensated employees. Relevant facts and circumstances used to determine if a plan discriminates significantly in favor of highly compensated employees include (1) whether the service credit merely prevents the employee from being disadvantaged with respect to benefits by a change in job or employer or provides the employee with benefits comparable to those of other employees; (2) the business ties between the current employer and prior employer; (3) the degree of excess coverage under section 410(b) of non-highly compensated employees for the plan crediting the service, considering employees who are credited with pre-participation service; (4) the circumstances of the employee’s transfer into the group of employees covered by the plan; and (5) the type of service being credited. 1 For an explanation of the nondiscrimination requirements for plan amendments granting past service credit, see Q 3861.

      As to which individuals must be treated as employees and what organizations constitute the employer in the IRC’s nondiscrimination testing, see Q 3928, Q 3929, Q 3933, and Q 3935.


      1. Treas. Reg. § 1.401(a)(4)-11(d)(3)(iii).

  • 3860. What are the requirements with respect to the nondiscriminatory availability of plan benefits, rights, and features?

    • Editor’s Note: The SECURE Act made changes that would make it easier for certain sponsors of closed defined benefit plans to satisfy their nondiscrimination testing requirements.1 See heading below for details.

      The benefits, rights, and features provided under a plan (i.e., all optional forms of benefit, ancillary benefits, and other rights and features available to any employee under a plan) must be made available in a nondiscriminatory manner. Benefits, rights, and features generally will meet this requirement only if each benefit, right, and feature satisfies a “current availability” requirement and an “effective availability” requirement.2

      The current availability requirement generally is satisfied if the group of employees to whom the benefit, right, or feature is currently available during the plan year satisfies the minimum coverage test of section 410(b) (Q 3842) without regard to the average benefit percentage test.3

      Current availability is based on the current facts and circumstances of the employee; the fact that an employee may satisfy an eligibility condition in the future does not make the benefit option currently available to that employee. Conditions based on termination of employment, disability, hardship, or conditions based on age or length of service may be disregarded in determining current availability.4

      To satisfy the effective availability requirement, the group of employees to whom a benefit, right, or feature is effectively available must not substantially favor highly compensated employees, based on all the facts and circumstances.5 Thus, for example, a matching contribution that is available only to employees deferring a relatively high percentage of income would fail this requirement if the level of deferral required makes the match effectively unavailable to most non-highly compensated employees.

      A plan that offers catch-up contributions will not be treated as violating these requirements merely because participants age 50 or over make, or have the right to make, catch-up contributions under the provisions of IRC Section 414(v), so long as a universal availability requirement is met (Q 3761).6

      The IRS has issued guidance under which two optional forms of benefit that differ only with respect to the timing of their commencement generally may be aggregated and treated as a single optional form of benefit for purposes of satisfying the nondiscriminatory current and effective availability requirements.7 For example, a preretirement age 72 (70½ pre-2020) distribution option that is available only to 5 percent owners, as required under IRC Section 401(a)(9) (Q 3895), may be aggregated with another optional form of benefit that differs only in the timing of the commencement of payments, provided certain requirements are met.8

      The fact that subsidized early retirement benefits and joint and survivor annuities are based on an employee’s Social Security retirement age generally will not result in their being treated as unavailable to employees on the same terms.9

      Employers may demonstrate compliance with the current availability requirement by using snapshot testing on a single day during the plan year, provided that that day is representative of the employer’s work force and the plan’s coverage throughout the plan year.10

      The IRS determined that a plan, in operation, violated IRC Section 401(a)(4) when it permitted highly compensated employees to direct their own investments, which resulted in their earning a substantially higher return than that earned on contributions by rank and file employees. The IRS commented that even if the investment decisions had resulted in a lower return or a loss, the opportunity for only highly compensated employees to make their own investment decisions still would result in discrimination.11

      SECURE Act Changes

      Many employers who have closed defined benefit plans to new participants have continued to allow groups of “grandfathered” employees to earn benefits under the closed defined benefit plans. Because of this, many of these plans have had difficulties meeting the applicable nondiscrimination requirements as more of these grandfathered employees become “highly compensated” over time. For a number of years, the IRS provided relief from the nondiscrimination rules for closed defined benefit plans. The SECURE Act essentially codifies a number of these relief provisions.

      Generally, a defined benefit plan cannot discriminate in favor of highly compensated employees with respect to any plan benefit, right or feature. Under the SECURE Act, defined benefit plans will be treated as passing nondiscrimination testing with respect to benefits, rights and features if:

      (1) the plan passes nondiscrimination testing in the plan year during which the plan closure takes place, and the two subsequent plan years,

      (2) the plan was not amended after closure to discriminate in favor of highly compensated employees, either by modifying the closed class or the benefits, rights and features provided to that class and

      (3) the plan was closed before April 5, 2017 or there was no substantial increase in value of either coverage or value of the benefits, rights and features for the five-year period before the plan was closed.12

      A plan is treated as having had a “substantial increase” in coverage or value of the benefits, rights, or features during the applicable five-year period only if, during that period:

      “(i) the number of participants covered by such benefits, rights, or features on the date the five-year period ends is more than 50 percent greater than the number of such participants on the first day of the plan year in which the period began, or

      “(ii) the benefits, rights, and features have been modified by plan amendments in such a way that, as of the date the class is closed, the value of the benefits, rights, and features to the closed class as a whole is substantially greater than the value as of the first day of such five-year period, solely as a result of the amendments.13

      Additionally, closed defined benefit plans can be aggregated with the employer’s defined contribution plans for purposes of compliance testing if

      (1) the defined benefit plan provides benefits to a closed group of participants,

      (2) the defined benefit plan passes nondiscrimination and coverage testing in the plan year during which the plan closure takes place, and the two subsequent plan years,

      (3) no amendments that discriminate in favor of highly compensated employees were made after the plan closed, and

      (4) the plan was closed before April 5, 2017 or there was no “substantial increase” in value of either coverage or value of the benefits, rights and features for the five-year period before the plan was closed (see above).14

      If the defined benefit plan is aggregated with a plan that provides matching contributions, the defined benefit plan must also be aggregated with the portion of the DC plan that provides elective deferrals and the matching contributions must be treated in the same way as nonelective contributions for purposes of nondiscrimination and coverage testing.15

      The nondiscrimination relief was effective immediately beginning in 2020, but plans have the option of applying this relief retroactively to plan years beginning after December 31, 2013.


      1. IRC § 401(o).

      2. Treas. Reg. §§ 1.401(a)(4)-1(b)(3), 1.401(a)(4)-4(a).

      3. Treas. Reg. § 1.401(a)(4)-4(b)(1).

      4. Treas. Reg. § 1.401(a)(4)-4(b)(2).

      5. Treas. Reg. § 1.401(a)(4)-4(c)(1).

      6. IRC § 414(v)(3)(B).

      7. See Notice 97-75, 1997-2 CB 337.

      8. Notice 97-75, 1997-2 CB 337, A-5.

      9. IRC § 401(a)(5)(F)(ii).

      10. Rev. Proc. 93-42, 1993-2 CB 540.

      11. TAM 9137001.

      12. IRC § 401(o)(1)(A), (C).

      13. IRC § 401(o)(1)(D).

      14. IRC § 401(o)(1)(B).

      15. IRC § 401(o)(1)(B)(ii).

  • 3861. What nondiscrimination requirements must a plan meet with respect to plan amendments and terminations?

    • The timing of plan amendments must not have the effect of discriminating significantly in favor of highly compensated employees.1 For this purpose, a plan amendment includes the establishment or termination of the plan, as well as any change in the benefits, rights, or features, benefit formulas, or allocation formulas under the plan.2

      Regulations provide a facts and circumstances test for determining whether a plan amendment or series of amendments has the effect of discriminating significantly in favor of current or former highly compensated employees.3

      The timing of a plan amendment that grants past service credit or increases benefits attributable to years of service for a period in the past will be deemed to be nondiscriminatory if the following four safe harbor requirements are met:

      (1) the period for which the credit is granted does not exceed the five years preceding the current year,

      (2) the past service credit is granted on a reasonably uniform basis to all employees,

      (3) benefits attributable to the period are determined by applying the current plan formula, and

      (4) the service credited is service, including pre-participation or imputed service (Q 3848), with the employer or a previous employer.4

      Guidelines for nondiscriminatory allocation of assets on termination of a defined benefit plan are set forth in Revenue Ruling 80-229.5


      1. Treas. Reg. § 1.401(a)(4)-1(b)(4).

      2. Treas. Reg. § 1.401(a)(4)-5(a).

      3. Treas. Reg. § 1.401(a)(4)-5(a)(2).

      4. Treas. Reg. § 1.401(a)(4)-5(a)(3).

      5. 1980-2 CB 133.

  • 3862. What are the requirements for cross tested plans?

    • Editor’s Note: The SECURE Act made changes that would make it easier for certain sponsors of closed defined benefit plans to satisfy their nondiscrimination testing requirements.1 See Q 3860 for details.

      Cross testing is the process by which defined contribution plans are tested for prohibited discrimination on the basis of benefits and defined benefit plans are tested on the basis of contributions. The general rules for converting allocations under a defined contribution plan to equal benefits and for converting benefits under a defined benefit plan to equal allocation rates are explained at Treasury Regulation Section 1.401(a)(4)-8.

      The most common form of cross testing is comparability testing of profit sharing plans. That is because it is normally more advantageous for older and more highly compensated participants to have contributions to a defined contribution plan tested on the basis of equivalent benefits than it is to have benefits in a defined benefit plan tested on the basis of allocations. The comparability feature uses cross testing to show that contributions under a plan provide nondiscriminatory benefits. Cross testing also can involve aggregating a defined benefit plan with a defined contribution plan, and testing plans together on the basis of the benefits they provide.

      Cross-testing requires that a defined contribution plan pass two tests: the gateway test and the non-discrimination test.

      The Gateway Test

      The gateway test requires that even a cross-tested plan must provide a minimum level of benefits to all participants and is a precondition to moving on to the nondiscrimination test.

      The minimum allocation gateway test sets forth two standards for comparability plans. First, if the allocation rate for each Nonhighly Compensated Employee (“NHCE”) in the plan is at least one-third of the allocation rate of the Highly Compensated Employee (“HCE”) with the highest allocation rate under the plan, the gateway will be satisfied. In the alternative, if the allocation rate for each NHCE is at least 5 percent of his or her plan year compensation, within the meaning of IRC Section 415(c)(3) (Q 3867), the gateway will be satisfied.2

      In lieu of the gateway contribution test, a comparability plan may pass through the gateway if it provides for “broadly available allocation rates.”3 To be broadly available, each allocation rate must be available to a group of employees that satisfies IRC Section 410(b), without regard to the average benefit percentage test (Q 3842).4 Final regulations liberalized this determination somewhat by allowing groups receiving two different allocation rates to be aggregated for purposes of determining whether allocation rates are “broadly available.” Thus, for example, a group receiving a 3 percent allocation rate could be aggregated with a group receiving a 10 percent allocation rate if each group passes the coverage test (not counting the average benefit percentage test).5 Differences in allocation rates resulting from permitted disparity under the Section 1.401(l) regulations may be disregarded.6

      A plan that provides for age-based allocation rates also will be excepted from the minimum allocation gateway if it has a gradual age or service schedule. A plan has a gradual age or service schedule if the allocation formula for all employees under the plan provides for a single schedule of allocation rates that (1) defines a series of bands based solely on age, years of service, or points representing the sum of age and years of service that applies to all employees whose age, years of service, or points are within each band, and (2) the allocation rates under the schedule increase smoothly at regular intervals (as defined in the regulations).

      Samples of smoothly-increasing allocation schedules, based on the sum of age and service, are included in the final regulations.7 Certain plans that fail the safe harbor for target benefit plans8 may satisfy the requirements for age-based allocation rates if the plan’s allocation rates are based on a uniform target benefit allocation.9

      The Nondiscrimination Test

      Once the gateway test is passed, the equivalent benefit rate groups are subject to nondiscrimination testing. To pass nondiscrimination testing, every rate group must satisfy the coverage requirements of IRC Section 410(b) (Q 3860). Both the ratio percentage test and average benefit test are available for this purpose.

      A defined benefit plan, benefitting primarily HCEs, may be aggregated with a defined contribution plan benefitting primarily NHCEs (sometimes referred to as a “DB/DC plan”) if a gateway similar to the one described above is met, with the 5 percent safe harbor contribution being increased to 7.5 percent.10

      In the alternative, if the combined plan is primarily defined benefit in character or consists of broadly available separate plans, as defined in regulations, it may be nondiscriminatory without satisfying the gateway.11

      The IRS recently advised that a DB/DC plan was not primarily defined benefit in character because the non-highly compensated employees participating in the arrangement received no meaningful benefit from the DB portion of the plan. In this case, a “floor offset arrangement” was created so that DB plan (cash balance plan) benefits were offset by DC plan (profit-sharing plan) benefits only for non-highly compensated, non-owner employees, and the arrangement essentially eliminated the DB plan benefits for these employees. The IRS found that in order to satisfy the minimum aggregate allocation gateway, non-highly compensated employees must receive sufficient allocations under the profit-sharing plan in order to demonstrate that the plans were nondiscriminatory based on equivalent benefits.12

      The IRS released guidance expressing disapproval with plans that attempt to satisfy the nondiscrimination requirements by limiting participation to highly compensated employees and to rank and file employees with very short periods of service. By way of example, the IRS stated that a plan cross tested under the forgoing provisions violates the nondiscrimination requirements of IRC Section 401(a)(4) (Q 3848) where:

      (1) the plan excludes most or all permanent NHCEs;

      (2) the plan covers a group of NHCEs who were hired temporarily for short periods of time;

      (3) the plan allocates a higher percentage of compensation to the accounts of the HCEs than to those of the NHCEs covered by the plan; and

      (4) compensation earned by the NHCEs covered by the plan is significantly less than the compensation earned by the NHCEs not covered by the plan.13


      1. IRC § 401(o).

      2. Treas. Reg. § 1.401(a)(4)-8(b)(1)(vi)(A).

      3. Treas. Reg. § 1.401(a)(4)-8(b)(1)(i)(B).

      4. Treas. Reg. § 1.401(a)(4)-8(b)(1)(iii)(A).

      5. Rev. Rul. 2001-30, 2001-1 CB 46.

      6. Treas. Reg. § 1.401(a)(4)-8(b)(1)(vii).

      7. Treas. Reg. § 1.401(a)(4)-8(b)(1)(iv)(B).

      8. See Treas. Reg. § 1.401(a)(4)-8(b)(3).

      9. See Treas. Reg. § 1.401(a)(4)-8(b)(1)(v).

      10. Treas. Reg. § 1.401(a)(4)-9(b)(2)(v)(A) and (D).

      11. See Treas. Reg. § 1.401(a)(4)-9(b)(1)(v)(B) and (C).

      12. CCA 201810008.

      13. Memorandum dated October 22, 2004, Carol D. Gold, Director Employee Plans.

  • 3863. What is permitted disparity and how does it work?

    • Permitted disparity, also called Social Security integration, describes a contribution allocation formula or a benefit accrual formula that has two tiers of benefits. Under this formula, higher paid participants receive a slightly larger employer-provided benefit than employees whose contribution is below a level specified in the plan (i.e., the integration level in a defined contribution plan).

      Permitted disparity rules are an exception to the general nondiscrimination requirement. Thus, a plan may use permitted disparity and still be classified as a safe-harbor design. The two-tier formula is based on the principle that employer-paid Social Security benefits will fund a greater portion of the replacement income of lower paid workers than of those whose earnings are above the Social Security wage base. The rules for permitted disparity are found under IRC Section 401(l).

      An integrated plan will not be considered discriminatory merely because plan contributions or benefits favor the highly compensated employees if certain disparity thresholds are met.1 If the requirements of IRC Section 401(l) are met, the disparity will be disregarded in determining whether the plan satisfies the nondiscrimination rules (Q 3848).2 The regulations under IRC Section 401(l) provide the exclusive means for a plan to satisfy IRC Sections 401(l) and 401(a)(5)(C).3

      Disparity formulas are not permitted for ESOPs, salary deferrals under a 401(k) plan, or employee or matching contributions to a 401(m) plan (Q 3753 to Q 3798).


      1. IRC § 401(a)(5)(C).

      2. Treas. Reg. § 1.401(l)-1(a)(1).

      3. Treas. Reg. § 1.401(l)-1(a)(3).

  • 3864. What are the permitted disparity requirements applicable to defined contribution plans?

    • A defined contribution plan may provide for disparity in the rates of employer contributions allocated to employees’ accounts if the contribution allocation formula meets the following requirements:

      (1) The disparity between contributions above the integration level (and contributions below the integration level)1 must not exceed the maximum excess allowance. The maximum excess allowance is the lesser of (1) the base contribution percentage, or (2) the greater of (x) 5.7 percentage points or (y) the percentage equal to the portion of the rate of Social Security tax in effect for the year that is attributable to old-age insurance.2 When the integration level in the plan document is less than the Social Security wage base, the percentages reflected above will need to be reduced as specified in regulations. The IRS will publish the percentage rate of the portion attributable to old-age insurance when it exceeds 5.7 percent. 3 Currently, the Social Security tax rate for old-age, survivors, and disability insurance combined is 6.2 percent.

      (2) The integration level, which determines the two levels of contributions, can be either equal to the taxable wage base in effect as of the beginning of the plan year, or a lower amount. If lower, then the contribution percentages must be reduced to satisfy one of two alternative tests.4 The integration level is the amount of compensation specified under the plan at or below which the rate of contributions, expressed as a percentage, is less than the rate of contribution above that level.5

      Special rules apply to target benefit plans (Q 3848).6 Cash balance plans (Q 3720) that meet the safe harbor requirements provided in final regulations under IRC Section 401(a)(4) may satisfy the permitted disparity rules on the basis of the defined contribution plan rules.7


      1. Treas. Reg. §§ 1.401(l)-2(a)(2), 1.401(l)-1(c)(16)(ii).

      2. IRC § 401(l)(2).

      3. Treas. Reg. §§ 1.401(l)-2(a)(3), 1.401(l)-2(b).

      4. Treas. Reg. §§ 1.401(l)-2(a)(5), 1.401(l)-2(d).

      5. IRC § 401(l)(5)(A).

      6. See Treas. Reg. § 1.401(a)(4)-8(b)(3)(i)(C).

      7. Treas. Reg. § 1.401(a)(4)-8(c)(3)(iii)(B).

  • 3865. What are the permitted disparity requirements applicable to defined benefit plans?

    • A defined benefit plan may be structured to use permitted disparity and satisfy the safe harbor provided by the Treasury regulations under IRC Section 401(a)(4). A defined benefit plan will not be considered discriminatory merely because the plan provides that a participant’s retirement benefit may not exceed the excess of (1) the participant’s final pay with the employer, over (2) the retirement benefit, under Social Security law, derived from employer contributions attributable to service by the participant with the employer.1 The participant’s final pay is the highest compensation paid to the participant by the employer for any year that ends during the five year period ending with the year in which the participant separated from service.2 Compensation in excess of $330,000 (for 2023) may not be taken into account.3

      A defined benefit plan may provide for disparity in the rates of employer-provided benefits if it meets all of the following requirements:

      (1) The disparity in benefit accruals for all employees under the plan must not exceed the maximum excess allowance (in the case of an excess plan) or the maximum offset allowance (in the case of an offset plan).4

      The maximum excess allowance is the lesser of .75 percent (subject to reduction as described below) or the base benefit percentage for the plan year.5 The maximum excess allowance cannot exceed the base benefit percentage.6

      The maximum offset allowance is the lesser of (1) .75 percent (reduced as described below) or (2) one-half of the gross benefit percentage multiplied by a fraction (not to exceed one) of which the numerator is the employee’s average annual compensation and the denominator is the employee’s final average compensation up to the offset level.7 The maximum offset allowance may not exceed 50 percent of the benefit that otherwise would have accrued.8 For plans meeting the maximum offset allowance limitation, the “PIA Offset” safe harbor described below may be available.

      (2) The disparity for all employees under the plan must be uniform.9 To be uniform, an excess plan must use the same base benefit percentage and the same excess benefit percentage for all employees with the same number of years of service. An offset plan is uniform only if it uses the same gross benefit percentage and the same offset percentage for all employees with the same number of years of service. The disparity provided under a plan that determines each employee’s accrued benefit under the fractional accrual method in IRC Section 411(b)(1)(C) is subject to special uniformity requirements.10

      (3) The integration level under an excess plan or the offset level under an offset plan for each participant must be the participant’s “covered compensation” (see below), a uniform percentage above 100 percent of covered compensation, a uniform dollar amount, or one of two intermediate amounts specified in the regulations.11

      Regulations under IRC Sections 401(a)(4) and 401(l) provide a “PIA offset” safe harbor for those defined benefit plans that limit the offset to the maximum offset allowance described above. Under the safe harbor, a defined benefit plan that satisfies any of the existing safe harbors provided in the regulations under IRC Section 401(a)(4) will not fail to be a safe harbor plan merely because it offsets benefits by a percentage of PIA.12

      Covered compensation, which is similar to the integration level in defined contribution plans and only applies to permitted disparity in defined benefit plans, means the average of the taxable wage bases for the 35 calendar years ending with the last day of the calendar year an individual attains Social Security retirement age.13 The IRS publishes tables annually for determining employees’ covered compensation.14

      Average annual compensation is the participant’s highest average annual compensation for any period of at least three consecutive years or, if shorter, the participant’s full period of service.15

      Final annual compensation is the participant’s average annual compensation for the three consecutive year period ending with the current year, or, if shorter, the participant’s full period of service, but not exceeding the contribution and benefit base in effect for Social Security purposes for the year.16

      Final regulations require certain reductions in the .75 percent factor if the integration or offset level exceeds covered compensation or if benefits begin at an age other than Social Security retirement age. These reductions may be determined on an individual basis by comparing each employee’s final average compensation to the employee’s covered compensation.17


      1. IRC § 401(a)(5)(D)(i); Treas. Reg. § 1.401(a)(5)-1(d)(2).

      2. IRC § 401(a)(5)(D)(ii).

      3. Treas. Reg. § 1.401(a)(5)-1(e)(2); IRC § 401(a)(17).

      4. Treas. Reg. §§ 1.401(l)-3(a)(3), 1.401(l)-3(b)(1).

      5. Treas. Reg. § 1.401(l)-3(b)(2).

      6. IRC § 401(l)(4)(A).

      7. Treas. Reg. § 1.401(l)-3(b)(3).

      8. IRC § 401(l)(4)(B).

      9. Treas. Reg. § 1.401(1)-3(b)(1).

      10. Treas. Reg. §§ 1.401(l)-3(a)(4), 1.401(l)-3(c)(1).

      11. Treas. Reg. § 1.401(l)-3(d). See IRC § 401(l)(5)(A).

      12. Treas. Reg. § 1.401(l)-3(c)(2)(ix).

      13. Treas. Reg. § 1.401(l)-1(c)(7)(i).

      14. See Rev. Rul. 2022-24 for the 2023 covered compensation table. See Rev. Rul. 2022-02, Rev. Rul. 2021-03, Rev. Rul. 2020-02 and Rev. Rul. 2019-06 for earlier years.

      15. IRC § 401(l)(5)(C). Treas. Reg. §§ 1.401(l)-1(c)(2), 1.401(a)(4)-3(e)(2).

      16. IRC § 401(l)(5)(D); Treas. Reg. § 1.401(l)-1(c)(17).

      17. Treas. Reg. §§ 1.401(l)-3(d)(9), 1.401(l)-3(e).

  • 3866. What are the permitted disparity requirements when an employee is covered by two or more plans of any employer?

    • The IRC specifies that in the case of an employee covered by two or more plans of an employer, regulations are to provide rules preventing the multiple use of the disparity otherwise permitted under IRC Section 401(l).1 Consequently, final regulations provide both an annual overall limit and a cumulative overall limit.2

      The annual overall permitted disparity limit requires the determination of a fraction based on the disparity provided to an employee for the plan year under each plan. The annual overall limit is met if the sum of those fractions does not exceed one.3

      The cumulative permitted disparity limit generally is satisfied for an employee who has benefited from a defined benefit if the total of an employee’s annual disparity fractions under all plans for all years of service does not exceed 35. In the case of an employee who has not benefited under a defined benefit plan for any plan year described in paragraph (c)(1)(v) of this section, the cumulative permitted disparity limit is satisfied.4


      1. IRC § 401(l)(5)(F)(ii).

      2. Treas. Reg. § 1.401(l)-5.

      3. Treas. Reg. § 1.401(l)-5(b)(1).

      4. Treas. Reg. §§ 1.401(l)-5(c)(1)(i), 1.401(l)-5(c)(2).

  • 3867. What is compensation for purposes of nondiscrimination in a qualified plan?

    • Compensation applies in at least three different ways under the IRC when addressing nondiscrimination requirements for qualified plans.

      First, when plans are tested for prohibited discrimination in favor of highly compensated employees, one element of the test is the participant’s compensation. IRC Section 401(a)(4) sets the definition of what constitutes compensation for this purpose.

      Second, plans must specify the types of compensation that are used to determine benefits or contributions under the plan.

      Third, compensation is used to determine if certain employees are to be treated as highly compensated employees in the nondiscrimination testing.

      The nondiscrimination rules of the IRC generally refer to nondiscriminatory compensation as compensation meeting the requirement of IRC Section 414(s). That definition then is tied to the definition of compensation under IRC Section 415(c)(3) and allows for certain modifications.

      That listing is not all inclusive, and other definitions of compensation may be used in various testing. For, example, plans must limit the maximum amount of compensation used to determine benefits or to test for prohibited nondiscrimination. No compensation in excess of $345,000 for 2024 ($330,000 for 2023, $305,000 in 2022, $290,000 in 2021 and $285,000 in 2020) may be taken into account for these purposes (Q 3927).1 The limit is indexed for inflation in increments of $5,000.2

      IRC Section 415(c)(3) compensation is the compensation of the participant from the employer for the year.

      IRC Section 415(c)(3) compensation is determined under one of the following definitions: currently includible compensation,3 W-2 compensation4 or wages for income tax withholding.5 The regulations provide a degree of latitude in modifying each of these definitions of compensation.

      Compensation generally includes elective deferrals as well as any amounts contributed or deferred by the employer at the election of the employee that are excluded from income under a cafeteria plan, a qualified transportation fringe benefit plan, or an IRC Section 457 plan.6 IRC Section 414(s) permits an employer to either exclude or include such deferrals, as described below.

      Employers may demonstrate that a definition of compensation is nondiscriminatory using snapshot testing on a single day during the plan year, provided that that day is representative of the employer’s work force and the plan’s coverage throughout the plan year.7 This is seldom used in a small plan.


      Planning Point: The definition of “compensation” is important for many reasons in the retirement planning arena, but has gained new importance in light of suspended deductions and exclusions post-tax reform. Retirement plans generally must use the IRC definition of compensation for nondiscrimination testing purposes, which includes, for example, nondeductible moving expenses (but excludes deductible moving expenses). Post-reform, however, all moving expenses are nondeductible. Despite this, the moving expense deduction was only suspended, not eliminated. This is one example of how tax reform has created a level of uncertainty regarding the appropriate definition of compensation while all tax reform provisions remain (at least temporarily) in effect, making it important for plan administrators to evaluate their definition of compensation and consult with qualified tax counsel in determining how to proceed.


      A definition of compensation other than IRC Section 415(c)(3) compensation still can satisfy IRC Section 414(s) if it meets the safe harbor definition or meets one of the alternative definitions plus a nondiscrimination test.8 The safe harbor definition is IRC Section 415(c)(3) compensation, reduced by:

      (1) reimbursements or other expense allowances;

      (2) cash and non-cash fringe benefits;

      (3) moving expenses;

      (4) deferred compensation; and

      (5) welfare benefits.9

      An alternative definition that defines compensation based on the rate of pay of each employee satisfies IRC Section 414(s) if the definition is nondiscriminatory and meets certain other requirements specified in the regulations.10

      An employer generally may elect not to treat as compensation any of the following items: (1) elective contributions to a cafeteria plan, a qualified transportation fringe benefit plan (note that these amounts are no longer deductible for 2018-2025), an IRC Section 401(k) arrangement, a cash or deferred SEP, or a tax sheltered annuity; (2) compensation deferred under a Section 457 plan; and (3) employee contributions to a government employer pick-up plan.11

      Any other reasonable alternative definition of compensation can satisfy IRC Section 414(s) if it does not favor, by design, highly compensated employees and if it meets a nondiscriminatory requirement. An alternative definition of compensation meets the nondiscriminatory requirement if the average percentage of total compensation included under the alternative definition for the employer’s highly compensated employees as a group does not exceed, by more than a de minimis amount, the average percentage of total compensation included under the alternative definition for the employer’s other employees as a group.12 Self-employed individuals are subject to special rules for purposes of using an alternative definition.13

      Compensation may have a slightly different definition for other purposes of the IRC.


      Planning Point: Currently, certain employees are exempt from overtime requirements based on compensation, including employees who are paid a minimum salary of $455 per week and employees who perform certain types of duties and earn at least $100,000 per year (and so are considered highly compensated for overtime exemption purposes). As of January 1, 2020, the DOL increased those amounts to $684 per week for certain types of employees (note that state-specific salary requirements may also apply). These rules change the calculus for many retirement plans that base contributions on compensation definitions that include overtime. The DOL compensation limit that applies to highly compensated employees will also be higher than the Section 414(q) limit ($155,000 in 2024 (projected)), which could create issues with respect to nondiscrimination testing in qualified plans. Because of these changes, it may be valuable for qualified plan sponsors to follow closely and calculate the potential impact in order to avoid qualification problems. Note that it is widely expected that the Biden administration could make new changes.



      1. IRC §§ 401(a)(17), 414(s)(1); Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.

      2. IRC § 401(a)(17); see Treas. Reg. § 1.401(a)(17)-1(a).

      3. See Treas. Reg. § 1.415(c)-2(b)(1).

      4. See Treas. Reg. § 1.415(c)-2(d)(4).

      5. See Treas. Reg. § 1.415(c)-2(d)(3).

      6. IRC § 415(c)(3)(D).

      7. Rev. Proc. 93-42, 1993-2 CB 540, modified by Rev. Proc. 95-34, 1995-2 CB 385.

      8. IRC § 414(s)(3).

      9. Treas. Reg. § 1.414(s)-1(c)(3).

      10. Treas. Reg. § 1.414(s)-1(e).

      11. IRC § 414(s)(2); Treas. Reg. § 1.414(s)-1(c)(4).

      12. Treas. Reg. § 1.414(s)-1(d).

      13. See Treas. Reg. §§ 1.414(s)-1(d)(3)(iii)(B), 1.414(s)-1(g).

  • 3868. What are the Section 415 limits for qualified plans?

    • IRC Section 415 sets maximum levels for the annual contributions that may be made for any one participant under a defined contribution plan and the maximum accruals for participants under a defined benefit plan. A plan is qualified only if the plan document precludes the possibility that benefits or contributions will exceed the limitations set forth in IRC Section 415 for any limitation year.1

      For limitation years beginning in 2022, the highest annual benefit payable that may be paid under a defined benefit plan or under all such plans aggregated, if the employer has more than one, at the plan’s normal retirement age (that is, at least 62) must not exceed the lesser of 100 percent of the participant’s average compensation during his or her high three years of service, or $275,000 (in 2024).2 See Q 3719 for further discussion on the application of the Section 415 limits to defined benefit plans.

      The contribution limits applicable to defined contribution plans generally are referred to as the “annual additions limit.” The annual additions limit is the maximum total allocation permitted to a participant’s account (this calculation includes all such accounts in any defined contribution plan of the employer). The annual additions for any participant under a defined contribution plan must not exceed the lesser of 100 percent of the participant’s compensation or $69,000 in 2024 ($66,000, in 2023, and $61,000 in 2022).3 See Q 3728 for details on the application of the Section 415 limits to defined contribution plans. All allocations to the account (other than “catch-up” contributions to a 401(k) plan and investment earnings) including salary deferrals, employer match, employer profit sharing contributions, employee contributions, and forfeiture reallocations are included as an annual addition in applying this limit.

      Unless the plan document provides otherwise, a limitation year is the calendar year.4 Contributions in excess of the Section 415 limits disqualify a plan for the year made and all subsequent years until such excess is corrected.5 The regulations referenced here are effective for limitation years beginning on or after July 1, 2007.6

      For purposes of the Section 415 limits, a benefit provided to an alternate payee of a participant pursuant to a qualified domestic relations order (“QDRO”) (Q 3915) is treated as if it were provided to the participant.7

      A controlled group of corporations or a group of trades or businesses under common control (Q 3933) or all members of an affiliated service group (Q 3935) are considered one employer for purposes of applying the limitations on contributions or benefits.8 Thus, annual additions to any plan of the group are treated as made to a single plan.

      A plan may incorporate the Section 415 limits by reference and will not fail to meet the definitely determinable benefit requirement (for defined benefit plans) or the definite predetermined allocation formula requirement (for defined contribution plans) merely because it incorporates the limits of IRC Section 415 by reference.9


      1. See IRC § 401(a)(16); Treas. Reg. § 1.415(a)-1(d).

      2. IRC § 415(b)(1); Notice 2023-75.

      3. IRC § 415(c); Notice 2021-61, Notice 2022-55, Notice 2023-75.

      4. Treas. Reg. § 1.415(j)-1(a).

      5. Treas. Reg. § 1.415(a)-1(a)(3); Martin Fireproofing Profit Sharing Plan and Trust v. Comm., 92 TC 1173 (1989); Hollen v. Comm., TC Memo 2011-2, 437 Fed. App’x 525 (8th Cir. 2011), cert. denied, 132 S. Ct. 2443 (2012).

      6. 72 Fed. Reg. 16878 (Apr. 15, 2007).

      7. Treas. Reg. § 1.415(a)-1(f)(6).

      8. IRC §§ 415(g), 415(h), 414(m); see Treas. Reg. § 1.415(a)-1(f)(2).

      9. Treas. Reg. § 1.415(a)-1(d)(3).