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Treas.
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Department of the Treasury

PRESS R E L E A S E S

JS-521: treasury a n d I K S Shut D o w n Arrangements Purporting to Defer T a x e s o n Stock ... P a g e 1 of 2

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
July 1,2003
JS-521
Treasury and IRS Shut Down Arrangements
Purporting to Defer Taxes on Stock Option Gains

Today, the Treasury Department and the IRS issued regulations and a
notice that will shut down arrangements involving stock options that are
being promoted to executives as a method of deferring tax on gains from
their stock options. Stock option gains are generally taxed at exercise.
Promoters have devised arrangements intended to defer the tax on the
option gains beyond the exercise date. In the regulations and the notice,
Treasury and the IRS stated that use of the arrangements does not defer
tax.
The arrangement involves an executive transferring stock options to a
related party, such as a family m e m b e r or a family limited partnership in
which the executive or the executive's family has a substantial interest. In
exchange, the executive receives a long-term unsecured note. T h e related
party exercises the option and claims that it does not recognize gain until
the stock is sold, and then only if the sale price exceeds the amount paid
for the option plus the exercise price. Promoters of this transaction claim
that the executive does not have to pay tax until payments are m a d e on the
note, even though the executive retains control over the exercise of the
options through the family m e m b e r or family limited partnership.
The notice states that the IRS will challenge the executive's claim that
income from the exercise of the stock options can be deferred. T h e
regulations, which are effective immediately, prevent an executive or any
other person from claiming tax deferral from the transfer of options to a
related party.
"The notice and the regulations eliminate any question that the
arrangements can be used to defer stock option gains," stated Treasury
Assistant Secretary for Tax Policy Pamela Olson. "Executives cannot defer
income taxes on stock option exercise by purporting to sell their stock
options to a family m e m b e r or family limited partnership."
This transaction, and any transaction that is substantially similar, are
identified as "listed transactions" that are subject to disclosure by both the
executive and the related person, and to list-keeping and registration
requirements. Neither the notice nor the regulations affect transactions
between the executive and the company that issued the options.

Attachments:

Related Documents:

http://www.treas.gov/press/releases/js521 .htm

4/26/2005

JS-521: Treasury and IRS Shut D o w n Arrangements Purporting to Deter taxes on S T O C K ... rage z.
• Notice 2003-47
• Temporary Regulations
• Proposed Regulations

http://www.treas.gov/press/releases/js521 .htm

4/26/2005

Part III - Administrative, Procedural, and Miscellaneous
Transfers of Compensatory Stock Options to Related Persons
Notice 2003-47
This notice addresses a transaction being promoted to and used by taxpayers to avoid
or evade federal income and employment taxes related to compensatory stock options.
This notice alerts taxpayers and their representatives that the tax benefits purportedly
generated by these transactions are not allowable for federal income tax purposes. This
notice also identifies some of these transactions as listed transactions and alerts taxpayers
and their representatives to certain responsibilities that m a y arise from participating in
these transactions.
Concurrent with this Notice, Treasury and the IRS are issuing temporary and proposed
regulations providing prospectively that, for purposes of § 83 of the Internal Revenue
Code and § 1.83-7, a sale or other disposition of a nonstatutory compensatory stock
option1 to a related person will not be treated as a transaction that closes the application
of § 83 with respect to the option.
I. The Transaction
The transaction involves an individual, generally an employee, who has been granted
a nonstatutory compensatory stock option. The individual transfers the option to a
related person. The related person m a y be a family m e m b e r or an entity in which the
individual or m e m b e r s of the individual's family hold a substantial interest. But, for
purposes of this notice, a related person does not include (1) a person w h o is related to
the individual by being the service recipient with respect to the option or (2) the grantor
of the option. A s part of the transfer, the related person pays an amount purportedly
equal to the option's value. The payment often is in the form of a long-term (e.g., 30year), unsecured and non-negotiable note, calling for a balloon payment of the purchase
price at the end of the note's term. Other payment forms m a y include other deferred
payment obligations, cash or combinations of these types of payments. T h e related
person often is a thinly capitalized entity, with no operating business, and the terms of the
note (e.g., the rate of interest and the extent of any security) often fail to reflect the
associated risk of nonpayment.
Promoters contend that the options should be treated as sold or otherwise disposed of
in an arm's length transaction for purposes of § 1.83-7, with the result that the individual
will not recognize compensation income w h e n the related person exercises the stock

1

A nonstatutory compensatory stock option refers to a stock option granted in connection with the
performance of services that does not qualify as an incentive stock option described in § 422 or an
option granted under an employee stock purchase plan described in § 423.

2
option. Furthermore, if the related person pays for the option with a note or other
deferred payment obligation, promoters argue that the individual does not recognize
compensation income for the purchase price until the related person pays the amounts
due under the note or other deferred payment obligation.
II. Intent to Challenge Transaction
The IRS intends to challenge the purported tax benefits for the above-described
transaction on a number of grounds, including, in appropriate cases:
A. Characterization of Transfer as an Arm's Length Transaction
Although the recipient of a compensatory stock option receives a valuable right, the
recipient historically has not recognized income at the time of the option grant unless the
option had a readily ascertainable fair market value. See C o m m . v. L o B u e , 351 U.S. 243
(1956); § 1.421-6.2 This treatment of compensatory stock options generally w a s
continued with the enactment of § 83 and the promulgation of § 1.83-7, which currently
govern the taxation of the grant of a nonstatutory compensatory stock option. Section
83(e)(3) provides that § 83 does not apply to require the recognition of income w h e n an
option is granted unless the option has a readily ascertainable fair market value. Section
1.83-7(b) defines w h e n an option will be considered to have a readily ascertainable fair
market value at grant. This standard is met where the option is actively traded on an
established market. Section 1.83-7(b)(l). Otherwise, an option has a readily
ascertainable fair market value only if it can be shown that its fair market value can be
measured with reasonable accuracy, including a demonstration that the fair market value
of the option privilege is readily ascertainable. Section 1.83-7(b)(2). Options that are not
taxed at grant generally result in compensation income at the time of exercise, in an
amount equal to the excess of the fair market value of the stock purchased over the
amount paid by the option recipient.
Section 1.83-7(a) provides an exception to this treatment if the recipient of an option
that does not have a readily ascertainable fair market value at the time of grant sells or
otherwise disposes of the option in an arm's length transaction. The transactions
described in Section I of this Notice rarely, if ever, reflect terms that would be agreed to
between unrelated parties dealing at arm's length. Accordingly, the Service will
challenge the transactions described in Section I as not satisfying the exception under §
1.83-7(a) for arm's length transactions.
B. Treatment of the Deferred Payment Obligation
In any case in which the transaction includes a disposition of an option without a

2

Except as provided in the transition rules under § 1.83-8(b), § 1.421-6 does not apply to options
granted on or after July 1, 1969. S e e § 1.421-6(a)(2).

3
readily ascertainable fair market value at the time of grant and the individual receives a
deferred payment obligation, the IRS intends to challenge any deferral of income with
respect to the deferred payment obligation. The preceding sentence applies regardless of
whether the transaction is treated as an arm's length transaction or a non-arm's length
transaction for purposes of § 1.83-7.3 Thus, in any such case, the IRS will argue that the
option recipient recognizes income to the extent that the amount of the deferred payment
obligation transferred to the option recipient, plus any cash or other property received by
the individual, exceeds the amount, if any, the option recipient paid for the option.
Employers and other service recipients are reminded that, under § 83(h), a service
recipient is entitled to a deduction for the compensation attributable to the transfer of the
option only w h e n the person w h o performed the services includes an amount in income
under § 83(a). Accordingly, the Service will seek to ensure that there is no mismatch of
income and deduction between the person w h o performed the services and the service
recipient.
III. Other Bases for Challenge
When appropriate, the Service will not respect the transaction or certain aspects of the
transaction, and nothing in this notice is intended to imply otherwise. Accordingly,
where the related entity to w h o m the option is sold or disposed of is not bonafide,lacks
substance, or lacks a business purpose, the use of the entity will be treated accordingly.
W h e r e the transfer of the option is not bonafide,lacks substance, or lacks a business
purpose, the transfer will also be treated accordingly. Finally, where the deferred
payment obligation lacks substance, the obligation will be treated accordingly.
IV. Listed Transactions
The following transactions, and any transaction that is substantially similar to the
following transactions, are identified as "listed transactions" for purposes of § 1.60114(b)(2) of the Income Tax Regulations and § 301.6111-2(b)(2) and § 301.6112-1(b)(2) of
the Procedure and Administration Regulations. Transactions in which an individual
purports to sell or otherwise dispose of an option described in § 83(e)(3) to a related
person are listed transactions with respect to the individual and the related person if the
3

Compare § 1.83-1 (a) (transferor of substantially nonvested property in a non-arm's length
transaction must include in income the sum of any money and the fair market value of any
substantially vested property received in such disposition).

4
purported sale or other disposition is in exchange for an amount that includes any
deferred payment of m o n e y or property.
It should be noted that, independent of any classification as "listed transactions" for
purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2), and 301.6112-1(b)(2) of the
regulations, transactions that are the same as, or substantially similar to, the transactions
described in this notice m a y already be subject to the disclosure requirements of § 6011,
the tax shelter registration requirements of § 6111 or the list maintenance requirements of
§ 6112 (§§ 1.6011-4, 301.6111-1T, 301.6111-2, and 301.6112-1).
Persons who are required to satisfy the registration requirement of § 6111 with respect
to the transactions described in this notice and w h o fail to do so m a y be subject to the
penalty under § 6707(a). Persons w h o are required to satisfy the list-keeping requirement
of § 6112 with respect to the transactions and w h o fail to do so m a y be subject to the
penalty under § 6708(a). In addition, the Service m a y impose penalties on participants in
this transaction or substantially similar transactions, or, as applicable, on persons w h o
participate in the reporting of this transaction or substantially similar transactions,
including the accuracy-related penalty under § 6662 and the return preparer penalty under
§ 6694.
V. Temporary and Proposed Regulations
Treasury and the IRS are issuing temporary regulations and proposed regulations
concurrent with this notice providing that a stock option sale or other disposition to a
related person will not be treated as a transaction that closes the application of § 83 with
respect to the option for purposes of § 1.83-7.
VI. Drafting Information
The principal author of this notice is Stephen Tackney of the Office of Division
Counsel / Associate Chief Counsel (Tax Exempt and Government Entities), though other
officials from the Office of Chief Counsel and Treasury participated in its development.
For further information regarding this notice contact Stephen Tackney on (202) 622-6030
(not a toll-free call).

[4830-01-p]
D E P A R T M E N T OF T H E T R E A S U R Y
Internal Revenue Service
26 CFR Part 1
[TD 9067]
RIN 1545-BC21
Transfers of Compensatory Options
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.

SUMMARY: This document contains regulations that provide rules governing transfers of
certain compensatory stock options (nonstatutory stock options). The regulations affect persons
who have been granted nonstatutory stock options, as well as service recipients who may be
entitled to deductions related to the options. The text of the temporary regulations also serves as
the text of the proposed regulations on this subject in the Proposed Rules section in this issue of
the Federal Register.
DATES: Effective Date: These regulations are effective July 2, 2003.
Applicability Dates: For dates of applicability, see §§1.83-7(d) and 1.83-7T(d).
F O R F U R T H E R I N F O R M A T I O N C O N T A C T : Stephen Tackney (202) 622-6030 (not a tollfree number).
S U P P L E M E N T A R Y INFORMATION:
Background
These regulations amend 26 CFR part 1. Section 83 of the Internal Revenue Code
(Code) provides that if, in connection with the performance of services, property is transferred to
any person other than the person for whom such services are performed, the excess of (1) the fair
market value of the property (determined without regard to lapse restrictions) at thefirsttime the
rights of the person having the beneficial interest in such property are transferable or are not
subject to a substantial risk of forfeiture, whichever occurs earlier, over (2) the amount (if any)
paid for such property, is included in the gross income of the service provider in thefirsttaxable
year in which the rights of the person having the beneficial interest in such property are
transferable or are not subject to a substantial risk of forfeiture.
Section 83(e)(4) provides that section 83 does not apply to the transfer of property
pursuant to the exercise of an option with a readily ascertainable fair market value at the date of
grant.
Section 83(e)(3) provides that section 83 does not apply to the transfer of an option
without a readily ascertainable fair market value. Under §1.83-7(a), section 83 generally applies
to the transfer of the property subject to the option at the time of exercise.

Section 1.83-7(a) further provides that section 83 applies to the transfer of m o n e y or
other property received upon the sale or disposition in an arm's length transaction of an option
without a readily ascertainable fair market value at the time of grant.
Recent transactions promoted by certain parties have raised issues concerning w h e n a
transfer of an option to a related person, typically a family m e m b e r or an entity a substantial
interest in which is owned by the option holder or family members, is an arm's length
transaction. See Notice 2003-47. The determination of whether a transfer to a related person is
an arm's length transaction requires scrutiny of the facts and circumstances surrounding the
transfer. Furthermore, if conducted under the terms promoted, Treasury and the IRS believe
these transfers will rarely constitute an arm's length transaction.
Explanation of Provisions
The regulations provide that a sale or other disposition of a nonstatutory stock option to a
related person will not be treated as a transaction that closes the application of section 83 with
respect to the option. For these purposes, a person is related to the service provider if (I) the
person and the service provider bear a relationship to each other that is specified in section
267(b) or 707(b)(1), subject to the modifications (i) that "20 percent" is used in place of "50
percent" each place it appears in section 267(b) and section 707(b)(1) and (ii) that section
267(c)(4) is applied as if the family of an individual includes the spouse of any m e m b e r of the
family, or (II) the service provider and such person are engaged in trades or businesses under
c o m m o n control (within the meaning of section 52(a) and (b)); provided that a person is not
related to the service provider if the person is the service recipient with respect to the option or
the grantor of the option. The regulations do not alter the treatment of the sale or disposition of
an option in an arm's length transaction with an unrelated person. In those circumstances,
section 83 applies to the transfer of m o n e y or other property received in the exchange.
Special Analyses
It has been determined that these regulations are not a significant regulatory action as
defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also
has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and because these regulations do not impose a collection
of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, these regulations are being submitted to the
Chief Counsel for Advocacy of the Small Business Administration for c o m m e n t on its impact on
small business.
Drafting Information
The principal author of these temporary regulations is Stephen Tackney of the Office of
Division Counsel / Associate Chief Counsel (Tax Exempt and Government Entities). However,
other personnel from the IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.

2

Adoption of A m e n d m e n t s to the Regulations

Accordingly, 26 CFR part 1 is 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 1.83-7 is amended by adding paragraph (d) to read as follows:
§1.83-7 Taxation of nonqualified stock options.
(d) Effective dates. This section applies for periods before July 2, 2003. For periods on
or after July 2, 2003, see §1.83-7T.

3

Par. 3. Section 1.83-7T is added to read as follows:
§1.83-7T Taxation of nonqualified stock options (Temporary).
(a) In general. If there is granted to an employee or independent contractor (or
beneficiary thereof) in connection with the performance of services, an option to which section
421 (relating generally to certain qualified and other options) does not apply, section 83(a) shall
apply to such grant if the option has a readily ascertainable fair market value (determined in
accordance with paragraph (b) of this section) at the time the option is granted. The person w h o
performed such services realizes compensation upon such grant at the time and in the amount
determined under section 83(a). If section 83(a) does not apply to the grant of such an option
because the option does not have a readily ascertainable fair market value at the time of grant,
sections 83(a) and 83(b) shall apply at the time the option is exercised or otherwise disposed of,
even though the fair market value of such option m a y have become readily ascertainable before
such time. If the option is exercised, sections 83(a) and 83(b) apply to the transfer of property
pursuant to such exercise, and the employee or independent contractor realizes compensation
upon such transfer at the time and in the amount determined under section 83(a) or 83(b). If the
option is sold or otherwise disposed of in an arm's length transaction, sections 83(a) and 83(b)
apply to the transfer of m o n e y or other property received in the same manner as sections 83(a)
and 83(b) would have applied to the transfer of property pursuant to an exercise of the option.
The preceding sentence does not apply to a sale or other disposition of the option to a person
related to the service provider that occurs on or after July 2, 2003. For this purpose, a person is
related to the service provider if~
(1) The person and the service provider bear a relationship to each other that is specified
in section 267(b) or 707(b)(1), subject to the modifications that the language "20 percent" is used
instead of "50 percent" each place it appears in sections 267(b) and 707(b)(1), and section
267(c)(4) is applied as if the family of an individual includes the spouse of any m e m b e r of the
family; or
(2) The person and the service provider are engaged in trades or businesses under
c o m m o n control (within the meaning of section 52(a) and (b)); provided that a person is not
related to the service provider if the person is the service recipient with respect to the option or
the grantor of the option.
(b) and (c) For further guidance, see §1.83-7(b) and (c).
(d) Effective dates. This section applies on or after July 2, 2003. For dates before July 2,
2003, see §1.83-7.

Approved: June 26, 2003
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Pamela F. Olson,
Assistant Secretary of the Treasury.

4

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
July 01, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

July 03, 2003
July 31, 2003
912795NF4

High Rate: 0.860% Investment Rate 1/: 0.876% Price: 99.933
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 61.06%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender

$

Competitive
Noncompetitive
FIMA (noncompetitive)

41,927, 650
37, 249
0

$

2,426,. 685

2,426,. 685

Reserve

$

TOTAL

44,391,.584

16,963, 204
37, 249
0
17,000, 453

41,964, 899

SUBTOTAL
Federal

Accepted

Tendered

Type

$

19,427,.138

Median rate
0.850%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.830%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 41,964,899 / 17,000,453 = 2.47
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

v/J -52 x

FROM THE OFFICE OF PUBLIC AFFAIRS
July 1,2003
2003-7-1-15-31-15-6018
U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $81,453 million as of the end of that week, compared to $82,350 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

June 20, 2003

June 27, 2003

82,350

81,453

TOTAL
1. Foreign Currency Reserves

]

a. Securities

Euro

Yen

TOTAL

Euro

Yen

TOTAL

7,724

13,286

21,010

7,585

13,139

20,723

Of which, issuer headquartered in the U.S.

0

0

b. Total deposits with:
b.i. Other central banks and BIS

12,556

2,668

15,224

12,353

2,638

14,991

b.ii. Banks headquartered in the U.S.

0

0

b.ii. Of which, banks located abroad

0

0

b.iii. Banks headquartered outside the U.S.

0

0

b.iii. Of which, banks located in the U.S.

0

0

23,335

23,084

11,737

11,611

11,044

11,044

0

0

2. IMF Reserve Position

2

3. Special Drawing Rights (SDRs)
4. Gold Stock

2

3

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
June 20, 2003
Euro
1. Foreign currency loans and securities

Yen

June 27, 2003

TOTAL

Euro

0

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:

fS - ^3

Yen

TOTAL
0

2.a. Short positions
2.b. Long positions
3. Other

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 20, 2003
Euro

Yen

June 27, 2003

TOTAL
0

1. Contingent liabilities in foreign currency

Euro

Yen

TOTAL
0

La. Collateral guarantees on debt due within 1
year
1 .b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3. a. With other central banks
3.b. With banks and otherfinancialinstitutions
Headquartered in the U.S.
3.c. With banks and otherfinancialinstitutions
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Written puts

Notes:

1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Accou
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency

Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

JS-524: N e w Lower TalfRates In Pay Checks

Fage i or t

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
July 1,2003
JS-524
New Lower Tax Rates In Pay Checks
The Treasury Department announced that by today, employers are expected to
have taken steps to begin using the new, lower withholding tables. The Jobs and
Growth Tax Relief Reconciliation Act of 2003 reduced tax rates, and the n e w
withholding tables list and describe the guidelines for the n e w rates.
"Right now all across the country, companies are adjusting withholding tables and
as a result hardworking Americans will see more take-home pay," Secretary S n o w
said.
The new lower withholding tables are available on the IRS website at www.irs.gov
and in IRS publication 15-T. These withholding tables tell employers and payroll
administrators h o w much less in federal income taxes to withhold from workers'
wages. A s a result of these changes workers will begin to see more m o n e y in their
paychecks.
These withholding changes alone are expected to reduce workers taxes and put
$22 billion into the economy this year, and $35 billion next year. Under the Jobs
and Growth Act, a family of four making 40,000 dollars will see their taxes reduced
by $1,133 in 2003, a reduction of 9 6 % .
Among other things, the Jobs and Growth Tax Relief and Reconciliation Act
immediately in 2003:
• expands the 10-percent bracket from $6,000 to $7,000 for single filers and
from $12,000 to $14,000 for married taxpayers filing joint returns, meaning
the lowest tax rate will apply to a larger portion of workers' incomes;
• lowers the tax rate from 2 7 % to 1 5 % on taxable incomes between $47,450
and $56,800 for married taxpayers filing jointly;
• lowers the 2 7 % rate to 2 5 % on taxable income up to $68,800 for single
taxpayers ($114,650 for married taxpayers filing joint returns);
• lowers the 3 0 % rate to 2 8 % on taxable income up to $143,500 for single
taxpayers ($174,700 for married taxpayers filing jointly);
• lowers the 3 5 % rate to 3 3 % on taxable income up to $311,950;
• lowers the 38.6% rate to 3 5 % on taxable income over $311,950;
• reduces the marriage penalty by expanding the standard deduction from
$7,950 to $9,500 for married individuals; and
• lowers tax rates for millions of small businesses. Twenty-three million small
business owners would benefit from the tax act (including all the provisions
in the bill).

-30-

http://www.treas.eov/Dress/releases/js524.htm

4/26/2005

JO-DZD: treasury Secretary John S n o w Statement on the Resignation of I R S Chief Couns...

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
July 2, 2003
JS-525
Treasury Secretary John S n o w Statement on the Resignation of
IRS Chief Counsel B. J o h n Williams
B. John Williams worked tirelessly in leading the Office of the Chief Counsel to
crack down on abusive tax shelters, to improve the process for developing
regulations and rulings, and to work with taxpayers in resolving issues. H e did an
excellent job, and taxpayers were extremely well served during his tenure as IRS
Chief Counsel. I look forward to ensuring that B. John's legacy of excellence as well
as his improvements in the Office of Chief Counsel are carried on.

http://www.treas,gov/press/releases/js525.htm

4/26/2005

JS-526: Treasury to Issue Depositary Compensation Securities to Pay tor Financial Services rage i 01 i

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
July 3, 2003
JS-526
Treasury to Issue Depositary Compensation Securities
to Pay for Financial Services

The Treasury Department announced today that it will begin issuing nonmarketable securities, called Depositary Compensation Securities (DCS), to
compensate those financial institutions serving as financial agents of the United
States for essential banking services provided to the Government. T h e
combination of low interest rates and the need to draw-down compensating
balances due to the debt ceiling have m a d e it impractical to continue using
compensating balances as payment for banking services.
The first Depositary Compensation Securities are expected to be issued to financial
agents by mid-July. The phase-out of compensating balances, beginning on July 3,
will lead to a short-term infusion of cash into Treasury accounts, and reduce the
need for bill issuance this summer.
The President's Budget Request for Fiscal Year 2004 includes a permanent and
indefinite appropriation proposal in order to provide a stable and consistent method
of compensating financial agents. Since the proposed permanent and indefinite
appropriation, if approved by Congress, would not be available until the beginning
of F Y 2004, Treasury must implement this temporary measure to pay financial
agents on a timely basis and ensure that there is no interruption in their services.
Depositary Compensation Securities are similar to the non-marketable 2 percent
Depositary Bonds first issued in 1941 as a means to compensate depositaries and
financial agents of the Government for essential banking services including the
collection and deposit of all Treasury receipts. The Depositary Bonds were phased
out when other methods of compensation, including compensating balances, were
used and the offering w a s terminated in 1994.

http://www.treas.gov/press/releases/js526.htm

4/26/2005

js-527: Maine Receives First Health Coverage Tax Credit Payments

Page I ot 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
July 3, 2003
js-527
Maine Receives First Health Coverage Tax Credit Payments
The Treasury Department announced that qualified health plans in Maine received
the first advance tax credit payments on behalf of eligible Maine residents. This is
particularly noteworthy because these are the first federal health coverage tax
credit payments in the nation. A s part of Maine's Health Coverage Tax Credit
( H C T C ) pilot program, participating plans received the first payment of nearly
$70,000 that will help cover the cost of health insurance premiums for more than
100 families in Maine. Many additional Maine families remain eligible, and they are
encouraged to register as soon as possible so that health coverage assistance can
begin for them as well.
In May, Treasury Secretary John Snow announced that Maine partnered with the
federal government to launch the first advance health coverage tax credit pilot
program to help cover the cost of health insurance premiums for m a n y Maine
residents.
The Trade Adjustment Assistance Act President Bush signed into law last year
includes the n e w Health Coverage Tax Credit (HCTC). This program provides an
advanced payment of 6 5 % of the premium cost for a qualified health plan for
individuals w h o are eligible to receive Trade Adjustment Assistance (TAA) benefits
or certain individuals w h o receive pension benefit payments from the Pension
Benefit Guaranty Corporation (PBGC). Approximately 2,800 workers and their
families in Maine are estimated to qualify for the program.
The Maine pilot program allows eligible individuals to register immediately for the
advance H C T C program, which will otherwise start in August 2003 for the rest of
the country.
Maine residents that are eligible for the pilot program should have received a HCTC
notification letter in the mail and an H C T C Program Kit. The Program Kit provides
all the necessary information to determine eligibility and the form to register.
The HCTC advance payment program will be available in other states beginning in
August 2003. For more information on a particular state and the health insurance
programs that qualify, please visit the H C T C website at www.irs.gov and enter IRS
Keyword: H C T C .
30

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4/26/2005

JS-528: Treasury and IRS issue Final Regulations on Catch-Up Contributions

f age t 01 t

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the Microsoft Word content on this page, download the free Microsoft Word
Viewer.
July 7, 2003
JS-528
Treasury and IRS issue Final Regulations
on Catch-Up Contributions
Today, the Treasury Department and the IRS issued final regulations on "catch-up
contributions" under section 414(v) and section 402(g). Employer plans, like 401 (k)
plans that allow employees to defer wages and contribute them to the plans, can
provide participants age 50 and older with the opportunity to make additional
elective contributions, called "catch up contributions".
The Economic Growth and Tax Relief Reconciliation Act of 2001 gave workers the
opportunity to make the increased contributions as they approach retirement age.
For 2003, a catch-up eligible participant could make up to $2,000 in additional
elective contributions. This amount increases by $1,000 each year until it reaches
$5,000 in additional elective contributions for 2006. The regulations provide
methods for simplifying the process of identifying catch-up contributions at the end
of the year.
"Catch-up contributions offer a chance for employees to increase their savings as
they get closer to retirement. By making the rules as simple as possible, w e hope
to encourage plan sponsors to offer catch-up contributions to their employees," said
Treasury Assistant Secretary for Tax Policy P a m Olson.
A plan must allow participants eligible to make catch-up contributions to contribute
in excess of any limit that the plan otherwise imposes. The catch up contributions
are not subject to nondiscrimination testing or the generally applicable limits on
contributions for a year. Under the final regulations, employers will not be required
to coordinate catch-up contributions for union and non-union employees. The final
regulations are similar to the proposed regulations, and reflect changes to section
414(v) and section 402(g) m a d e by the Job Creation and Worker Assistance Act of
2002.

Related Documents:
• The text of the final regulations

http://www.treas.2ov/Dress/releases/js528.htm

4/26/2005

4830-01-p
DEPARTMENT OF TREASURY
Internal Revenue Service (IRS)
26 CFR Part 1
[TD 9072]
RIN 1545-BA24
Catch-Up Contributions for Individuals Age 50 or Older
AGENCY: Internal Revenue Service (IRS), Treasury
ACTION: Final regulations
SUMMARY: This document contains final regulations that provide guidance concerning

the requirements for retirement plans providing catch-up contributions to individuals ag

50 or older pursuant to the provisions of section 414(v). These final regulations affect
section 401 (k) plans, section 408(p) SIMPLE IRA plans, section 408(k) simplified
employee pensions, section 403(b) tax-sheltered annuity contracts, and section 457

eligible governmental plans, and affect participants eligible to make elective deferrals
under these plans or contracts.
DATES: Effective Date: These final regulations are effective on July 8, 2003.
Applicability Date: These final regulations are applicable to contributions in
taxable years beginning on or after January 1, 2004.
FOR FURTHER INFORMATION CONTACT: R. Lisa Mojiri-Azad or John T. Ricotta at
622-6060.
SUPPLEMENTARY INFORMATION:

2
Background
This document contains amendments to the Income Tax Regulations (26 C F R
Part 1) under sections 402(g) and 414(v) of the Internal Revenue C o d e (Code). Section
414(v), added by the Economic Growth and Tax Relief Reconciliation Act of 2001
( E G T R R A ) (Public Law 107-16; 115 Stat. 38), effective for years beginning after
December 31, 2001, permits an individual age 50 or older to m a k e additional elective
deferrals each year, up to a dollar limit, if certain requirements provided under that
section are satisfied. Under section 414(v)(3), these additional elective deferrals are not
subject to certain otherwise applicable limitations on elective deferrals and are excluded
from consideration for certain nondiscrimination tests. Under section 414(v)(4), catchup contributions generally must be m a d e available to all catch-up eligible individuals
w h o participate under any plan maintained by the employer that provides for elective
deferrals.
Section 402(g)(1)(C) w a s added by the Job Creation and Worker Assistance Act
of 2002, ( J C W A A ) (Public Law 107-147; 116 Stat. 21), effective for years beginning
after December 31, 2001. This section increases the amount of elective deferrals that a
catch-up eligible participant, as defined in section 414(v), m a y exclude from gross
income under section 402(g) by the s a m e dollar limit applicable for the year under
section 414(v).
J C W A A also included technical corrections to section 414(v), including
clarifications relating to: initial eligibility to m a k e catch-up contributions, coordination of
section 414(v) catch-up contributions for individuals w h o participate in more than one
plan, coordination of section 414(v) catch-up contributions with the catch-up

3
contributions provided under section 457(b)(3), and the application of the universal
availability requirement of section 414(v)(4) in connection with mergers and
acquisitions.
Proposed regulations under section 414(v) were published in the Federal
Register on October 23, 2001 (66 F R 53555). O n February 21, 2002, a public hearing
w a s held on the proposed regulations. Notice 2002-4 (2002-1 C.B. 298) provided
transitional rules for complying with the universal availability requirement of section
414(v)(4) and the proposed regulations.
After consideration of the comments and the changes m a d e by J C W A A , these
final regulations adopt the provisions of the proposed regulations with certain
modifications, the most significant of which are highlighted below.
Explanation of Provisions
Under these final regulations, an applicable employer plan is not treated as
violating any provision of the Code merely because the plan permits a catch-up eligible
participant to m a k e catch-up contributions. For this purpose, an applicable employer
plan is a section 401 (k) plan, a S I M P L E IRA plan (as defined in section 408(p)), a
simplified employee pension (as defined in section 408(k)) (SEP), a plan or contract that
satisfies the requirements of section 403(b), or a section 457 plan maintained by an
eligible governmental employer (a section 457 eligible governmental plan).
Catch-up contributions are elective deferrals m a d e by a catch-up eligible
participant that exceed an otherwise applicable limit and that are treated as catch-up
contributions under the plan, but only to the extent they do not exceed the m a x i m u m
amount of catch-up contributions permitted for the taxable year. A n employer is not

4
required to provide for catch-up contributions in any of its plans. However, if any plan of
an employer provides for catch-up contributions, all plans of the employer that provide
for elective deferrals must comply with the universal availability requirement described
below, to the extent applicable.
A.

Eligibility for Catch-up Contributions
A s under the proposed regulations, a participant is a catch-up eligible participant,

and thus is permitted to m a k e catch-up contributions, if the participant is otherwise
eligible to m a k e elective deferrals under the plan and would attain age 50 or older
before the end of the participant's taxable year. In the case of a non-calendar year
plan, a participant is treated as a catch-up eligible participant beginning on January 1 of
the calendar year that includes the participant's 50 th birthday, without regard to the plan
year.
B.

Determination of Catch-up Contributions
These final regulations retain the s a m e basic structure for determining catch-up

contributions as provided in the proposed regulations. Elective deferrals m a d e by a
catch-up eligible participant are treated as catch-up contributions if they exceed any
otherwise applicable limit, to the extent they do not exceed the m a x i m u m dollar amount
of catch-up contributions permitted under section 414(v). Catch-up contributions are
determined by reference to three types of otherwise applicable limits: statutory limits,
employer-provided limits, and the actual deferral percentage (ADP) limit.
A statutory limit is a limit contained in the C o d e on elective deferrals or annual
additions permitted to be m a d e under the plan or contract (without regard to section
414(v)). Statutory limits include the requirement under section 401(a)(30) that a plan

5
limit all elective deferrals within a calendar year under the plan and other plans (or
contracts) maintained by m e m b e r s of a controlled group to the amount permitted under
section 402(g).
A n employer-provided limit is a limit on the elective deferrals an employee can
m a k e under the plan (without regard to section 414(v)) that is contained in the terms of
the plan, but is not a statutory limit or the A D P limit. A number of commentators
suggested that the regulations specifically provide that a limitation on elective deferrals
set by the plan administrator in accordance with plan terms is a limit contained in the
terms of the plan. A s noted in the preamble to the proposed regulations, the condition
that an employer-provided limit be contained in the terms of the plan is intended to
correspond with the requirements of §1.401-1 that a qualified plan be a definite written
program and provide for a definite predetermined formula for allocating contributions
m a d e to the plan. Accordingly, if a limit is otherwise permissible under a section 401 (k)
plan, the limit will also satisfy the requirement in section 414(v)(5) that the limit be
contained in the terms of the plan.
The A D P limit is the highest dollar amount of elective deferrals that any highly
compensated employee ( H C E ) is permitted under a section 401 (k) plan for a plan year
by reason of the A D P test under section 401(k)(3) (without regard to section 414(v)).
The A D P limit is determined after taking into account all elective deferrals (other than
elective deferrals that are catch-up contributions because of an employer-provided limit
or statutory limit) and qualified nonelective contributions or qualified matching
contributions for the plan year in accordance with section 401(k)(3) and the applicable
regulations, and after any necessary correction under section 401(k)(8).

6
The final regulations retain the rule that the amount of elective deferrals in
excess of an applicable limit is generally determined as of the end of a plan year by
comparing the total elective deferrals for the plan year with the applicable limit for the
plan year. For an applicable limit that is determined on the basis of a year other than a
plan year (such as the calendar year limit on elective deferrals under section
401(a)(30)), the determination of whether elective deferrals are in excess of the
applicable limit is m a d e on the basis of such other year.
A s under the proposed regulations, this annual method for determining whether
amounts are in excess of an applicable limit also applies to an employer-provided limit
that is applied on a payroll-by-payroll basis during the plan year. A number of
commentators suggested that plans that provide for payroll-by-payroll limits, or similar
limits that apply to a portion of the plan year, be permitted to determine amounts in
excess of an applicable limit based on the period for which the limit is applied. These
commentators noted that, although a plan is permitted to determine an additional
amount of elective deferrals that a catch-up eligible participant is permitted to m a k e on a
payroll-by-payroll basis, the plan could not designate these elective deferrals as catchup contributions on the s a m e basis. These commentators suggested that for such a
plan, an annual determination process would require the plan to collect and retain
additional data during the year. In m a n y cases, plans use a definition of compensation
for purposes of A D P testing that is different from the definition used during the year to
determine elective deferrals. Recordkeepers for these plans must collect and retain
payroll-by-payroll compensation, and then determine the employer-provided limit on an
annual basis before determining the amount of elective deferrals that are catch-up

7
contributions.
A number of advocates for a payroll-by-payroll determination of catch-up
contributions acknowledged that their proposal creates a risk that A D P testing could be
distorted through changes in plan limits during the year. For example, if a plan were to
provide that H C E s ' elective deferrals are limited, on a payroll-by-payroll basis, to 1 % of
compensation for the first 2 months of the plan year, and then to 1 5 % of compensation
for the remainder of the year, the result would be equivalent to treating the first dollars
deferred as catch-up contributions. While few employers might be likely to adopt such a
design, a payroll-by-payroll system for determining catch-up contributions would require
restrictions on the extent to which changes in employer-provided limits during the year
could be made.
After considering these comments, Treasury and the IRS have determined that
the need for rules to prevent abuse associated with a payroll-by-payroll method of
determining catch-up contributions outweighs the relative administrative advantages of
that method, and these regulations retain the annual method. However, to address
administrative concerns raised in these comments, these regulations also expand the
alternative methods for determining an employer-provided limit in order to avoid
requiring plans that use one definition of compensation for elective deferrals and
another definition for A D P testing purposes to collect and retain data on both definitions.
These final regulations retain the rule in the proposed regulations that a plan that
changes an employer-provided limit during the plan year is permitted to use a timeweighted average of these limits as the employer-provided limit. For example, under
this alternative method, a plan that provides for an employer-provided limit of 8 % for the

8
first 6 months of the plan year and 1 0 % for the second 6 months is permitted to use 9 %
as the employer-provided limit for the plan year. These final regulations also provide
that the plan is permitted to use the definition of compensation used for A D P testing
purposes for this weighted-average simplification, and can use this alternative method
without regard to whether the employer-provided limit is changed during the plan year.
C.

Treatment of Catch-up Contributions
A n elective deferral that is treated as a catch-up contribution is not subject to

otherwise applicable limits under the applicable employer plan and the plan will not be
treated as failing otherwise applicable nondiscrimination requirements because of catchup contributions. Under these final regulations (including changes from the proposed
regulations to reflect the provisions of J C W A A ) , catch-up contributions are not taken
into account in applying the limits of section 401(a)(30), 402(h), 403(b), 408, 415(c), or
457(b)(2) (determined without regard to section 457(b)(3)) to other contributions or
benefits under the plan offering catch-up contributions or under any other plan of the
employer.
Elective deferrals that are treated as catch-up contributions under a plan
because they exceed a statutory limit or an employer-provided limit are disregarded for
purposes of A D P testing. These catch-up contributions are subtracted from the
participant's elective deferrals for the plan year prior to determining the participant's
actual deferral ratio. This subtraction applies without regard to whether the catch-up
eligible participant is an H C E or a nonhighly compensated employee ( N H C E ) . If a plan
needs to take corrective action under section 401(k)(8), the plan must determine the
amount of elective deferrals for H C E s that are catch-up contributions because they are

9
in excess of the A D P limit and retain such amounts. The plan would not be treated as
failing section 401(k)(8) because these excess contributions are treated as catch-up
contributions and retained.
Amounts in excess of an applicable limit are treated as catch-up contributions
only to the extent that such excess amounts, combined with amounts previously treated
as catch-up contributions for the taxable year, do not exceed the catch-up contribution
limit for the year. A s discussed above, whether elective deferrals in excess of an
applicable limit can be treated as catch-up contributions is determined based on the
year (e.g., plan year, calendar year, or limitation year) with respect to which each
applicable limit is applied.
The interaction of this timing rule and the catch-up contribution limit for the year
is most significant for a plan with a plan year that is not the calendar year. For example,
in a plan with a plan year ending on June 30, 2005, elective deferrals in excess of the
employer-provided limit or the A D P limit for the plan year ending June 30, 2005, would
be treated as catch-up contributions as of the last day of the plan year, up to the catchup contribution limit for 2005. These catch-up contributions are not taken into account
for purposes of compliance with section 401 (a)(30) for 2005. After June 30, 2005, the
catch-up eligible participant is permitted to continue to m a k e elective deferrals up to the
section 401(a)(30) limit for 2005 (disregarding any amounts treated as catch-up
contributions for 2005, as of June 30, 2005) and these additional contributions are not
treated as contributions in excess of the section 401(a)(30) limit. Accordingly, these
additional contributions are generally taken into account under the A D P test for the plan
year ending June 30, 2006. In addition, to the extent the catch-up eligible participant

10
has not m a d e catch-up contributions up to the catch-up contribution limit for 2005, the
participant can m a k e additional catch-up contributions in excess of the section
401(a)(30) limit for 2005. These latter contributions are catch-up contributions which
will not be taken into account under the A D P test for the plan year ending June 30,
2006.
Without regard to their special treatment under certain nondiscrimination
provisions and limitations under the Code, catch-up contributions are elective deferrals
and remain subject to the applicable requirements for elective deferrals. For example,
catch-up contributions under an applicable employer plan that is a section 401 (k) plan
are subject to the distribution and vesting restrictions of section 401(k)(2)(B) and (C),
although the plan provisions applicable to distributions of elective deferrals treated as
catch-up contributions m a y differ from those applicable to other elective deferrals under
the plan (as long as each provision complies with the distribution restrictions of section
401(k)(2)(B)). In addition, excess contributions treated as catch-up contributions
nevertheless remain excess contributions for purposes of section 411(a)(3)(G).
Therefore, the plan is permitted to provide that matching contributions related to excess
contributions treated as catch-up contributions are forfeited. However, as discussed
below, it is also permissible for a plan to provide that these matching contributions are
not forfeited, without violating section 401(a)(4).
These final regulations retain the rules of the proposed regulations on the
treatment of catch-up contributions for purposes of sections 416, 410(b) and 401(a)(4).
Catch-up contributions for the current plan year are not taken into account under section
416 or 410(b). However, catch-up contributions for prior years are taken into account in

11
determining whether a plan is top-heavy under section 416, and for purposes of
average benefit percentage testing to the extent prior years' contributions are taken into
account (i.e., if accrued-to-date calculations are used). In addition, a plan does not fail
the requirements of section 401(a)(4) merely because it permits only catch-up eligible
participants to m a k e catch-up contributions, without regard to whether the group of
catch-up eligible employees would satisfy section 410(b). Similarly, if a plan applies a
single matching formula to elective deferrals whether or not they are catch-up
contributions, the matching formula as applied to catch-up eligible participants is not
treated as a separate benefit, right, or feature under §1.401(a)(4)-4 from the matching
formula as applied to the other participants. However, the matching contributions under
the plan must satisfy the actual contribution percentage test under section 401(m)(2)
taking into account all matching contributions, including matching contributions on
catch-up contributions.
A number of commentators indicated that s o m e employers would not want to
provide matching contributions on catch-up contributions and requested guidance on
h o w they might accomplish that goal in light of the annual determination of whether
amounts are in excess of an employer-provided limit. The IRS and Treasury believe
that employers can achieve their desired goal by specifying which contributions will be
matched, rather than specifying which contributions will not be matched. For example,
if an employer-provided limit on elective deferrals is 1 0 % of compensation for each
payroll period, the plan can specify that matching contributions will be m a d e based on
elective deferrals that do not exceed 1 0 % of compensation for that payroll period (and
that do not exceed a statutory limit), and that matching contributions on elective

12
deferrals in excess of the ADP limit will be forfeited, with the assurance that the plan will
not be matching catch-up contributions.
D. Universal Availability
Section 414(v)(4)(A) provides that an applicable employer plan is treated as
failing to comply with section 401(a)(4) unless the plan allows all catch-up eligible
participants to make the same election with respect to additional elective deferrals.
Section 414(v)(4)(B) provides that, for this purpose, all plans maintained by employers
treated as a single employer under section 414(b), (c), (m) or (o) are treated as a single
plan. The proposed regulations provided that, if an applicable employer plan otherwise
subject to section 401(a)(4) provides for catch-up contributions, all other applicable
employer plans in the controlled group that provide for elective deferrals (including plans
not subject to section 401(a)(4)) must provide catch-up eligible participants with the
same effective opportunity to make catch-up contributions. The proposed regulations
also included a transition rule for collectively bargained plans and an exception related
to mergers and acquisitions.
Several commentators requested that collectively bargained employees
described in section 410(b)(3) be disregarded for purposes of the universal availability
requirement, just as they are disregarded for purposes of section 401(a)(4)
compliance. These commentators explained that it is difficult to coordinate catch-up
contributions among non-collectively bargained employees and collectively bargained
employees, particularly when more than one collective bargaining unit is involved. For
employers participating in multiemployer plans, the difficulties are increased
significantly, because of the implications for other, unrelated employers. Some

13
commentators also requested that other groups of employees be excluded pursuant to
provisions of the regulations under section 410(b) allowing employees to be excluded
based on plan design, such as participants w h o have not met the minimum age and
service requirements of section 410(a)(1) or employees in different qualified separate
lines of business under section 414(r).
In response to comments, these final regulations provide that employees
described in section 410(b)(3), most notably collectively bargained employees, are
disregarded for purposes of determining whether an applicable employer plan complies
with the universal availability requirement. Pursuant to sections 401(a)(4) and
410(b)(3), collectively bargained employees are disregarded for purposes of section
401(a)(4), without regard to plan design or an employer's choice of testing method. The
final regulations do not adopt the other suggested exclusions, participants w h o have not
met minimum age and service or participants in different qualified separate lines of
business, because these exclusions are based on plan design and testing choices.
These regulations otherwise retain the basic rules of the proposed regulations
relating to universal availability and provide that a plan that offers catch-up contributions
satisfies the requirements of section 401(a)(4) only if all catch-up eligible participants
are provided with an effective opportunity to m a k e the s a m e dollar amount of catch-up
contributions. Catch-up eligible participants do not have an effective opportunity to
m a k e catch-up contributions unless the applicable employer plan permits each catch-up
eligible participant to m a k e sufficient elective deferrals during the year so that the
participant has the opportunity to m a k e elective deferrals up to the otherwise applicable
limit plus the catch-up contribution limit. A n effective opportunity could be provided in

14
several different ways. For example, a plan that limits elective deferrals on a payroll-bypayroll basis might also provide participants with an opportunity to m a k e catch-up
contributions that is administered on a payroll-by-payroll basis (i.e., by allowing catch-up
eligible participants to increase their deferrals above the otherwise applicable limit by a
pro-rata portion of the catch-up limit for the year). The plan would satisfy the effective
opportunity requirement even though, as discussed above, whether these elective
deferrals are treated as catch-up contributions would not be determined until the end of
the year.
A plan will not fail the universal availability requirement solely because an
employer-provided limit does not apply to all employees or different employer-provided
limits apply to different groups of employees, as long as each limit satisfies the
nondiscriminatory availability requirements of §1.401 (a)(4)-4 for benefits, rights, and
features. Thus, for example, a plan could provide for an employer-provided limit that
applies to H C E s , even though no employer-provided limit applies to N H C E s . However,
as under the proposed regulations, these final regulations retain the rule that an
applicable employer plan is not permitted to provide lower employer-provided limits for
catch-up eligible participants. Furthermore, a plan fails to provide an effective
opportunity to m a k e catch-up contributions if it has an applicable limit (e.g., an
employer-provided limit) and does not permit all catch-up eligible participants to m a k e
elective deferrals in excess of that limit.
In addition to the exclusion for collectively bargained employees discussed
above, these final regulations include several other exceptions to the universal
availability requirement. Under these regulations, a plan does not fail the universal

15
availability requirement because it restricts elective deferrals, including elective deferrals
for catch-up eligible participants, under a cash availability limit. A cash availability limit
is a limit that restricts elective deferrals to amounts available after withholding from the
employee's pay (e.g., after deduction of all applicable income and employment taxes).
For this purpose, a limit of 7 5 % of compensation or higher will be treated as limiting
employees to amounts available after other withholdings.
These final regulations also include a broader exception to the universal
availability requirement during the transition period provided under section 410(b)(6)(C)
than w a s included in the proposed regulations, consistent with the a m e n d m e n t s m a d e
by J C W A A . Under these final regulations, an applicable employer plan that satisfies the
universal availability requirement before an acquisition or disposition described in
§1.410(b)-2(f) continues to be treated as satisfying the universal availability requirement
of section 414(v)(4) through the end of the period described in section 410(b)(6)(C).
These final regulations also retain a rule providing for coordination between catch-up
contributions under section 414(v) and the provisions of section 457(b)(3), in
accordance with section 414(v)(6)(C).
A number of c o m m e n t s were received on the application of the universal
availability requirement to an applicable employer plan that is qualified under Puerto
Rico tax law as well as under the Code. These final regulations do not affect the
transitional relief granted in Notice 2002-4 that provides that an applicable employer
plan will not fail to satisfy the universal availability requirement solely because another
applicable employer plan of the employer that is qualified under Puerto Rico law does
not provide for catch-up contributions.

16
E.

Participants in Multiple Plans
The technical corrections in J C W A A amended section 414(v) to provide that all

applicable employer plans of an employer, other than section 457 eligible governmental
plans, are treated as one plan for purposes of determining the amount of catch-up
contributions and all section 457 eligible governmental plans of the s a m e employer are
treated as one plan for this purpose. Statutory limits, such as the limits under section
401(a)(30) or 415, already provide for coordination a m o n g plans in the s a m e controlled
group, and elective deferrals in addition to the amounts permitted under these limits are
similarly coordinated. Employer-provided limits, however, apply only to the plan that
provides for the limit, and the A D P limit applies only to section 401 (k) plans.
Accordingly, these final regulations provide guidance on coordination of the amount in
excess of these limits on a controlled-group basis.
With respect to employer-provided limits, these regulations allow a plan to permit
a catch-up eligible participant to defer an amount in addition to the amount allowed
under the employer-provided limit, without regard to whether the employee has already
utilized his or her catch-up opportunity under another plan of the s a m e employer.
However, to the extent elective deferrals under another plan maintained by the
employer have already been treated as catch-up contributions during the taxable year,
the elective deferrals under the plan m a y be treated as catch-up contributions only up to
the amount remaining under the catch-up limit for the year. Any other elective deferrals
that exceed the employer-provided limit m a y not be treated as catch-up contributions
and must satisfy the otherwise applicable nondiscrimination rules. For example, the
right to m a k e contributions in excess of the employer-provided limit is an other right or

17
feature which must satisfy §1.401 (a)(4)-4 to the extent that the contributions are not
catch-up contributions. Also, contributions in excess of the employer provided limit are
taken into account under the A D P test to the extent they are not catch-up contributions.

Finally, these regulations retain the allocation rule included in the proposed
regulations. W h e n a participant is eligible under more than one applicable employer
plan maintained by the s a m e employer, the specific plan under which amounts in
excess of an applicable limit are treated as catch-up contributions is permitted to be
determined in any manner that is not inconsistent with the manner in which such
amounts were actually deferred under the plans.
F.

Excludabilitv of Catch-up Contributions
J C W A A a m e n d e d section 402(g) to increase the elective deferral limit for a

catch-up eligible participant by the amount of the allowable catch-up contributions for
the taxable year. The provisions of these final regulations related to these provisions
are under n e w §1.402(g)-2, rather than under §1.414(v)-1, as in the proposed
regulations. Under §1.402(g)-2, the amount of elective deferrals that a catch-up eligible
participant is permitted to exclude from income under section 402(g) for the taxable year
is increased by the m a x i m u m amount of catch-up contributions permitted for the taxable
year under section 414(v). This treatment by the catch-up eligible participant is not
affected by whether the applicable employer plans treat the elective deferrals as catchup contributions. Thus, a catch-up eligible participant w h o participates in plans of two or
more employers is permitted to exclude from gross income elective deferrals that
exceed the section 402(g) limit, even though neither plan treats those elective deferrals

18
as catch-up contributions. In addition, the treatment by an individual of such elective
deferrals as catch-up contributions will not have any effect on either employer's plan.
Effective Date
These final regulations are applicable to contributions in taxable years beginning
on or after January 1, 2004. Taxpayers are permitted to rely on these final regulations
and the proposed regulations for taxable years beginning prior to January 1, 2004.
Special Analyses
It has been determined that these final regulations are not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Because
§§1.402(g)-2 and 1.414(v)-1 impose no new collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, the notice of proposed rulemaking that preceded
these final regulations w a s submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.
Drafting Information
The principal authors of these regulations are R. Lisa Mojiri-Azad and John T.
Ricotta of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and Treasury
participated in their development.
List of Subjects in 26 C F R Part 1
Income taxes, Reporting and recordkeeping requirements.

19
Adoption of A m e n d m e n t s to the Regulations
Accordingly, 26 C F R part 1 is amended as follows:
P A R T 1--INCOME T A X E S
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.402(g)-2 is added to read as follows:
$1.402(g)-2 Increased limit for catch-up contributions.
(a) General rule. Under section 402(g)(1)(C), in determining the amount of
elective deferrals that are includible in gross income under section 402(g) for a catch-up
eligible participant (within the meaning of §1.414(v)-1(g)), the otherwise applicable dollar
limit under section 402(g)(1)(B) (as increased under section 402(g)(7), to the extent
applicable) shall be further increased by the applicable dollar catch-up limit as set forth
under §1.414(v)-1 (c)(2).
(b) Participants in multiple plans. Paragraph (a) of this section applies without
regard to whether the applicable employer plans (within the meaning of section
414(v)(6)) treat the elective deferrals as catch-up contributions. Thus, a catch-up
eligible participant w h o makes elective deferrals under applicable employer plans of two
or more employers that in total exceed the applicable dollar amount under section
402(g)(1) by an amount that does not exceed the applicable dollar catch-up limit under
either plan m a y exclude the elective deferrals from gross income, even if neither
applicable employer plan treats those elective deferrals as catch-up contributions.
(c) Effective date--(1) Statutory effective date. Section 402(g)(1 )(C) applies to
contributions in taxable years beginning on or after January 1, 2002.

20
(2) Regulatory effective date. Paragraphs (a) and (b) of this section apply to
contributions in taxable years beginning on or after January 1, 2004.
Par. 3. Section 1.414(v)-1 is added to read as follows:
§1.414(v)-1 Catch-up contributions.
(a) Catch-up contributions--(1) General rule. A n applicable employer plan shall
not be treated as failing to meet any requirement of the Internal Revenue C o d e solely
because the plan permits a catch-up eligible participant to m a k e catch-up contributions
in accordance with section 414(v) and this section. With respect to an applicable
employer plan, catch-up contributions are elective deferrals m a d e by a catch-up eligible
participant that exceed any of the applicable limits set forth in paragraph (b) of this
section and that are treated under the applicable employer plan as catch-up
contributions, but only to the extent they do not exceed the catch-up contribution limit
described in paragraph (c) of this section (determined in accordance with the special
rules for employers that maintain multiple applicable employer plans in paragraph (f) of
this section, if applicable). T o the extent provided under paragraph (d) of this section,
catch-up contributions are disregarded for purposes of various statutory limits. In
addition, unless otherwise provided in paragraph (e) of this section, all catch-up eligible
participants of the employer must be provided the opportunity to m a k e catch-up
contributions in order for an applicable employer plan to comply with the universal
availability requirement of section 414(v)(4). The definitions in paragraph (g) of this
section apply for purposes of this section and §1.402(g)-2.
(2) Treatment as elective deferrals. Except as specifically provided in this
section, elective deferrals treated as catch-up contributions remain subject to statutory

21
and regulatory rules otherwise applicable to elective deferrals. For example, catch-up
contributions under an applicable employer plan that is a section 401 (k) plan are subject
to the distribution and vesting restrictions of section 401(k)(2)(B) and (C). In addition,
the plan is permitted to provide a single election for catch-up eligible participants, with
the determination of whether elective deferrals are catch-up contributions being made
under the terms of the plan.
(3) Coordination with section 457(b)(3). In the case of an applicable employer
plan that is a section 457 eligible governmental plan, the catch-up contributions
permitted under this section shall not apply to a catch-up eligible participant for any
taxable year for which a higher limitation applies to such participant under section
457(b)(3). For additional guidance, see regulations under section 457.
(b) Elective deferrals that exceed an applicable limit—(1) Applicable limits. An
applicable limit for purposes of determining catch-up contributions for a catch-up eligible
participant is any of the following:
(i) Statutory limit. A statutory limit is a limit on elective deferrals or annual
additions permitted to be made (without regard to section 414(v) and this section) with
respect to an employee for a year provided in section 401(a)(30), 402(h), 403(b), 408,
415(c), or 457(b)(2) (without regard to section 457(b)(3)), as applicable.
(ii) Employer-provided limit. An employer-provided limit is any limit on the
elective deferrals an employee is permitted to make (without regard to section 414(v)
and this section) that is contained in the terms of the plan, but which is not required
under the Internal Revenue Code. Thus, for example, if, in accordance with the terms
of the plan, highly compensated employees are limited to a deferral percentage of 10%

22
of compensation, this limit is an employer-provided limit that is an applicable limit with
respect to the highly compensated employees.
(iii) Actual deferral percentage (ADP) limit. In the case of a section 401 (k) plan
that would fail the ADP test of section 401(k)(3) if it did not correct under section
401(k)(8), the ADP limit is the highest amount of elective deferrals that can be retained
in the plan by any highly compensated employee under the rules of section 401(k)(8)(C)
(without regard to paragraph (d)(2)(iii) of this section). In the case of a simplified
employee pension (SEP) with a salary reduction arrangement (within the meaning of

section 408(k)(6)) that would fail the requirements of section 408(k)(6)(A)(iii) if it did not
correct in accordance with section 408(k)(6)(C), the ADP limit is the highest amount of
elective deferrals that can be made by any highly compensated employee under the
rules of section 408(k)(6) (without regard to paragraph (d)(2)(iii) of this section).
(2) Contributions in excess of applicable limit--(i) Plan year limits--(A) General
rule. Except as provided in paragraph (b)(2)(ii) of this section, the amount of elective
deferrals in excess of an applicable limit is determined as of the end of the plan year by
comparing the total elective deferrals for the plan year with the applicable limit for the
plan year. In addition, except as provided in paragraph (b)(2)(i)(B) of this section, in the
case of a plan that provides for separate employer-provided limits on elective deferrals
for separate portions of plan compensation within the plan year, the applicable limit for
the plan year is the sum of the dollar amounts of the limits for the separate portions. For
example, if a plan sets a deferral percentage limit for each payroll period, the applicable
limit for the plan year is the sum of the dollar amounts of the limits for the payroll
periods.

23
(B) Alternative method for determining employer-provided limit—(1) General rule.

If the plan limits elective deferrals for separate portions of the plan year, then, solely fo
purposes of determining the amount that is in excess of an employer-provided limit, the
plan is permitted to provide that the applicable limit for the plan year is the product of
the employee's plan year compensation and the time-weighted average of the deferral
percentage limits, rather than determining the employer-provided limit as the sum of the
limits for the separate portions of the year. Thus, for example, if, in accordance with the
terms of the plan, highly compensated employees are limited to 8% of compensation
during the first half of the plan year and 10% of compensation for the second half of the
plan year, the plan is permitted to provide that the applicable limit for a highly
compensated employee is 9% of the employee's plan year compensation.
(2) Alternative definition of compensation permitted. A plan using the alternative
method in this paragraph (b)(2)(i)(B) is permitted to provide that the applicable limit for
the plan year is determined as the product of the catch-up eligible participant's
compensation used for purposes of the ADP test and the time-weighted average of the
deferral percentage limits. The alternative calculation in this paragraph (b)(2)(i)(B)(2) is
available regardless of whether the deferral percentage limits change during the plan
year.
(ii) Other year limit. In the case of an applicable limit that is applied on the basis
of a year other than the plan year (e.g., the calendar-year limit on elective deferrals
under section 401(a)(30)), the determination of whether elective deferrals are in excess
of the applicable limit is made on the basis of such other year.
(c) Catch-up contribution limit—(1) General rule. Elective deferrals with respect to

24
a catch-up eligible participant in excess of an applicable limit under paragraph (b) of this
section are treated as catch-up contributions under this section as of a date within a
taxable year only to the extent that such elective deferrals do not exceed the catch-up
contribution limit described in paragraphs (c)(1) and (2) of this section, reduced by
elective deferrals previously treated as catch-up contributions for the taxable year,
determined in accordance with paragraph (c)(3) of this section. The catch-up
contribution limit for a taxable year is generally the applicable dollar catch-up limit for
such taxable year, as set forth in paragraph (c)(2) of this section. However, an elective
deferral is not treated as a catch-up contribution to the extent that the elective deferral,
when added to all other elective deferrals for the taxable year under any applicable
employer plan of the employer, exceeds the participant's compensation (determined in
accordance with section 415(c)(3)) for the taxable year. See also paragraph (f) of this
section for special rules for employees who participate in more than one applicable
employer plan maintained by the employer.
(2) Applicable dollar catch-up limit--(i) In general. The applicable dollar catch-up
limit for an applicable employer plan, other than a plan described in section 401 (k)(11)
or 408(p), is determined under the following table:

For Taxable Years
Beginning in

Applicable Dollar Catchup Limit

2002

$1,000

2003

$2,000

2004

$3,000

2005

$4,000

25
2006

$5,000

(ii) S I M P L E plans. The applicable dollar catch-up limit for a S I M P L E 401 (k) plan
described in section 401(k)(11) or a SIMPLE IRA plan as described in section 408(p) is
determined under the following table:
For Taxable Years
Beginning in

Applicable Dollar Catchup Limit

2002

$

2003

$1,000

2004

$1,500

2005

$2,000

2006

$2,500

500

(iii) Cost of living adjustments. For taxable years beginning after 2006, the

applicable dollar catch-up limit is the applicable dollar catch-up limit for 2006 describe
in paragraph (c)(2)(i) or (ii) of this section increased at the same time and in the same
manner as adjustments under section 415(d), except that the base period shall be the
calendar quarter beginning July 1, 2005, and any increase that is not a multiple of $500
shall be rounded to the next lower multiple of $500.
(3) Timing rules. For purposes of determining the maximum amount of permitted
catch-up contributions for a catch-up eligible participant, the determination of whether

an elective deferral is a catch-up contribution is made as of the last day of the plan yea

(or in the case of section 415, as of the last day of the limitation year), except that, wi

respect to elective deferrals in excess of an applicable limit that is tested on the basis
the taxable year or calendar year (e.g., the section 401(a)(30) limit on elective

26
deferrals), the determination of whether such elective deferrals are treated as catch-up
contributions is made at the time they are deferred.
(d) Treatment of catch-up contributions--(1) Contributions not taken into account
for certain limits. Catch-up contributions are not taken into account in applying the limits
of section 401(a)(30), 402(h), 403(b), 408, 415(c), or 457(b)(2) (determined without
regard to section 457(b)(3)) to other contributions or benefits under an applicable
employer plan or any other plan of the employer.
(2) Contributions not taken into account in application of ADP test--(i) Calculation
of ADR. Elective deferrals that are treated as catch-up contributions pursuant to
paragraph (c) of this section with respect to a section 401 (k) plan because they exceed
a statutory or employer-provided limit described in paragraph (b)(1)(i) or (ii) of this
section, respectively, are subtracted from the catch-up eligible participant's elective
deferrals for the plan year for purposes of determining the actual deferral ratio (ADR)
(as defined in regulations under section 401 (k)) of a catch-up eligible participant.
Similarly, elective deferrals that are treated as catch-up contributions pursuant to
paragraph (c) of this section with respect to a SEP because they exceed a statutory or
employer-provided limit described in paragraph (b)(1)(i) or (ii) of this section,
respectively, are subtracted from the catch-up eligible participant's elective deferrals for
the plan year for purposes of determining the deferral percentage under section
408(k)(6)(D) of a catch-up eligible participant.
(ii) Adjustment of elective deferrals for correction purposes. For purposes of the
correction of excess contributions in accordance with section 401(k)(8)(C), elective
deferrals under the plan treated as catch-up contributions for the plan year and not

27
taken into account in the ADP test under paragraph (d)(2)(i) of this section are
subtracted from the catch-up eligible participant's elective deferrals under the plan for
the plan year.
(iii) Excess contributions treated as catch-up contributions. A section 401 (k) plan
that satisfies the ADP test of section 401(k)(3) through correction under section
401(k)(8) must retain any elective deferrals that are treated as catch-up contributions
pursuant to paragraph (c) of this section because they exceed the ADP limit in
paragraph (b)(1)(iii) of this section. In addition, a section 401 (k) plan is not treated as
failing to satisfy section 401(k)(8) merely because elective deferrals described in the
preceding sentence are not distributed or recharacterized as employee contributions.
Similarly, a SEP is not treated as failing to satisfy section 408(k)(6)(A)(iii) merely
because catch-up contributions are not treated as excess contributions with respect to a
catch-up eligible participant under the rules of section 408(k)(6)(C). Notwithstanding the
fact that elective deferrals described in this paragraph (d)(2)(iii) are not distributed, such
elective deferrals are still considered to be excess contributions under section 401(k)(8),
and accordingly, matching contributions with respect to such elective deferrals are
permitted to be forfeited under the rules of section 411(a)(3)(G).
(3) Contributions not taken into account for other nondiscrimination purposes--(i)
Application for top-heavy. Catch-up contributions with respect to the current plan year
are not taken into account for purposes of section 416. However, catch-up contributions
for prior years are taken into account for purposes of section 416. Thus, catch-up
contributions for prior years are included in the account balances that are used in
determining whether the plan is top-heavy under section 416(g).

28
(ii) Application for section 410(b). Catch-up contributions with respect to the
current plan year are not taken into account for purposes of section 410(b). Thus,
catch-up contributions are not taken into account in determining the average benefit
percentage under §1.410(b)-5 for the year if benefit percentages are determined based
on current year contributions. However, catch-up contributions for prior years are taken
into account for purposes of section 410(b). Thus, catch-up contributions for prior years
would be included in the account balances that are used in determining the average
benefit percentage if allocations for prior years are taken into account.
(4) Availability of catch-up contributions. An applicable employer plan does not
violate §1.401(a)(4)-4 merely because the group of employees for whom catch-up
contributions are currently available (i.e., the catch-up eligible participants) is not a
group of employees that would satisfy section 410(b) (without regard to §1.410(b)-5). In

addition, a catch-up eligible participant is not treated as having a right to a different rate
of allocation of matching contributions merely because an otherwise nondiscriminatory
schedule of matching rates is applied to elective deferrals that include catch-up
contributions. The rules in this paragraph (d)(4) also apply for purposes of satisfying the
requirements of section 403(b)(12).
(e) Universal availability reouirement--(1) General rule--(i) Effective opportunity.
An applicable employer plan that offers catch-up contributions and that is otherwise
subject to section 401(a)(4) (including a plan that is subject to section 401(a)(4)
pursuant to section 403(b)(12)) will not satisfy the requirements of section 401(a)(4)
unless all catch-up eligible participants who participate under any applicable employer
plan maintained by the employer are provided with an effective opportunity to make the

29
s a m e dollar amount of catch-up contributions. A plan fails to provide an effective
opportunity to m a k e catch-up contributions if it has an applicable limit (e.g., an
employer-provided limit) that applies to a catch-up eligible participant and does not
permit the participant to m a k e elective deferrals in excess of that limit. A n applicable
employer plan does not fail to satisfy the universal availability requirement of this
paragraph (e) solely because an employer-provided limit does not apply to all
employees or different limits apply to different groups of employees under paragraph
(b)(2)(i) of this section. However, a plan m a y not provide lower employer-provided limits
for catch-up eligible participants.
(ii) Certain practices permitted--(A) Proration of limit. A applicable employer plan
does not fail to satisfy the universal availability requirement of this paragraph (e) merely
because the plan allows participants to defer an amount equal to a specified percentage
of compensation for each payroll period and for each payroll period permits each catchup eligible participant to defer a pro-rata share of the applicable dollar catch-up limit in
addition to that amount.
(B) Cash availability. A n applicable employer plan does not fail to satisfy the
universal availability requirement of this paragraph (e) merely because it restricts the
elective deferrals of any employee (including a catch-up eligible participant) to amounts
available after other withholding from the employee's pay (e.g., after deduction of all
applicable income and employment taxes). For this purpose, an employer limit of 7 5 %
of compensation or higher will be treated as limiting employees to amounts available
after other withholdings.
(2) Certain employees disregarded. A n applicable employer plan does not fail to

30
satisfy the universal availability requirement of this paragraph (e) merely because
employees described in section 410(b)(3) (e.g., collectively bargained employees) are
not provided the opportunity to m a k e catch-up contributions.
(3) Exception for certain plans. A n applicable employer plan does not fail to
satisfy the universal availability requirement of this paragraph (e) merely because
another applicable employer plan that is a section 457 eligible governmental plan does
not provide for catch-up contributions to the extent set forth in section 414(v)(6)(C) and
paragraph (a)(3) of this section.
(4) Exception for section 410(b)(6)(C)(ii) period. If an applicable employer plan
satisfies the universal availability requirement of this paragraph (e) before an acquisition
or disposition described in §1.410(b)-2(f) and would fail to satisfy the universal
availability requirement of this paragraph (e) merely because of such event, then the
applicable employer plan shall continue to be treated as satisfying this paragraph (e)
through the end of the period determined under section 410(b)(6)(C)(ii).
(f) Special rules for an employer that sponsors multiple plans--(1) General rule.
For purposes of paragraph (c) of this section, all applicable employer plans, other than
section 457 eligible governmental plans, maintained by the s a m e employer are treated
as one plan and all section 457 eligible governmental plans maintained by the s a m e
employer are treated as one plan. Thus, the total amount of catch-up contributions
under all applicable employer plans of an employer (other than section 457 eligible
governmental plans) is limited to the applicable dollar catch-up limit for the taxable year,
and the total amount of catch-up contributions for all section 457 eligible governmental
plans of an employer is limited to the applicable dollar catch-up limit for the taxable

31
year.
(2) Coordination of employer-provided limits. A n applicable employer plan is
permitted to allow a catch-up eligible participant to defer amounts in excess of an
employer-provided limit under that plan without regard to whether elective deferrals
m a d e by the participant have been treated as catch-up contributions for the taxable year
under another applicable employer plan aggregated with such plan under this paragraph
(f). However, to the extent elective deferrals under another plan maintained by the
employer have already been treated as catch-up contributions during the taxable year,
the elective deferrals under the plan m a y be treated as catch-up contributions only up to
the amount remaining under the catch-up limit for the year. Any other elective deferrals
that exceed the employer-provided limit m a y not be treated as catch-up contributions
and must satisfy the otherwise applicable nondiscrimination rules. For example, the
right to m a k e contributions in excess of the employer-provided limit is an other right or
feature which must satisfy §1.401(a)(4)-4 to the extent that the contributions are not
catch-up contributions. Also, contributions in excess of the employer provided limit are
taken into account under the A D P test to the extent they are not catch-up contributions.
(3) Allocation rules. If a catch-up eligible participant m a k e s additional elective
deferrals in excess of an applicable limit under paragraph (b)(1) of this section under
more than one applicable employer plan that is aggregated under the rules of this
paragraph (f), the applicable employer plan under which elective deferrals in excess of
an applicable limit are treated as catch-up contributions is permitted to be determined in
any manner that is not inconsistent with the manner in which such amounts were
actually deferred under the plan.

32
(g) Definitions--(1) Applicable employer plan. The term applicable employer plan
means a section 401 (k) plan, a SIMPLE IRA plan as defined in section 408(p), a
simplified employee pension plan as defined in section 408(k) (SEP), a plan or contract
that satisfies the requirements of section 403(b), or a section 457 eligible governmental
plan.
(2) Elective deferral. The term elective deferral means an elective deferral within
the meaning of section 402(g)(3) or any contribution to a section 457 eligible
governmental plan.
(3) Catch-up eligible participant. An employee is a catch-up eligible participant
for a taxable year if~
(i) The employee is eligible to make elective deferrals under an applicable
employer plan (without regard to section 414(v) or this section); and
(ii) The employee's 50th or higher birthday would occur before the end of the
employee's taxable year.
(4) Other definitions, (i) The terms employer, employee, section 401 (k) plan, and
highly compensated employee have the meanings provided in §1.410(b)-9.
(ii) The term section 457 eligible governmental plan means an eligible deferred
compensation plan described in section 457(b) that is established and maintained by an
eligible employer described in section 457(e)(1)(A).
(h) Examples. The following examples illustrate the application of this section.
For purposes of these examples, the limit under section 401(a)(30) is $15,000 and the
applicable dollar catch-up limit is $5,000 and, except as specifically provided, the plan
year is the calendar year. In addition, it is assumed that the participant's elective

33
deferrals under all plans of the employer do not exceed the participant's section
415(c)(3) compensation, that the taxable year of the participant is the calendar year and
that any correction pursuant to section 401(k)(8) is made through distribution of excess
contributions. The examples are as follows:
Example 1. (i) Participant A is eligible to make elective deferrals under a section
401 (k) plan, Plan P. Plan P does not limit elective deferrals except as necessary to
comply with sections 401(a)(30) and 415. In 2006, Participant A is 55 years old. Plan P
also provides that a catch-up eligible participant is permitted to defer amounts in excess
of the section 401(a)(30) limit up to the applicable dollar catch-up limit for the year.
Participant A defers $18,000 during 2006.
(ii) Participant A's elective deferrals in excess of the section 401(a)(30) limit
($3,000) do not exceed the applicable dollar catch-up limit for 2006 ($5,000). Under
paragraph (a)(1) of this section, the $3,000 is a catch-up contribution and, pursuant to
paragraph (d)(2)(i) of this section, it is not taken into account in determining Participant
A's A D R for purposes of section 401(k)(3).
Example 2. (i) Participants B and C, who are highly compensated employees
each earning $120,000, are eligible to m a k e elective deferrals under a section 401 (k)
plan, Plan Q. Plan Q limits elective deferrals as necessary to comply with section
401(a)(30) and 415, and also provides that no highly compensated employee m a y m a k e
an elective deferral at a rate that exceeds 1 0 % of compensation. However, Plan Q also
provides that a catch-up eligible participant is permitted to defer amounts in excess of
1 0 % during the plan year up to the applicable dollar catch-up limit for the year. In 2006,
Participants B and C are both 55 years old and, pursuant to the catch-up provision in
Plan Q, both elect to defer 1 0 % of compensation plus a pro-rata portion of the $5,000
applicable dollar catch-up limit for 2006. Participant B continues this election in effect
for the entire year, for a total elective contribution for the year of $17,000. However, in
July 2006, after deferring $8,500, Participant C discontinues making elective deferrals.
(ii) Once Participant B's elective deferrals for the year exceed the section
401(a)(30) limit ($15,000), subsequent elective deferrals are treated as catch-up
contributions as they are deferred, provided that such elective deferrals do not exceed
the catch-up contribution limit for the taxable year. Since the $2,000 in elective
deferrals m a d e after Participant B reaches the section 402(g) limit for the calendar year
does not exceed the applicable dollar catch-up limit for 2006, the entire $2,000 is
treated as a catch-up contribution.
(iii) As of the last day of the plan year, Participant B has exceeded the employerprovided limit of 1 0 % ( 1 0 % of $120,000 or $12,000 for Participant B) by an additional
$3,000. Since the additional $3,000 in elective deferrals does not exceed the $5,000
applicable dollar catch-up limit for 2006, reduced by the $2,000 in elective deferrals

34
previously treated as catch-up contributions, the entire $3,000 of elective deferrals is
treated as a catch-up contribution.
(iv) In determining Participant B's ADR, the $5,000 of catch-up contributions are
subtracted from Participant B's elective deferrals for the plan year under paragraph
(d)(2)(i) of this section. Accordingly, Participant B's A D R is 1 0 % ($12,000 / $120,000).
In addition, for purposes of applying the rules of section 401 (k)(8), Participant B is
treated as having elective deferrals of $12,000.
(v) Participant C's elective deferrals for the year do not exceed an applicable limit
for the plan year. Accordingly, Participant C's $8,500 of elective deferrals must be
taken into account in determining Participant C's A D R for purposes of section 401(k)(3).
Example 3. (i) The facts are the same as in Example 2, except that Plan Q is
amended to change the m a x i m u m permitted deferral percentage for highly
compensated employees to 7 % , effective for deferrals after April 1, 2006. Participant B,
w h o has earned $40,000 in the first 3 months of the year and has been deferring at a
rate of 1 0 % of compensation plus a pro-rata portion of the $5,000 applicable dollar
catch-up limit for 2006, reduces the 1 0 % of pay deferral rate to 7 % for the remaining 9
months of the year (while continuing to defer a pro-rata portion of the $5,000 applicable
dollar catch-up limit for 2006). During those 9 months, Participant B earns $80,000.
Thus, Participant B's total elective deferrals for the year are $14,600 ($4,000 for the first
3 months of the year plus $5,600 for the last 9 months of the year plus an additional
$5,000 throughout the year).
(ii) The employer-provided limit for Participant B for the plan year is $9,600
($4,000 for the first 3 months of the year, plus $5,600 for the last 9 months of the year).
Accordingly, Participant B's elective deferrals for the year that are in excess of the
employer-provided limit are $5,000 (the excess of $14,600 over $9,600), which does not
exceed the applicable dollar catch-up limit of $5,000.
(iii) Alternatively, Plan Q may provide that the employer-provided limit is
determined as the time-weighted average of the different deferral percentage limits over
the course of the year. In this case, the time-weighted average limit is 7.75% for all
participants, and the applicable limit for Participant B is 7.75% of $120,000, or $9,300.
Accordingly, Participant B's elective deferrals for the year that are in excess of the
employer-provided limit are $5,300 (the excess of $14,600 over $9,300). Since the
amount of Participant B's elective deferrals in excess of the employer-provided limit
($5,300) exceeds the applicable dollar catch-up limit for the taxable year, only $5,000 of
Participant B's elective deferrals m a y be treated as catch-up contributions. In
determining Participant B's actual deferral ratio, the $5,000 of catch-up contributions are
subtracted from Participant B's elective deferrals for the plan year under paragraph
(d)(2)(i) of this section. Accordingly, Participant B's actual deferral ratio is 8 % ($9,600 /
$120,000). In addition, for purposes of applying the rules of section 401 (k)(8),
Participant B is treated as having elective deferrals of $9,600.

35
Example 4. (i) The facts are the s a m e as in Example 1. In addition to Participant
A, Participant D is a highly compensated employee w h o is eligible to m a k e elective
deferrals under Plan P. During 2006, Participant D, w h o is 60 years old, elects to defer
$14,000.
(ii) The ADP test is run for Plan P (after excluding the $3,000 in catch-up
contributions from Participant A's elective deferrals), but Plan P needs to take corrective
action in order to pass the A D P test. After applying the rules of section 401(k)(8)(C) to
allocate the total excess contributions determined under section 401(k)(8)(B), the
m a x i m u m deferrals which m a y be retained by any highly compensated employee in
Plan Pis $12,500.
(iii) Pursuant to paragraph (b)(1)(iii) of this section, the ADP limit under Plan P of
$12,500 is an applicable limit. Accordingly, $1,500 of Participant D's elective deferrals
exceed the applicable limit. Similarly, $2,500 of Participant A's elective deferrals (other
than the $3,000 of elective deferrals treated as catch-up contributions because they
exceed the section 401(a)(30) limit) exceed the applicable limit.
(iv) The $1,500 of Participant D's elective deferrals that exceed the applicable
limit are less than the applicable dollar catch-up limit and are treated as catch-up
contributions. Pursuant to paragraph (d)(2)(iii) of this section, Plan P must retain
Participant D's $1,500 in elective deferrals and Plan P is not treated as failing to satisfy
section 401(k)(8) merely because the elective deferrals are not distributed to Participant
D.
(v) The $2,500 of Participant A's elective deferrals that exceed the applicable
limit are greater than the portion of the applicable dollar catch-up limit ($2,000) that
remains after treating the $3,000 of elective deferrals in excess of the section
401(a)(30) limit as catch-up contributions. Accordingly, $2,000 of Participant A's
elective deferrals are treated as catch-up contributions. Pursuant to paragraph (d)(2)(iii)
of this section, Plan P must retain Participant A's $2,000 in elective deferrals and Plan P
is not treated as failing to satisfy section 401(k)(8) merely because the elective deferrals
are not distributed to Participant A. However, $500 of Participant A's elective deferrals
can not be treated as catch-up contributions and must be distributed to Participant A in
order to satisfy section 401(k)(8).
Example 5. (i) Participant E is a highly compensated employee who is a
catch-up eligible participant under a section 401 (k) plan, Plan R, with a plan year ending
October 31, 2006. Plan R does not limit elective deferrals except as necessary to
comply with section 401(a)(30) and section 415. Plan R permits all catch-up eligible
participants to defer an additional amount equal to the applicable dollar catch-up limit for
the year ($5,000) in excess of the section 401(a)(30) limit. Participant E did not exceed
the section 401(a)(30) limit in 2005 and did not exceed the A D P limit for the plan year
ending October 31, 2005. Participant E m a d e $3,200 of deferrals in the period
November 1, 2005 through December 31, 2005 and an additional $16,000 of deferrals
in the first 10 months of 2006, for a total of $19,200 in elective deferrals for the plan

36
year.
(ii) Once Participant E's elective deferrals for the calendar year 2006 exceed
$15,000, subsequent elective deferrals are treated as catch-up contributions at the time
they are deferred, provided that such elective deferrals do not exceed the applicable
dollar catch-up limit for the taxable year. Since the $1,000 in elective deferrals m a d e
after Participant E reaches the section 402(g) limit for the calendar year does not
exceed the applicable dollar catch-up limit for 2006, the entire $1,000 is a catch-up
contribution. Pursuant to paragraph (d)(2)(i) of this section, $1,000 is subtracted from
Participant E's $19,200 in elective deferrals for the plan year ending October 31, 2006
in determining Participant E's A D R for that plan year.
(iii) The ADP test is run for Plan R (after excluding the $1,000 in elective
deferrals in excess of the section 401(a)(30) limit), but Plan R needs to take corrective
action in order to pass the A D P test. After applying the rules of section 401(k)(8)(C) to
allocate the total excess contributions determined under section 401(k)(8)(C), the
m a x i m u m deferrals that m a y be retained by any highly compensated employee under
Plan R for the plan year ending October 31, 2006 (the A D P limit) is $14,800.
(iv) Under paragraph (d)(2)(ii) of this section, elective deferrals that exceed the
section 401(a)(30) limit under Plan R are also subtracted from Participant E's elective
deferrals under Plan R for purposes of applying the rules of section 401(k)(8).
Accordingly, for purposes of correcting the failed A D P test, Participant E is treated as
having contributed $18,200 of elective deferrals in Plan R. The amount of elective
deferrals that would have to be distributed to Participant E in order to satisfy section
401(k)(8)(C) is $3,400 ($18,200 minus $14,800), which is less than the excess of the
applicable dollar catch-up limit ($5,000) over the elective deferrals previously treated as
catch-up contributions under Plan R for the taxable year ($1,000). Under paragraph
(d)(2)(iii) of this section, Plan R must retain Participant E's $3,400 in elective deferrals
and is not treated as failing to satisfy section 401(k)(8) merely because the elective
deferrals are not distributed to Participant E.
(v) Even though Participant E's elective deferrals for the calendar year 2006 have
exceeded the section 401(a)(30) limit, Participant E can continue to m a k e elective
deferrals during the last 2 months of the calendar year, since Participant E's catch-up
contributions for the taxable year are not taken into account in applying the section
401(a)(30) limit for 2006. Thus, Participant E can m a k e an additional contribution of
$3,400 ($15,000 minus ($16,000 minus $4,400)) without exceeding the section
401(a)(30) for the calendar year and without regard to any additional catch-up
contributions. In addition, Participant E m a y m a k e additional catch-up contributions of
$600 (the $5,000 applicable dollar catch-up limit for 2006, reduced by the $4,400
($1,000 plus $3,400) of elective deferrals previously treated as catch-up contributions
during the taxable year). The $600 of catch-up contributions will not be taken into
account in the A D P test for the plan year ending October 31, 2007.
Example 6. (i) The facts are the same as in Example 5, except that Participant E

37
exceeded the section 401 (a)(30) limit for 2005 by $1,300 prior to October 31, 2005, and
m a d e $600 of elective deferrals in the period November 1, 2005, through December 31,
2005 (which were catch-up contributions for 2005). Thus, Participant E m a d e $16,600
of elective deferrals for the plan year ending October 31, 2006.
(ii) Once Participant E's elective deferrals for the calendar year 2006 exceed
$15,000, subsequent elective deferrals are treated as catch-up contributions as they are
deferred, provided that such elective deferrals do not exceed the applicable dollar
catch-up limit for the taxable year. Since the $1,000 in elective deferrals m a d e after
Participant E reaches the section 402(g) limit for calendar year 2006 does not exceed
the applicable dollar catch-up limit for 2006, the entire $1,000 is a catch-up
contribution. Pursuant to paragraph (d)(2)(i) of this section, $1,000 is subtracted from
Participant E's elective deferrals in determining Participant E's A D R for the plan year
ending October 31, 2006. In addition, the $600 of catch-up contributions from the
period November 1, 2005 to December 31, 2005 are subtracted from Participant E's
elective deferrals in determining Participant E's A D R . Thus, the total elective deferrals
taken into account in determining Participant E's A D R for the plan year ending October
31, 2006, is $15,000 ($16,600 in elective deferrals for the current plan year, less $1,600
in catch-up contributions).
(iii) The ADP test is run for Plan R (after excluding the $1,600 in elective
deferrals in excess of the section 401(a)(30) limit), but Plan R needs to take corrective
action in order to pass the A D P test. After applying the rules of section 401 (k)(8)(C) to
allocate the total excess contributions determined under section 401(k)(8)(C), the
m a x i m u m deferrals that m a y be retained by any highly compensated employee under
Plan R (the A D P limit) is $14,800.
(iv) Under paragraph (d)(2)(H) of this section, elective deferrals that exceed the
section 401(a)(30) limit under Plan R are also subtracted from Participant E's elective
deferrals under Plan R for purposes of applying the rules of section 401(k)(8).
Accordingly, for purposes of correcting the failed A D P test, Participant E is treated as
having contributed $15,000 of elective deferrals in Plan R. The amount of elective
deferrals that would have to be distributed to Participant E in order to satisfy section
401(k)(8)(C) is $200 ($15,000 minus $14,800), which is less than the excess of the
applicable dollar catch-up limit ($5,000) over the elective deferrals previously treated as
catch-up contributions under Plan R for the taxable year ($1,000). Under paragraph
(d)(2)(iii) of this section, Plan R must retain Participant E's $200 in elective deferrals and
is not treated as failing to satisfy section 401(k)(8) merely because the elective deferrals
are not distributed to Participant E.
(v) Even though Participant E's elective deferrals for calendar year 2006 have
exceeded the section 401(a)(30) limit, Participant E can continue to m a k e elective
deferrals during the last 2 months of the calendar year, since Participant E's catch-up
contributions for the taxable year are not taken into account in applying the section
401(a)(30) limit for 2006. Thus Participant E can m a k e an additional contribution of
$200 ($15,000 minus ($16,000 minus $1,200)) without exceeding the section 401(a)(30)

38
for the calendar year and without regard to any additional catch-up contributions. In
addition, Participant E m a y m a k e additional catch-up contributions of $3,800 (the
$5,000 applicable dollar catch-up limit for 2006, reduced by the $1,200 ($1,000 plus
$200) of elective deferrals previously treated as catch-up contributions during the
taxable year). The $3,800 of catch-up contributions will not be taken into account in the
A D P test for the plan year ending October 31, 2007.
Example 7. (i) Participant F, who is 58 years old, is a highly compensated
employee w h o earns $100,000 per year. Participant F participates in a section 401 (k)
plan, Plan S, for the first 6 months of the year and then transfers to another section
401 (k) plan, Plan T, sponsored by the s a m e employer, for the second 6 months of the
year. Plan S limits highly compensated employees' elective deferrals to 6 % of
compensation for the period of participation, but permits catch-up eligible participants to
defer amounts in excess of 6 % during the plan year, up to the applicable dollar catch-up
limit for the year. Plan T limits highly compensated employees' elective deferrals to 8 %
of compensation for the period of participation, but permits catch-up eligible participants
to defer amounts in excess of 8 % during the plan year, up to the applicable dollar catchup limit for the year. Participant F earned $50,000 in the first 6 months of the year and
deferred $6,000 under Plan S. Participant F also deferred $6,500 under Plan T.
(ii) As of the last day of the plan year, Participant F has $3,000 in elective
deferrals under Plan S that exceed the employer-provided limit of $3,000. Under Plan
T, Participant F has $2,500 in elective deferrals that exceed the employer-provided limit
of $4,000. The total amount of elective deferrals in excess of employer-provided limits,
$5,500, exceeds the applicable dollar catch-up limit by $500. Accordingly, $500 of the
elective deferrals in excess of the employer-provided limits are not catch-up
contributions and are treated as regular elective deferrals (and are taken into account in
the A D P test). The determination of which elective deferrals in excess of an applicable
limit are treated as catch-up contributions is permitted to be m a d e in any manner that is
not inconsistent with the manner in which such amounts were actually deferred under
Plan S and Plan T.
Example 8. (i) Employer X sponsors Plan P, which provides for matching
contributions equal to 5 0 % of elective deferrals that do not exceed 1 0 % of
compensation. Elective deferrals for highly compensated employees are limited, on a
payroll-by-payroll basis, to 1 0 % of compensation. Employer X pays employees on a
monthly basis. Plan P also provides that elective contributions are limited in
accordance with section 401(a)(30) and other applicable statutory limits. Plan P also
provides for catch-up contributions. Under Plan P, for purposes of calculating the
amount to be treated as catch-up contributions (and to be excluded from the A D P test),
amounts in excess of the 1 0 % limit for highly compensated employees are determined
at the end of the plan year based on compensation used for purposes of A D P testing
(testing compensation), a definition of compensation that is different from the definition
used under the plan for purposes of calculating elective deferrals and matching
contributions during the plan year (deferral compensation).

39
(ii) Participant A, a highly compensated employee, is a catch-up eligible
participant under Plan P with deferral compensation of $10,000 per monthly payroll
period. Participant A defers 1 0 % per payroll period for the first 10 months of the year,
and is allocated a matching contribution each payroll period of $500. In addition,
Participant A defers an additional $4,000 during the first 10 months of the year.
Participant A then reduces deferrals during the last 2 months of the year to 5 % of
compensation. Participant A is allocated a matching contribution of $250 for each of the
last 2 months of the plan year. For the plan year, Participant A has $15,000 in elective
deferrals and $5,500 in matching contributions.
(iii) A's testing compensation is $118,000. At the end of the plan year, based on
1 0 % of testing compensation, or $11,800, Plan P determines that A has $3,200 in
deferrals that exceed the 1 0 % employer provided limit. Plan P excludes $3,200 from
A D P testing and calculates A's A D R as $11,800 divided by $118,000, or 1 0 % . Although
A has not been allocated a matching contribution equal to 5 0 % of $11,800, because
Plan P provides that matching contributions are calculated based on elective deferrals
during a payroll period as a percentage of deferral compensation, Plan P is not required
to allocate an additional $400 of matching contributions to A.
(i) Effective date—(1) Statutory effective date. Section 414(v) applies to
contributions in taxable years beginning on or after January 1, 2002.

40
(2) Regulatory effective date. Paragraphs (a) through (h) of this section apply to
contributions in taxable years beginning on or after January 1, 2004.

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement
Approved: June 27, 2003.

Pamela F. Olson,
Assistant Secretary (Tax Policy)

JS-529: Administration Proposal on Improving Accuracy and Transparency of Pension In... Page 1 of 2

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
July 8, 2003
JS-529
The Administration Proposal to Improve
the Accuracy and Transparency of Pension Information
The Proposal Will Strengthen and Secure Americans' Pension Security by:
• Improving the accuracy of the pension liability discount rate
• Increasing the transparency of pension plan information
• Strengthening safeguards against pension underfunding
1. Improving the Accuracy of the Pension Liability Discount Rate:
Accuracy is essential because too high a rate leads to underfunding, putting
retirees and taxpayers at risk. Too low a rate causes businesses to contribute more
than is needed to meet future obligations, overburdening businesses at this early
stage of the recovery.
Use of Appropriate Yield Curve Discount Rate
The Administration recommends that pension liabilities ultimately be discounted
with rates drawn from a corporate bond yield curve that takes into account the term
structure of a pension plan's liabilities. For the first two years, pension liabilities
would be discounted using the blend of corporate bond rates proposed in H R 1776
(Congressmen Portman and Cardin). A phase-in to the appropriate yield curve
discount rate would begin in the third year and would be fully applicable by the fifth
year. Using the yield curve is essential to match the timing of future benefit
payments with the resources necessary to make the payments.
Phase In Use of Yield Curve for Lump Sums
Currently, lump sums are valued using a lower rate than that used for pension
funding, draining pension plans' assets whenever lump sums are paid. In order to
protect the retirement security of both those w h o have not yet retired, and those
w h o have chosen to take benefits as an annuity, the Administration proposes that
ultimately, lump sums be discounted by the same rate used for other pension
liabilities. In order to avoid disrupting the plans of workers w h o will receive benefits
in the immediate future, lump sums would be computed using the 30-year Treasury
rate as under current law in years one and two. In the third year a phase-in to the
appropriate yield curve discount rate would begin. By the fifth year lump sums will
be discounted by the same rate used for other pension liabilities.

The Administration's proposal is:
• Easy and simple. It can be done using a simple spreadsheet.
• Provides the right level of contributions. Contributions will be based on an
accurate determination of plan liability.
• Recognizes current conditions. The interest rate for the first two years will provide
funding relief to plan sponsors.
• Pro-growth. Pension funds are a significant source of private investment that
create growth and jobs.
• A well-established best practice in financial accounting.
2. Increasing the Transparency of Pension Plan Information:
Disclose Plan Assets and Liabilities on a Termination Basis
The Administration proposes that all companies disclose the value of pension plan
assets and liabilities on a termination basis in their annual reporting. Too often
workers are unaware of the extent of their plans' underfunding until their plans
terminate, frustrating workers' expectations of receiving promised benefits.
Disclose Funding Status of Severely Underfunded Plans

http://www.treas.gov/press/releases/js529.htm

JS-529: Administration Proposal on Improving Accuracy and Transparency of Pension In... Page 2 of 2
The Administration proposes that certain financial data already collected by the
P B G C from companies sponsoring pension plans with more than $50 million of
underfunding should be m a d e public. Publicly available information would include
the assets, liabilities and funding ratios of the underfunded plan, but not confidential
employer financial information. This data is more timely and accurate that what is
publicly available under current law.
Disclose Liabilities Based on the Duration-matched Yield Curve of Corporate
Bonds
The Administration proposes that companies annually disclose their liabilities as
measured by the proposed yield curve before duration-matching is fully phased in
for funding purposes. By providing this information before the n e w discount rate is
effective, workers and the financial markets will have more accurate expectations of
a plan's funding obligations and status.
3. Strengthening Pension Funding to Protect Workers and Retirees:
Firms with Below Investment Grade Credit Rating
W h e n firms with junk bond credit ratings increase pension benefit promises, these
costs stand a good chance of being passed on to the pension insurance system,
frustrating the benefit expectations of workers and retires and penalizing employers
w h o have adequately funded their plans. Under the Administration's proposal, if a
plan sponsored by a firm with a below investment grade credit rating has a funding
ratio below 50 percent of termination liability, benefit improvements would be
prohibited, the plan would be frozen (no accruals resulting from additional service,
age or salary growth), and lump sum payments would be prohibited unless the
employer contributes cash or provides security to fully fund these added benefits. In
an analysis of over half of P B G C claims, 90 percent of companies whose pension
plans have been trusteed by the P B G C had junk bond credit ratings for the entire
ten year period before termination.
Firms in Bankruptcy
S a m e restrictions as above plus PBGC's guaranty limit would be fixed as of the
date the plan sponsor files for bankruptcy.
4. The Administration Supports Comprehensive Funding Reforms
Congress should immediately implement the discount rate, benefit protection and
transparency reform proposals. The Administration also is exploring additional
funding reforms to protect workers' retirement security by improving the funding
status of all defined benefit plans. Issues under consideration include the proper
establishment of funding targets; appropriate assumptions for mortality and
retirement age and incentives for more consistent annual funding requirements.

http://www.treas.gov/press/releases/js529.htm

4/26/2005

JS-530: Treasury Issues Final Regulation Under Terrorism Risk Insurance Act

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the Microsoft Word content on this page, download the free Microsoft Word
Viewer.
July 8, 2003
JS-530
Treasury Department Announces a Final Regulation Implementing the
Definitions in the Terrorism Risk Insurance Act
The Treasury Department today announced a final regulation under the Terrorism
Risk Insurance Act of 2002, which was signed into law by President Bush on
November 26, 2002.
Today's final regulation addresses definitions under the Terrorism Risk Insurance
Act that were set forth in an interim final rule with a request for comment that w a s
published in the Federal Register on February 28, 2003. That rule set forth the
purpose and scope of the Program and key definitions that Treasury will use in
implementing the Program. It was the first in a series of regulations related to
Treasury's implementation of the Program.
"The comments Treasury received on the interim final rule provided many helpful
suggestions as Treasury moved forward with finalizing this rulemaking," said
Treasury Assistant Secretary W a y n e Abemathy, w h o oversees the Terrorism Risk
Insurance Program. "We anticipate continuing to benefit from the thoughtful input of
insurance market participants and other interested parties, as well as from our
continuing consultations with the National Association of Insurance Commissioners,
as w e move forward with implementing the Terrorism Risk Insurance Act."
In general, the final rule reflects the interim final rule. However, revisions and
clarifications were m a d e in several areas, based on comments received. For
example, revisions were made to the rebuttable presumptions to controlling
influence determinations under the definition of "affiliate," and clarifications were
m a d e to the definitions of "direct earned premium" and "commercial property and
casualty insurance." The final rule also sets forth procedures for requesting general
interpretations of the Act or regulations.
Treasury will continue moving forward with implementing the Terrorism Risk
Insurance Act by finalizing other outstanding rulemakings and developing additional
regulations to address issues such as claims procedures. This final regulation,
previously issued regulations, interim guidance notices, and other information
related to the Terrorism Risk Insurance Program can be found at
www.treasury.gov/trip.
Related Documents:
• Final Regulation

http://www.treas.2ov/Dress/releases/js530.htm

4/26/2005

Billing Code 4810-25-M

D E P A R T M E N T OF T H E TREASURY

Departmental Offices

31 CFR Part 50

RIN 1505-AA96

Terrorism Risk Insurance Program

AGENCY: Departmental Offices, Treasury

ACTION: Final rule.

SUMMARY: The Department of the Treasury (Treasury) is issuing this rule in final
form as part of its implementation of Title I of the Terrorism Risk Insurance Act of 2002
(Act). That Act established a temporary Terrorism Risk Insurance Program (Program)

under which the Federal Government will share the risk of insured loss from certified acts
of terrorism with commercial property and casualty insurers until the Program sunsets on
December 31, 2005. Treasury published an interim final rule with a request for comment
on February 28, 2003. That rule set forth the purpose and scope of the Program and key

definitions that Treasury will use in implementing the Program. It was the first in a series
of regulations that Treasury will be issuing to implement the Program. This final rule

generally adopts the interim final rule, but makes revisions in the definition of "affili
and certain other changes described in the preamble.

DATES: This final rule is effective [INSERT DATE OF PUBLICATION IN THE
FEDERAL REGISTER]

FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director,

Office of Financial Institutions Policy (202) 622-2730, or Martha Ellett or Cynthia Reese
Attorney-Advisors, Office of the Assistant General Counsel (Banking & Finance), (202)
622-0480 ( not toll-free numbers).

SUPPLEMENTARY INFORMATION:

I. Background

A. Terrorism Risk Insurance Act of 2002

On November 26, 2002, President Bush signed into law the Terrorism Risk
Insurance Act of 2002 (Public Law 107-297, 116 Stat. 2322). The Act was effective
immediately. Title I of the Act establishes a temporary federal program of shared public
and private compensation for insured commercial property and casualty losses resulting

2

from an act of terrorism as defined in the Act and certified by the Secretary of the
Treasury, in concurrence with the Secretary of State and the Attorney General. The Act
authorizes Treasury to administer and implement the Terrorism Risk Insurance Program,
including the issuance of regulations and procedures. The Program will sunset on
December 31, 2005.

The Act's purposes are to address market disruptions, ensure the continued
widespread availability and affordability of commercial property and casualty insurance
for terrorism risk and to allow for a transition period for the private markets to stabilize
and build capacity while preserving State insurance regulation and consumer protections.
The amount of Federal payment for an insured loss resulting from an act of terrorism is to
be determined based upon the insurance company deductibles and excess loss sharing
with the Federal Government, as specified by the Act. Thus, the Program provides a
Federal reinsurance backstop for a temporary period of time. The Act also provides
Treasury with authority to recoup Federal payments made under the Program through
policyholder surcharges, up to a maximum annual limit.

Each entity that meets the definition of "insurer" (well over 2000 firms) must
participate in the Program. From the date of enactment of the Act through the last day of
Program Year 2 (December 31, 2004), insurers under the Program must "make available"
terrorism risk insurance in their commercial property and casualty insurance policies and
the coverage must not differ materially from the terms, amounts and other coverage
limitations applicable to commercial property and casualty losses arising from events

3

other than acts of terrorism. The Act permits Treasury to extend the "make available"
requirement into Program Year 3, based on an analysis of factors referenced in the study
required by section 108(d)(1) of the Act, and not later than September 1, 2004.
An insurer's deductible increases each year of the Program, thereby reducing the Federal
government's involvement prior to sunset of the Program. An insurer's deductible is
based on "direct earned premiums" over a statutory Transition Period and the three
Program Years. Once an insurer has met its deductible, the Federal payments cover 90
percent of insured losses above the deductible, subject to an aggregate annual cap of $100
billion. The Act prohibits duplicative payments for insured losses that have been covered
under any other Federal program.

As conditions for federal payment under the Program, insurers must provide clear
and conspicuous disclosure to the policyholders of the premium charged for insured
losses covered by the Program, and must submit a claim and certain certifications to
Treasury. Treasury will be prescribing claims procedures at a later date.

The Act also contains specific provisions designed to manage litigation arising
from or relating to a certified act of terrorism. Section 107 creates an exclusive federal
cause of action, provides for claims consolidation in federal court and contains a
prohibition on Federal payments for punitive damages under the Program. This section
also provides the United States with the right of subrogation with respect to any payment
or claim paid by the United States under the Program.

4

B. T h e Interim Final Rule

The interim final rule established Subpart A of a n e w Part 50 in Title 31 of the
Code of Federal Regulations. Subpart A of new Part 50 contains certain general
provisions and definitions of Program terms. The definitions contained in the interim
final rule provide the foundation for participation by insurers under the Federal
reinsurance Program created by the Act.

Some of the definitions in the interim final rule were taken virtually verbatim
from the Act because they do not need further clarification. For other definitions, the
interim final rule generally incorporated previously issued interim guidance provided by
Treasury as it pertains to Program terms, for example, the terms "insurer," "affiliate,"
"property and casualty insurance" and "direct earned premium." Such interim guidance
was published at 67 FR 76206 (December 11, 2002), 67 FR 78864 (December 26, 2002)
and 68 FR 4544 (January 29, 2003). In several areas, the interim final rule made
clarifying modifications to, or supplemented, the previously issued interim guidance.

In implementing the Program, Treasury has been guided by several goals. First,
we strive to implement the Act in a transparent and effective manner that treats
comparably those insurers required to participate in the Program and that provides
necessary information to policyholders in a useful and efficient manner. Second,
Treasury seeks to rely as much as possible on the State insurance regulatory structure. In
that regard, Treasury is closely coordinating with the National Association of Insurance

5

Commissioners ( N A I C ) in implementing definitional and other aspects of the Program.
Third, to the extent possible within statutory constraints, Treasury seeks to allow insurers
to participate in the Program in a manner consistent with their normal course of business.
Finally, given the temporary and transitional nature of the Program, Treasury is guided
by the Act's goal for insurers to develop their own capacity, resources and mechanisms
for terrorism risk insurance coverage when the Program expires.

II. Summary of Comments and Final Rule

Treasury received over 40 comments on the interim final rule. Comments were
submitted by insurance companies, industry trade associations, the NAIC, two cities, and
by two members of Congress. After review and careful consideration of these comments,
as well as additional research and consultation with the NAIC, Treasury is now
promulgating a final rule concerning TRIA definitions. In general, the final rule reflects
the interim final rule. However, revisions and clarifications were made in several areas,
based on comments received. For example, revisions were made to the rebuttable
presumptions to controlling influence determinations under the definition of "affiliate,"
and clarifications were made to the definitions of "direct earned premium" and
"commercial property and casualty insurance." The final rule, including changes and
clarifications, is discussed in the summary below.

A. "Act of Terrorism" (Section 50.5.b)

6

The interimfinalrule incorporated the statutory definition of "act of terrorism"
found in section 102(1) of the Act. In that regard, the interim final rule provides that an
"act of terrorism" for purposes of the Program must be certified by the Treasury
Secretary, in concurrence with the Secretary of State and the Attorney General of the
United States, and must fall within other statutory parameters. The requirements in
clauses (i) - (iv) of section 102(1)(A) are conjunctive. An act of terrorism, if it also
meets the limitations in section 102(1)(B), may be certified if it: is violent or dangerous
to human life, property or infrastructure; and has resulted in damage within the United

States, or outside the United States in the case of certain air carriers or vessels or if on the
premises of a U.S. mission; and has been committed by individual(s) on behalf of any
foreign person or foreign interest, as part of an effort to coerce the U.S. civilian
population or to influence the policy or affect the conduct of the U.S. government by
coercion. Therefore, acts of domestic civil disturbance would not be covered by the
Act's definition of "act of terrorism" or by the Program.

Section 102(1)(B) limits the Secretary's ability to certify an act if committed as
part of a course of war declared by Congress, (except for workers'compensation
coverage), or if property and casualty insurance losses resulting from the act, in the
aggregate, do not exceed a $5,000,000 de minimis threshold. With regard to the first
limitation, one commenter raised a question concerning the effect of a declaration of war
on an act of terrorism certification. While it is not possible for a regulation to address all
potential situations surrounding an act of terrorism determination under the Program, it is
Treasury's view that the war exclusion in the Act applies only to acts of terrorism

7

committed in connection with a formal, congressionally declared war. While the phrase
"war declared by the Congress" is not defined in the Act, Article I, section 8, clause 11 of
the Constitution grants Congress the exclusive authority to declare war. Congress has
done so on five occasions, the most recent of which occurred in 1941 at the outset of
World War II. Most other American military actions have been conducted pursuant to
constitutional authorities of the President connected with his role as commander-in-chief,
and while many of these have also enjoyed explicit Congressional support, they have not
been authorized by a formal declaration of war. For example, the "Authorization for Use
of Military Force Against Iraq Resolution of 2002," (P.L. 107-243) gave the President
authority to conduct military operations, but is not a formal declaration of war.

With regard to the second statutory limitation on an act of terrorism certification,
one commenter asked whether the $5,000,000 threshold loss has to be suffered by one
insured policyholder. The Act, as reflected in the interim final rule, provides that the de
minimis threshold is based on loss "in the aggregate". One certified act of terrorism
could result in insured losses from several policyholders, none of which alone would
amount to $5,000,000, but, in the aggregate, would be in excess of that amount.

Section 106(a)(2) of the Act provides that the Act's definition is the exclusive
definition of the term "act of terrorism" for purposes of compensation for insured losses
under the Act. In addition, section 102(1)(C) of the Act provides that the Secretary's
determination or certification with regard to whether an act is an act of terrorism for
purposes of the Program is final and is not subject to judicial review.

8

O n e commenter urged Treasury to establish a time frame within which the
Secretary would be required to make a determination or certification that an "act of
terrorism" had occurred in order to better assist insurers in responding to inquiries and
claims from their policyholders. Treasury understands the desire for certainty of those in
the industry who would advocate a definite time frame, and intends to make its
determination as promptly as possible after obtaining and evaluating the facts
surrounding a possible act of terrorism. However, there is no way to predict future events
and ascertain a time frame that would be appropriate for all potential situations. Facts
could be immediately available and, after consultation, present a clear basis for a quick
determination by the Secretary; conversely, a determination could require more time to
gather information and conduct an analysis of the act. Given this inherent uncertainty and
the significance of an act of terrorism determination to all aspects of the Program,
Treasury does not believe that it would be in the public interest to establish in advance a
regulatory time frame that may later prove to be inappropriate or unattainable.

B. "Affiliate" including "Control" (Section 50.5(c))

Approximately one-third of the comments submitted to Treasury on the interim
final rule raised questions or concerns with regard to the definition of "affiliate", which
includes the definition of "control" in section 50.5(c). Most of these comments raised
questions with either procedural or substantive aspects of the rebuttable presumptions of
controlling influence in this section. After careful consideration of the comments and

9

further consultation with the N A I C , Treasury has m a d e several revisions in thefinalrule
to address these comments. The regulatory definitions and changes to the interim final
rule are set forth below.

Section 102(6) of the Act defines an "insurer" to include "any affiliate thereof."
The definitions of "affiliate" and "control" are intertwined in the Act. Section 102(2)
defines "affiliate" to mean "with respect to any insurer, an entity that controls, is
controlled by, or is under common control with the insurer." Pursuant to Section 102(3)
of the Act, "control" exists if
• an entity directly or indirectly or acting through 1 or more other persons
owns, controls, or has power to vote 25 percent or more of any class of
voting securities of the other entity; or
• an entity controls in any manner the election of a majority of the
directors or trustees of the other entity; or
• the Secretary determines, after notice and opportunity for hearing, that
the entity directly or indirectly exercises a controlling influence over the
management or policies of the other entity.

Section 50.5(c) of the interim final rule generally incorporates and combines the
related statutory definitions of "affiliate" and "control." In addition, the interim final rule
provides that an affiliate must itself meet the definition of "insurer" to participate in the
Program. (See part E of this preamble for further discussion of "insurer" definition.)

10

The definitions of affiliate and control are integral to Treasury's implementation
of the Program. As discussed further in parts C and F of this preamble, affiliated insurers
are treated collectively as one entity by Treasury for purposes of calculating direct earned
premiums and an insurer deductible under the Program. Three comments objected to this
consolidated treatment as not equitable. However, as noted in the preamble to the interim
final rule, this consolidated treatment is in accord with the Act's legislative history and
the clear intent of Congress. The Conference Report states that the terms "affiliate" and
"control" were meant "to ensure that affiliated insurers are treated as a consolidated
entity for calculating direct earned premiums." H.R. Conf. Rep. No. 107-779 (2002).

Therefore, for example, if an insurance company meets the definition of an
"insurer" under section 102(6) as implemented by Treasury, and three out of four of the
companies it controls also meet the Act's definition of "insurer," then the parent company
and the three companies it controls that meet the Act's definition of "insurer" (the parent
company's affiliates) will be treated by Treasury collectively as one insurer for purposes
of calculating direct earned premiums and calculating the insurer deductible under the
Program. The company that does not meet the definition of "insurer" is not included in
the Program.

In addition, if an entity is under common control with an insurer, and that entity
also meets the definition of "insurer" under Section 102(6) of the Act as implemented by
Treasury, then the two insurers are "affiliates" and Treasury will treat them collectively
as one "insurer" for the Program purposes of consolidating direct earned premiums and

11

calculating the insurer deductible. If their parent company does not meet the definition of
"insurer" under the Act, then it is not included in the Program.

Control
The statutory definition of "control" in section 102(3) contains three categories.
Section 102(3)(A) and (B) establish conclusive control under certain circumstances for
purposes of the Program. The conclusive control provisions of the Act are contained in

the definition of "affiliate" in the interim final rule at section 50.5(c)(2)(i) and (ii). If a
relationship between or among insurers does not fit within the conclusive control
provisions, control may still exist for purposes of the Program if Treasury determines,
pursuant to section 102(3)(C), that an entity directly or indirectly exercises a controlling
influence over the management or policies of another entity. Section 102(3)(C) is
contained in the interim final rule at section 50.5(c)(2)(iii). In making a determination of
whether controlling influence exists among insurers, section 102(3)(C) of the Act
requires Treasury to provide notice and an opportunity for a hearing.

The Act's definition of control in section 102(3)(A), (B) and (C) is almost
identical to the definition of "control" contained in the Bank Holding Company Act
(BHCA) at 12 U.S.C. 1841(a)(2) and in the Savings and Loan Holding Company Act
(SLHCA) at 12 U.S.C. 1467a, except that the Act does not contain a presumption of no
control for holding less than 5 percent of any class of voting securities, nor does the Act
provide any of the other explicit statutory exemptions that are provided in the BHCA and
SLHCA. The Act's definition of control is also similar to the definition of control in the

12

N A I C ' s Model Insurance C o m p a n y Holding C o m p a n y Act (Model Act) except that the
Model Act contains a presumption of control if an entity owns 10 percent of the voting
securities of an insurance company instead of the 25 percent conclusive control threshold
that is contained in the Act (and in the BHCA and the SLHCA).

Owns, Controls or has the Power to Vote 25 Percent or More of Voting Securities

Under Section 102(3)(A) of the Act, "an entity has 'control' over another entity
if the entity directly or indirectly or acting through 1 or more persons owns, controls or
has the power to vote 25 percent or more of any class of voting securities of the other
entity." The interim final rule incorporates this statutory definition, but uses the word
"insurer" instead of "entity" to clarify that the definition of control does not include
entities that are not insurers.

One commenter asked for clarification that an affiliate itself must be an insurer to
be treated as part of a consolidated entity with a related insurer. In view of the
congressional intent that affiliated insurers be treated as a consolidated entity for
purposes of calculating direct earned premiums, there is no reason to include non-insurer
entities in the definition of "affiliate" because these entities do not have "direct earned
premiums" as defined in the Act. Viewing a group of affiliates with both insurer and
non-insurer entities, the direct earned premiums for the group should be no different
whether or not the non-insurers are included in the group. For this reason, Treasury has
decided to interpret the Act as generally excluding non-insurers from the definitions of

13

affiliate and control at this time. Treasury could revisit this issue if itfindsevidence that
other corporate structures or arrangements are being used to thwart the goals and
purposes of the Program.

Five insurance industry commenters took the position that ownership of 25
percent or more of the voting securities of an insurer should not automatically result in
control. These commenters asserted that Treasury could and should by regulation change
this statutory limit. One commenter referenced the NAIC Model Act language in support
of creating a regulatory presumption. As noted above, unlike section 102(3)(A), the
NAIC Model Act contains a 10 percent statutory presumption not a threshold of
conclusive control. Several of these commenters stated that a 25 percent or more
conclusive control limit could adversely affect the availability and affordability of
coverage, and in particular, would have an adverse effect on their own companies if they
were required to aggregate direct earned premiums. These commenters suggested
various alternatives for Treasury to use instead of the 25 percent statutory limit. These
included substituting other regulatory factors for the 25 percent limit and accepting a
state determinations of "no control" based on state law even where there is ownership of
more than 25 percent.

Consistent with the statutory language in section 102(3)(A) and with other
statutes containing similar language, Treasury interprets the 25 percent or more direct or
indirect ownership of any class of voting securities to be an objective standard
establishing conclusive control. Under the plain language of the statute, the 25 percent

14

voting securities threshold is not a presumption, and is not subject to rebuttal. W e also
note that in addressing the rebuttable presumptions in the interim final rule in connection
with section 102(3)(C), several commenters characterized the ownership of 25 percent or
more of any class of voting securities threshold in section 102(3)(A), as well as the
control provision in section 102(3)(B), as objective standards. For these reasons,
Treasury has not made any change in the final rule to the 25 percent threshold in section
50.5(c)(2)(ii) of the interim final rule.

Controls the Election of a Majority of the Directors or Trustees

The interim final rule provides that an insurer controls another insurer for
purposes of the Program if the insurer controls in any manner the election of a majority of
the directors or trustees of the other insurer. In general, this regulatory provision
incorporates the statutory language in section 102(3)(B). For the reasons stated above in
connection with section 102(3)(A), Treasury interprets the section 102(3)(B) as another
objective standard that establishes conclusive control for purposes of the Act. This
standard is not a presumption and is not subject to rebuttal.

Controlling Influence and Rebuttable Presumptions

In addition to the conclusive control provisions in section 102(3)(A) and (B), the
Act defines control to exist if, "the Secretary determines, after notice and opportunity for
hearing, that the entity directly or indirectly exercises a controlling influence over the

15

management or policies of the other entity." Section 102(3)(C). In the interimfinalrule,
Treasury established several rebuttable presumptions for the purposes of a determination
of controlling influence: (1) if a State has determined that an insurer controls another
insurer; (2) if an insurer provides 25 percent or more of another insurer's capital (in the
case of a stock insurer), policyholder surplus (in the case of a mutual insurer), or

corporate capital (in the case of other entities that qualify as insurers); or (3) if an insurer
at any time during a Program Year, supplies 25 percent or more of the underwriting
capacity for that year to an insurer that is a syndicate consisting of a group including
incorporated and individual unincorporated underwriters.

Section 50.5(c)(4) of the interim final rule provided an insurer with an
opportunity for an informal hearing to rebut a controlling influence presumption through
written submissions and, in addition in Treasury's discretion, by an informal oral
presentation. Treasury subsequently issued a notice on March 25, 2003 (68 FR 15039,
March 27, 2003, "Interim Guidance IV") providing further guidance on the procedure for
rebutting a presumption of controlling influence.

In establishing several rebuttable presumptions in Section 50.5(c)(3) of the
interim final rule, Treasury had two key goals. One was to provide additional
transparency about the factors that Treasury considers indicative of controlling influence
to provide greater certainty to insurers prior to a final determination of control and
thereby facilitate the calculation of insurer deductibles prior to presentment of a claim.

16

The second was to enhance administrative efficiency given available time and other
resources in this temporary Program.

With regard to the second goal, we point out that, in the Act, Congress established
a temporary backstop program with the expectation that Treasury would not build a large
bureaucratic program structure, but instead would leverage off of the state insurance
regulatory structure, where possible and appropriate. Unlike state insurance
commissioners, or state or federal bank examiners, Treasury does not conduct regular onsite examinations of Program participants, nor does it routinely review acquisitions,
mergers or other transactions of such insurers. Thus, Treasury does not have ready access
to detailed information on the control relationships of insurers that is generally available
to regulators that implement the control provisions of the BHCA, the SLHCA, or state
insurance law.

At this point, it is unclear to Treasury how many insurers fall outside section
102(3)(A) and (B) but may come within the controlling influence category. Rejecting the
imposition of significant new regulatory reporting requirements on the property and
casualty insurance industry, Treasury decided to utilize regulatory presumptions to
accomplish these two goals and to implement the controlling influence provisions.

Treasury received 6 comments, from insurers and from a large insurance industry
trade group, taking exception to the rebuttable presumptions as presented in the interim

17

final rule. These commenters objected on procedural and substantive grounds. In
addition, one commenter supported, in principle, the rebuttable presumption process.

Most of these commenters objected to the reliance on a state law determination of
control in the first rebuttable presumption in the interim final rule. They contended that
exclusive reliance on a state law determination, for purposes of a rebuttable presumption,
was inappropriate given the varying state standards and the differences between the Act's
definition of "control", and the definition of "control" in the NAIC Model Law used by
most states. Several commenters suggested that Treasury utilize specific guidelines or
standards (such as the existence of a management agreement) instead of rebuttable
presumptions.

After consideration of these comments and the stated administrative goals,
Treasury has decided to retain the use of rebuttable presumptions, with modifications.
Use of the rebuttable presumptions provides increased certainty and transparency to
insurers and others of the factors that Treasury considers indicative of a controlling
influence. Rebuttable presumptions have been and are used successfully by other
agencies in implementing nearly identical statutory definitions of "control." Rebuttable
presumptions also aid efficient implementation of the controlling influence determination
process, given that Treasury does not have ready access to relevant information about the
financial, managerial, policymaking and corporate structures of insurers. Moreover, a
rebuttable presumption is not a final determination of controlling influence by Treasury.
Under the final rule, insurers subject to rebuttable presumptions, and others that do not

18

fall within the conclusive control provisions and wish to have afinaldetermination of
controlling influence, all have an opportunity for a hearing. Based upon the comments,
and further consultation with NAIC, Treasury is revising the rebuttable presumptions to
provide more detail and transparency concerning factors that Treasury will consider
indicative of controlling influence and is using these factors in the rebuttable
presumptions. For example, in response to several comments, no rebuttable presumption
relies exclusively on a state law determination of control in the absence of the existence
of at least one of the listed control factors. The final rule also adds the existence of at
least one of the control factors to the other two presumptions (which are based on the
provision of 25 percent corporate capital/ policyholder surplus, or the provision of 25
percent underwriting capacity to another insurer).

In the final rule, if an insurer does not come within the conclusive control provisions
of section 102(3)(A) or (B) (section 50.5 (c)(2)(i) or (ii) of the final rule), but at least two
of the following control factors exists, then Treasury will presume controlling influence
exists prior to a final determination unless and until rebutted by the insurer:

• The insurer is one of the two largest shareholders of any class of voting stock;
• The insurer holds more than 35 percent of the combined debt securities and equity
of the other insurer;
• The insurer is party to an agreement pursuant to which the insurer possesses a
material economic stake in another insurer resulting from a profit-sharing

19

arrangement, use of c o m m o n names, facilities or personnel, or the provision of
essential services to another insurer;
• The insurer is party to an agreement that enables the insurer to influence a
material aspect of the management or policies of another insurer;
• The insurer would have the ability, other than through the holding of revocable
proxies, to direct the votes of more than 25 percent of the other insurer's voting
stock in the future upon the occurrence of an event;
• The insurer has the power to direct the disposition of more than 25 percent of a
class of voting stock in a manner other than a widely dispersed or public offering;
• The insurer and/or the insurer's representative or nominee constitute more than
one member of the other insurer's board of directors;
• The insurer or its nominee or an officer of the insurer serves as the chairman of
the board, chairman of the executive committee, chief executive officer, chief
operating officer, chief financial officer or in any position with similar
policymaking authority in another insurer;

In addition, if a State has determined that an insurer controls another insurer, and
at least one of the factors listed above exists, then Treasury will presume controlling
influence exists unless and until rebutted by the insurer.

Further, if an insurer provides 25 percent or more of another insurer's capital in
the case of a stock insurer, policyholder surplus (in the case of a mutual insurer) or

20

corporate capital (in the case of other entities that qualify as insurers), and at least one of
the factors listed above exists, then Treasury will presume a controlling influence exists
unless and until rebutted by the insurer.

Finally, if an insurer, at anytime during the Program Year, supplies 25 percent or
more of the underwriting capacity for that year to an insurer that is a syndicate consisting
of a group including incorporated and individual unincorporated underwriters, and at
least one of the factors in the above list exists, then Treasury will presume a controlling
influence unless and until rebutted by the insurer.

A few of the commenters objected to the second and third rebuttable
presumptions in the interim final rule as inconsistent with the conclusive control
provisions in section 102(3)(A) and (B). As a general matter, Treasury is directed by the
Act to treat insurers comparably under the Program. Treasury views the provision by an
insurer of 25 percent of an insurer's corporate capital (or policyholder surplus), or
supplying of 25 percent of an insurer's underwriting capacity for the Program Year, to
indicate the functional equivalent of ownership of 25 percent of voting securities. As the
administrator of the Program, Treasury also seeks to prevent loopholes in the regulations
and elsewhere that may create opportunities to avoid or greatly minimize an insurer
deductible merely on the basis of an insurer's unusual corporate structure or arrangement
where, in effect, the insurer exercises a controlling influence over another insurer in the
same or similar manner as the more traditional corporate structures of other insurers. The
controlling influence determination authority in section 102(3)(C) aids Treasury's efforts

21

to treat insurers comparably and helps preserve the goals and effectiveness of the
Program. As described below, the final rule provides insurers with an opportunity for a
hearing and a final determination on controlling influence.

Opportunity for Hearing

Section 102(3)(C) of the Act authorizes Treasury to make a determination that an
insurer directly or indirectly exercises a controlling influence over the management or
policies of another insurer, after notice and opportunity for hearing. The statutory
language providing an opportunity for hearing does not require a formal hearing on the
record. In the interim final rule, Treasury provided an opportunity for an informal
hearing to any insurer that 1) does not come within the conclusive control provisions of
section 102(3)(A) or (B) and 2) wanted to rebut a presumption of controlling influence.
The informal hearing procedure requires an insurer to provide Treasury with relevant
facts and circumstances concerning the relationship and in support of the insurer's
contention that no controlling influence exists. The procedure also allows a
supplementary oral presentation by the insurer, if deemed necessary by Treasury. Based
on the information provided by the insurer, including any oral presentation, the factors
listed in the regulation and other relevant facts and circumstances, Treasury would then
make a final determination of whether a controlling influence exists.

A few commenters contended that Section 554 of the Administrative Procedure
Act ("APA"), 5 U.S.C. § 554, requires Treasury to hold a formal hearing for insurers

22

challenging determinations of entity control under section 102(3) of the Act. W e do not
agree. The APA's formal hearing requirements apply when a hearing on the record is
required by statute. "While the exact phrase 'on the record' is not an absolute
prerequisite to the application of formal hearing procedures, the Supreme Court has made
clear that these provisions do not apply, unless Congress has clearly indicated that the
'hearing' required by the statute must be trial-type hearing on the record." U.S. Lines Inc.
v. Federal Maritime Commission, 584 F. 2d 519 (D.C. Cir 1978) (citing United State v.
Florida East Coast R. Co., 410 U.S. 224, 234-38 (1973)). The D.C. Circuit added that, in
that case, the statute did not provide for a hearing "on the record," and nothing in the
terms of the statute or in its legislative history indicated that a trial-type hearing was
intended. Id. Similarly, section 102(3)(C) of the Act does not require a hearing on the
record and nothing in the language or history of the Act indicates that Congress intended
Treasury to establish procedures and apparatus for formal trial-type hearings on the issue
of controlling influence for purposes of this temporary Program.

In response to the comments received, the final rule revises the interim final rule
to provide greater transparency in the controlling influence determination process. The
final rule includes regulatory notice of specific factors that Treasury considers indicative
of a controlling influence, and the rebuttable presumptions in the interim final rule are
revised to avoid reliance on state law determinations without other indicia of control.
The final rule affords insurers an opportunity to request an informal hearing in which an
insurer may submit all relevant information on the issue of controlling influence, whether
to rebut a presumption or to otherwise obtain a final controlling influence determination

23

from Treasury. A s in the interimfinalrule, thefinalrule allows an oral presentation,
where deemed necessary by Treasury to supplement the written submission. Treasury
will base its final determination on the factors set forth in the final rule, on information
provided to Treasury by the insurer and on other relevant facts and circumstances.
Although the final rule sets no deadline for an insurer to request a hearing, Treasury
encourages insurers that do not come within the conclusive control provisions but that are
in a relationship or arrangement in which the control factors apply or exist to request a
hearing as soon as possible if they wish to rebut the regulatory presumptions of
controlling influence and obtain a final determination from Treasury of whether the
relationship involves a controlling influence (and therefore control).

Separately from the issuance of the interim final rule, Treasury solicited
comment on a pro rata allocation method for control determinations under section
102(3)(C) of the Act, in situations in which multiple insurers each provide 25 percent or
more of the capital of a stock insurer, policyholder surplus of a mutual insurer or
corporate capital of other entities that meet the definition of insurer under the Act and in
the interim final rule. The pro rata approach under consideration by Treasury would
allocate premium on a pro rata basis in situations where there are multiple 25 percent
owners. This approach is still under consideration by Treasury and may be proposed in
connection with claims procedures.

Treasury anticipates proposing within claims procedures at a later date that the
controlling insurer will be the insurer that will be required to file any claim with Treasury

24

for Federal payment under the Program and that this insurer will receive the Federal
payment that is to be distributed within the consolidated insurer group in accordance with
distribution of risk within the consolidated insurer group.

Treasury also solicited comment on various means to ensure the prompt
distribution of the federal payment as appropriate to ensure that the purposes of the
Program are not thwarted or evaded, and that the ultimate risk bearing entities are treated
in an equitable manner, within the Act's requirements. Treasury will propose means of
distribution of the federal payment in connection with the claims procedures at a later
date.

C. Direct Earned Premium (Section 50.5.d) and Property and Casualty Insurance
(Section 50.5.1)

The Act requires that "commercial property and casualty insurance" that falls
within the scope of "insured loss" and that is written by an "insurer," is part of the
Program, and thus eligible for Federal payments and also subject to other provisions of
the Act. Losses arising from a certified act of terrorism that do not meet these
requirements are not eligible for Federal payments under the Program. For those losses
that are eligible, the amount of Federal payment that an insurer may receive is subject to
the insurer's "insurer deductible," which is determined by a calculation based on the
insurer's "direct earned premium".

25

In the interimfinalrule, Treasury initially looked to the Act's definition to
ascertain the scope of commercial property and casualty insurance for purposes of the
Program. Section 102(12) of the Act expressly includes several lines of insurance:
excess insurance, workers' compensation insurance and surety insurance. It also
expressly excludes several additional lines of insurance: (i) Federal crop insurance issued
or reinsured under the Federal Crop Insurance Act or any other type of crop or livestock
insurance that is privately issued or reinsured; (ii) private mortgage insurance as defined
in the Homeowners Protection Act or title insurance; (iii) financial guaranty insurance
issued by monoline financial guaranty insurance corporations; (iv) insurance for medical
malpractice; (v) health or life insurance including group life insurance; (vi) flood
insurance provided under the National Flood Insurance Act of 1968; and (vii) reinsurance
or retrocessional reinsurance.

In addition to these specific statutory inclusions and exclusions, Treasury needed
to develop a uniform regulatory definition of commercial property and casualty insurance
for purposes of the Program. Insurance is generally regulated by State law in the United
States. After consulting with the NAIC and others, Treasury found no uniform or
consistent definition of "commercial property and casualty insurance" among the States
that could provide guidance or be used for purposes of the Program. In some States, a
line of insurance may be considered as commercial; and, in other States, the same line of
insurance may be considered as a personal line.

26

The closest reference point that Treasury found for a uniform definition was the
NAIC's Annual Statement's Exhibit of Premiums and Losses ("Statutory Page 14").
Therefore, the interim final rule incorporated the interim guidance issued at 67 FR 76206
that designated those commercial lines reported on specified lines of Statutory Page 14 as
commercial property and casualty lines of coverage to be included in the Program
(subject to the Act's specific inclusions and exclusions). The lines so specified were:
Line 1 (Fire); Line 2.1 (Allied Lines); Line 3 (Farmowners Multiple Peril); Line 5.1
(Commercial Multiple Peril - non-liability portion); Line 5.2 (Commercial Multiple Peril
- liability portion); Line 8 (Ocean Marine); Line 9 (Inland Marine); Line 16 (Workers'
Compensation); Line 17 (Other Liability): Line 18 (Products Liability); Line 19.3
(Commercial Auto No Fault - personal injury protection); Line 19.4 (Other Commercial
Auto Liability); Line 21.2 (Commercial Auto Physical Damage); Line 22 (Aircraft - all
perils); Line 24 (Surety); Line 26 (Burglary and Theft); and Line 27 (Boiler and
Machinery). In making this determination Treasury considered the Act's definition of
"commercial property and casualty insurance" and how it relates to the lines of coverage
listed on Statutory Page 14, the Program structure, and what would be necessary to
effectively administer the Program. In developing the interim final rule, Treasury
consulted with the NAIC and others regarding State law and premium reports filed with
insurance regulators in the respective States and with the NAIC.

Section 102(4) of the Act defines "direct earned premium" to mean direct earned
premium (DEP) for property and casualty insurance issued by any "insurer" for losses
within the scope of "insured loss." The interim final rule also clarified that premium

27

information on the specified lines of Statutory Page 14 should be included in calculating
an insurer's DEP only to the extent that coverage under the Program is provided for
commercial property and casualty exposures. Therefore, policies (or portions of
policies) not eligible for Federal payments under the Program, such as personal lines or
other lines of coverage (such as medical malpractice) specifically excluded by the Act,
should not go into the calculation of an insurer's DEP. Treasury's approach is designed
to maintain a close correlation between the lines of commercial property and casualty
insurance eligible for the Federal payments under the Program, and the amount of
premiums for those coverages that actually go into calculating an insurer's DEP under the
Program.

Many policies have combined risk coverage (hybrid policies). Under some hybrid
policies, some of the risks or lines are covered by the definition of commercial property
and casualty insurance under the Program and some are not covered. To address these
situations, the interim final rule allows (but does not require) an insurer to allocate a
portion of the premium (i.e. that portion for covered lines or risks) in calculating an
insurer's DEP under the Program. If an insurer does not choose to allocate its hybrid
policy premiums in this manner, then the entire DEP reported on the specific lines of
Statutory Page 14 must go into its DEP calculation, and also, potentially, into the
recoupment base for that insurer. Treasury has not yet issued rules or procedures
governing any potential recoupment under section 103(e)(7) of the Act or concerning the
surcharges required by section 103(e)(8) of the Act. However, it is Treasury's
expectation that an insurer's policies (or portions of policies) that go into calculating an

28

insurer's D E P would be the same policies (or portions of policies) that go into
determining an insurer's recoupment base.

Instead of issuing a new reporting requirement or mandating a specific allocation
formula for hybrid policies, Treasury has suggested several methods that insurers may
use in adjusting and calculating their DEP under the Program:

(1) For policies with predominant personal line coverages, but where the
premiums might also cover a portion for coverage of commercial risks, Treasury
indicated that a policy would be considered personal, and not included in DEP, if
the commercial portion was incidental (less than 25 percent of the total premium).
If the commercial coverage portion represented more than 25 percent of the total
premium, then the company should allocate the appropriate portion of the
premium as commercial to be included in DEP.

(2) For policies written by insurers required to participate in the Program, but for
which the premiums are not reported on Statutory Page 14 (e.g. certain county or
town mutuals), the interim final rule suggested other methods by which
adjustments could be made by the insurer to calculate its DEP. Specific methods
were suggested in the interim final rule for county or town mutual insurers,
eligible surplus line insurers, and federally approved insurers.

Included Versus Excluded Lines of Coverage in General

29

Several commenters were uncertain about whether the interimfinalrule's list of
commercial lines as reported on the specified lines of Statutory Page 14 was exclusive or
merely illustrative. Their uncertainty appears to arise from use of the word "includes" in
section 50.5(1) of the interim final rule that property and casualty insurance ("includes
commercial lines within the following lines of insurance.") These commenters suggested

that Treasury clarify whether it intended for the list to be exclusive, or identify those lines
of business that are excluded.

As previously noted, Treasury consulted with the NAIC and others concerning the
definition of commercial property and casualty insurance. Finding no uniform or
consistent definition of the term, Treasury determined that the NAIC's Statutory Page 14,
provided the best available point of reference - not only for identifying the lines of
coverage for the Program, but also for guidance in determining an insurer's DEP for
those lines of coverage. Treasury intended that the list of specified lines on Statutory
Page 14 would be exclusive, and premiums reported on other lines would not be part of
the Program. The final rule revises the previous language to clarify this.

In its comment on the interim final rule, the NAIC suggested Treasury should add
the following language from the Act: ".. .or any other type of crop or livestock insurance
that is privately issued or reinsured" to section 50.5(l)(2)(i) of the interim final rule. The
NAIC commented that such an addition would prevent any uncertainty concerning the
treatment of crop or livestock coverage that is not part of the Program.

30

In developing the interimfinalrule, Treasury understood based on available
information that privately issued or reinsured crop or livestock insurance was reported
under Multiple Peril Crop insurance on Line 2.2 of Statutory Page 14. It is now
Treasury's understanding, based on additional information from the NAIC, that privately
issued or reinsured crop or livestock insurance is generally reported as Allied Lines
insurance on Line 2.1 of Statutory Page 14. Therefore, in the final rule, Treasury has
added the specific statutory language and the appropriate reporting lines of Statutory
Page 14 to section 50.5(l)(2)(i) of the final rule.

The Act and interim final rule exclude Federal flood insurance which is a line of
single peril natural disaster insurance. Similarly, the interim final rule excluded
earthquake insurance reported on Statutory Page 14. Treasury received no comments on
the interim final rule regarding the treatment of any single peril natural disaster insurance.
However, in light of information subsequently received in response to Treasury's
proposed rule concerning state residual market insurance entities, Treasury is considering
issuing a proposed rule specifically requesting comment on the inclusion or exclusion in
the Program definition of commercial property and casualty insurance of other single
peril natural disaster insurance, such as stand alone, single peril wind insurance, if
reported on included lines of Statutory Page 14.

Personal Lines

31

O n e commenter asserted that Treasury's determination that commercial coverage
is incidental if its applicable premium is less than 25 percent of a hybrid
personal/commercial lines policy premium would have adverse effects, suggesting that
this could cause insurers to force incidental coverages off such personal policies, such as
Homeowners insurance. Others commented that the incidental rule should only be used
as a threshold calculation, or that insurers should be allowed to allocate
personal/commercial hybrid policy premiums according to their normal business methods
and procedures. One commenter contended that Homeowners policies should not be
included in the Program regardless of the percentage of commercial premium, and that
allocation of commercial/personal premium would not be appropriate for Farmowners or
Farm Properties policies since they are both considered by some states to be commercial
lines.

As discussed above, Treasury has suggested methods for the allocation of
commercial portions of premiums in hybrid policies in an attempt to aid insurers by
simplifying the adjustment and calculation of an insurer's DEP. If the appropriate
premium was included in the DEP and the other required conditions for Federal payment
are met, commercial portions of hybrid policies are covered by the Program. The 25
percent incidental provision was included in the interim final rule by Treasury to provide
a threshold, so that those insurers that did not want to calculate an actual allocation of
premiums on small incidental amounts of coverage, and did not intend to perfect their
right to recover Federal payment on claims paid on such incidental commercial coverage,
could then exclude those premiums from their DEP calculation if they wished to do so.

32

In order to clarify this in thefinalrule, and to m a k e it clear that an insurer can chose to
allocate premiums below that amount, Treasury has modified the language in section
50.5(d)(l)(i-iv) of the interim final rule.

Personal versus Commercial Lines

Four commenters asked for clarification with regard to whether coverage for one
to four family rental units is personal or commercial insurance. One pointed out that such
coverage is generally written under a Dwelling Properties insurance policy (which is
considered to be a personal line). However, in other situations, under four family rental
units are written as a commercial coverage. Treasury's designation in section 50.5(1)(1)
of the interim final rule of the specific lines of commercial coverage from Statutory Page
14 was made, in part, to provide greater clarity for insurers in cases where various States
may not treat certain types of coverage consistently as commercial coverage. In general,
it is our understanding that premium income for one to four family rental unit insurance
coverage generated from policies insuring property owned for business purposes (e.g. to
generate income for the property owner) is reported on Lines 1 (Fire) 2.1 (Allied Lines)
and 17 (Other Liability) of Statutory Page 14. Based on section 50.5(1)(1) of the final
rule, such insurance coverage would be considered commercial property and casualty
insurance coverage that is included in the Program. Treasury also addressed the issue of
personal lines in the context of adjustments to DEP in section 50.5(d)(1) of the interim
final rule and through adjustments to that section in the final rule. To the extent that one

33

to four family rental units have a personal coverage component, the suggested methods of
adjusting and calculating the appropriate DEP may be used by an insurer.

Another commenter stated that farm residences should be considered commercial.
For purposes of the Program, Treasury does not agree, but considers any owner occupied
residence to be basically a personal coverage. Therefore, where a farm residence is
covered in a hybrid farm policy, the suggested methods of adjusting and calculating the
appropriate DEP can be utilized.

Other Non-Covered Lines

One commenter suggested that Treasury consider extending the
commercial/personal allocation to other hybrid contracts containing premiums for
excluded lines of coverage such as Medical Malpractice in combination with Hospital
General Liability coverage. Such insurance lines are not within the scope of the
definition of commercial property and casualty insurance of the Act and are not included
in the Program. Therefore, premiums in hybrid policies applicable to those exceptions do
not need to be included in an insurer's DEP. Any allocation of premium for such
exclusions should be calculated by insurers either using methods suggested by Treasury,
or other similar methods in accordance with the insurer's normal business methods and
procedures.

34

Another commenter suggested that Treasury should exclude premiums reported
on the specified lines on Statutory Page 14, but earned from retroactive insurance
programs such as certain Novations, Adverse Development Cover, or Loss Portfolio
Transfer Programs. Retroactive insurance is insurance covering only events that occurred
prior to the inception date of the policy, but there appears to be no differentiation in the
Statutory Page 14 reporting to indicate that such premiums relate to risks from prior
years. Treasury takes the position that such retroactive premiums are not within the time
period of the definition of "insured losses" if they are associated with losses that occurred
prior to enactment and the effective date of the Act (November 26, 2002). Such premium
income may be removed in an insurer's calculation of its DEP. Treasury has modified
the language in the final rule (section 50.5(d)(l)(i-iv) of the interim final rule) to clarify
the nature of the allocation provisions with regard to hybrid policies and other policies
with coverage of losses outside the scope of insured losses under the Program.

Fidelity Insurance

Treasury did not include Line 23 (Fidelity) of Statutory Page 14 in its list of
specified lines considered to be commercial "property and casualty insurance" covered
under the Act in its initial interim guidance or in its interim final rule. Comments were
received from five different commenters, two in support of Treasury's position, and three
in opposition.

35

O n e of the commenters advocating the inclusion offidelityinsurance argued that
it can also have a distinct property component as in cases where coverage is provided for
the destruction of money and securities, such as those held in bank or corporate vaults.
The commenter pointed out that it had losses associated with fidelity policies arising
from the September 11 terrorist attacks totaling some $20 million due to the destruction
of cash on the premises of its insured. Another commenter emphasized that fidelity has
always been considered by state regulators, insurers and policholders to be a commercial
property and casualty line.

Those opposed to the inclusion of fidelity insurance contend that it is a line of
insurance that by itself faces low exposure to terrorism losses. One commenter had
indicated previously that it had provided terrorism coverage for all of its fidelity policies
prior to the Act, but needed to confirm whether fidelity insurance was covered under the
Program in order to know how much reinsurance coverage would be needed to cover its
deductible exposure. Commenters also pointed out that if Treasury were to reverse itself
and now include fidelity insurance as a covered line, problems associated with the timing
of the disclosure requirements and other issues would need to be addressed.

After considering the comments, Treasury has determined that fidelity insurance
is not covered under the Act, and thus has not inserted Line 23 (Fidelity) in the specified
lines on Statutory Page 14 that make up commercial property and casualty insurance
covered under the Act. In making the overall determination of what lines of coverage are
included and excluded in the definition of property and casualty insurance, Treasury

36

relied on specific guidance provided by Congress in section 102(12) of the Act. Section
102(12)(A) expressly includes excess insurance, workers' compensation insurance, and
surety insurance. Traditional surety insurance and fidelity insurance share a similar
characteristic in that they guarantee against losses associated with the performance of
third parties. Treasury maintains the position that if Congress had intended fidelity
insurance to be covered, it would have specifically included it as it did surety insurance.
Treasury relied on a similar rationale for excluding group accident coverage, a line of
coverage that shares some of the same risk characteristics as workers' compensation
coverage, from the list of specified lines on Statutory Page 14 that make up commercial
property and casualty insurance covered under the Act.

Through the comment process, Treasury has been made aware that the traditional
fidelity insurance coverage has been expanded in recent years by some insurers to include
coverage to non-employee "insiders," as well as to property coverage for loss of firm
assets, including cash, due to crime. Although Treasury is making no change to the

interim final rule definition with regard to fidelity in the final rule, Treasury will continu
to evaluate this wrap-around or hybrid-type coverage which could include other types of
coverage that are generally covered by the Act, but not reported as such. In this regard,
Treasury will evaluate whether and how the designation of included and excluded lines
has affected the availability of coverage for terrorism insurance risk, and whether any
further change in the Program might be warranted.

Other DEP-Related Comments

31

O n behalf of county or town mutual insurers that do not report on Statutory Page
14, one commenter suggested that Treasury's suggestion that they convert direct
premium or other types of payments such as assessments or contributions into DEP,
would lead to inconsistencies in the Program because states have varying reporting
requirements. The result would be that DEPs would vary significantly from state to state,
which would be "bad from a public policy perspective, but leaves insurers on uncertain
ground despite their best good faith efforts at compliance." Treasury has consulted with
the NAIC on this issue and we understand that the NAIC plans to develop a
recommended conversion method that States in turn could recommend to county or town
mutual insurers.

Another commenter requested that Treasury give insurers assurance that "fronted"
premiums received by an insurer would not be included in DEP and thus raise its
deductible, if the insurer assuming the risk (captive or otherwise) is also an insurer under
the Program. The commenter explained that "fronting" is a credit enhancement
procedure that is sometimes employed by business customers and their insurers to expand
available insurance capacity, and is recognized by state regulators. However, fronting
arrangements are not addressed in the Act, and the Act does not appear to provide any
basis to exclude "fronted" premiums from DEP. If one insurer "fronts" for another by
receiving premiums but passes the risk to another, it remains the "insurer" under the Act
and the premiums it receives become part of its DEP. This is not unlike situations where
primary insurers report DEP on policies that they subsequently reinsure, and reinsurance

38

is specifically excluded from the Act. Therefore, Treasury will not provide assurance
that fronted premiums will not be included in DEP.

D. Insured Loss (Section 50.5.e)

Treasury incorporated the statutory definition of "insured loss" found in section
102(5) of the Act in section 50.5(e)(1) of the interim final rule. Section 50.5(e)(2) of the
interim final rule clarified the meaning of insured loss as it relates to section 102(5)(B) of
that Act as follows:

(i) A loss that occurs to an air carrier (as defined in 49 U.S.C. 40102), to a United
States flag vessel, or a vessel based principally in the United States, on which
United States income tax is paid and whose insurance coverage is subject to
regulation in the United States, is not an insured loss under section 102(5)(B) of
the Act unless it is incurred by the air carrier or vessel outside the United States.
(ii) An insured loss to an air carrier or vessel outside the United States under
section 102(5)(B) of the Act does not include losses covered by third party
insurance contracts that are separate from the insurance coverage provided to the
air carrier or vessel.

One commenter took exception to Treasury's clarification that such
extraterritorial insured third party losses to United States air carriers and vessels are not
insured losses, and cited legislative history of the Act to indicate an intent on the part of

39

Congress to provide extraterritorial coverage to United States air carriers and vessels
without limitation.

After reviewing the comments including the legislative history cited by the
commenter, Treasury has determined not to change the position it took in the interim
final rule. Therefore, for purposes of the Program, an insured loss is "any" loss,
including a third party liability loss, if it occurs within the geographic boundaries of the
United States; but, if the loss occurs outside of the geographic boundaries of the United
States (extraterritorial) to a United States air carrier or vessel, then only that portion of
the loss "to" that air carrier or vessel is an insured loss eligible for the backstop. To
further clarify, "to" in this context means insured losses that are incurred by United States
air carriers and vessels (e.g., through United States air carriers' or vessels' property and
liability insurance coverage), not losses that are incurred by other entities that are covered
by third party insurance contracts that are separate from the insurance coverage provided
to the air carrier or vessel.

Treasury's position is consistent with how third party liability losses are generally
treated under the Program (including how such losses are treated for foreign air carriers
and foreign flag vessels) in that such losses would be considered insured losses if they are
incurred within the geographic scope of the United States. The extension of coverage
provided to United States air carriers and vessels under the Act is related directly to those
entities and their potential insurance exposures, which are fully covered under the interim
final rule. Treasury does not believe that granting broader third party indemnification on

40

an extraterritorial basis and creating greater exposure for United States taxpayers is
consistent with congressional intent for the Program.

E. Insurer (Section 50.5.f)

The interim final rule incorporated the statutory definition of "insurer" as
generally reflected in previously issued interim guidance that was published at 67 FR
78864. In accordance with section 103(a)(3) of the Act, each entity that meets the
definition of "insurer" under the Act as implemented by Treasury must participate in the
Program. To participate in the Program, an entity, including an "affiliate" of an insurer
(see further discussion in part B of this preamble), must itself meet all of the requirements
of section 102(6)(A) and (B) and, as the Treasury may prescribe, (C). This means that to
be an insurer, an entity must: 1) fall within one of the categories in section 102(6)(A)
described below; 2) receive direct earned premiums as required by section 102(6)(B); and
3) meet any additional criteria established by Treasury pursuant to section 102(6)(C).

The categories of insurers in Section 102(6)(A) that were directly addressed in the
interim final rule include:

(i) Licensed or admitted to engage in the business of providing primary or excess
insurance in any State ("State" includes the District of Columbia and
territories of the United States);

41

(ii)

Not so licensed or admitted, but is an eligible surplus line carrier listed on the

Quarterly Listing of Alien Insurers of the National Association of Insurance
Commissioners;
(iii) Approved for the purpose of offering property and casualty insurance by a
Federal agency in connection with maritime, energy or aviation activity; and
(iv) A State residual market insurance entity or State workers' compensation fund.

The interim final rule provides that an entity that falls within two categories will be
considered by Treasury to fall within the first category that it meets under section
102(6)(A)(i)-(iv). All entities that are licensed or admitted by a State's insurance
regulatory authority, such as captive insurers, risk retention groups, and farm and county
mutuals, fall under section 102(6)(A)(i).

The interim final rule also specified that the scope of insurance coverage (insured
losses) under the Program for federally approved insurers under section 102(6)(A)(iii) is
only to the extent of federal approval of the commercial property and casualty insurance
coverage approved by the Federal agency in connection with maritime, energy or aviation
activity. Therefore, insured losses under other insurance coverage that may be offered by
a federally approved insurer under section 102(6)(A)(iii) would not be covered by the
Program.

In addition to falling within a category in section 102(6)(A), an "insurer" must
meet the requirements in section 102(6)(B) unless statutorily excepted. Therefore, an

42

"insurer" must receive "direct earned premiums" (as defined) on any type of commercial
property and casualty insurance (as defined). In addition, an "insurer" must meet any
additional criteria prescribed by Treasury under section 102(6)(C). The interim final rule
did not prescribe additional criteria under section 102(6)(C). However, under a separate
notice of proposed rulemaking published at 68 FR 9814 Treasury solicited public
comment on whether the Secretary should prescribe other criteria for certain insurers
pursuant to the authority provided by section 102(6)(C) and, if so, what criteria Treasury
should prescribe.

Captive Insurers

Treasury received six comments that addressed the treatment of captive insurers
under the Program. The majority of these objected to Treasury's mandatory inclusion of
captive insurers as a State licensed or approved insurer under Section 102(6)(A)(i).
These commenters suggested that captives should be allowed to opt-in to the Program as
opposed to being mandatory participants. In support of this position, commenters offered
the following points: many captive insures were created to operate outside of the
traditional insurance marketplace, and thus they should not be treated as other insurance
companies; some types of commercial coverage provided by captive insurers may have
little or no exposure to terrorism risk, thus captive insurers should not be subject to the
Act's potential recoupment provisions; and mandatory participation requirements for
captives, in particular the Act's potential recoupment provisions, could negatively affect

43

the formation of domestic captives as companies m a y find setting up off-shore captives to
be advantageous.

Treasury received one comment letter in support of treating State licensed or
admitted captive insurers as mandatory participants under the Program. Treasury also
received a comment letter from the NAIC that described a split view on the part of State
regulators over mandatory participation requirements for state-licensed or admitted
captive insurers. Although the NAIC's comments included some of the points noted
above, the NAIC also acknowledged that allowing opt-in treatment for captive insurers
could allow for adverse selection and could set a bad precedent as other entities would
seek similar treatment. In addition, the NAIC noted that "when pressed for a decision
regarding whether a complete inclusion is better than a complete exclusion for captives,
regulators generally agree that inclusion is preferable."

Treasury disagrees with the suggestion in some comments that captive insurers
should be provided with opt-in treatment. Requiring mandatory participation for State
licensed or admitted captive insurers is in accord with the plain language of section
102(6)(A)(i) where no distinction is made regarding types of State licensed or admitted
insurers. This treatment also furthers other statutory objectives such as ensuring that
policyholders have widespread access to the terrorism risk insurance benefits of the
Program, and spreading potential costs of the Program associated with any federal losssharing payments. For example, the cost spreading provisions in connection with
recoupment as required by section 103(e)(7) and in connection with surcharges as

44

required by section 103(e)(8) are to be applied to all commercial property and casualty
policyholders.

As it relates to the overall administration of the Program, allowing for opt-in
treatment would create the potential for adverse selection within the Program as those
captive insurers that perceived themselves to have higher risk to terrorism would likely
opt-in to the Program while others with lower perceived risks would likely opt-out of the
Program. A major consequence of this type of action would be the potential policyholder
recoupment base would be reduced, which in turn would increase the potential
recoupment costs on the policyholders of other mandatory participants in the Program.

Treasury does not support the view set forth by some of the commenters that
limited risk exposure to terrorism of the coverage provided by some captive insurers is a
reason to provide for an opt-in option. This same type of argument could be made by any
number of insurers and policyholders that feel they have limited risk exposure to
terrorism. Because the recoupment base applies to all commercial property and casualty
policyholders, potentially limited risk exposure to terrorism is not a valid reason to limit
participation under the Program.

Treasury also finds little or no support for assertions that the potential recoupment
provisions of the Act would have an adverse effect on U.S. domestic captive
jurisdictions. It should be noted that any such recoupment would only be imposed in the
case of a terrorist event that triggers Federal payments under the Program, and that any

45

potential recoupment is limited to a m a x i m u m 3 percent of premium surcharge in any
given year. Although it is possible that certain state-licensed or admitted captive insurers
would find these potential costs unattractive and search out other jurisdications, other
state-licensed or admitted captive insurers would recognize the benefits of Program
participation. Therefore, the ultimate effect on any particular captive insurance
jurisdiction is difficult to quantify.

In addition to the general comments on providing captive insurers opt-in
treatment under the Program, two members of Congress offered the view that, in the case
of captives, the Act must be read in the context of section 103(f). This section authorizes
(but does not require) Treasury to apply the provisions of the Act to "other" classes or
types of captive insurers. These commenters believe that the use of the word "other" in
section 103(f) is a grammatical error in the Act and, for that reason, they contend that
Treasury's interim final rule does not reflect the intent of Congress to create a process
through which captive insurers could be integrated into the Program on an opt-in basis.

As previously noted, Section 102(6)(A)(i) of the Act mandates participation by
insurers that are "licensed or admitted" by a State to engage in the business of providing
property and casualty insurance. Following this state-licensed or admitted category in the
definition of "insurer", is a category for "any other entity described in Section 103(f), to
the extent provided in the rules of the Secretary issued under section 103(f)." (emphasis
added). Section 103(f) of the Act gives discretionary authority to the Secretary to add to
the Program, "other classes or types of captive insurers .. ."(emphasis added). A key

46

principle of statutory construction is that words in a statute must be read to have meaning
unless the reading of those words produces an absurd result. The bar for interpreting
words in a statute to be a legislative error is extremely high. If the words in a statute can
be construed as having a rational meaning, then the rules of statutory construction
preclude an interpretation that they were enacted by Congress in error.

In this case, the word "other" in these two provisions can be easily construed as
referring to captives other than those that are State-licensed or admitted. Adopting the
interpretation of legislative error suggested by the two commenters would require the
conclusion that Congress erred in two places in the Act. In addition, we found nothing in
the Act's language or legislative history that would support treating state-licensed or
admitted captives differently from other state-licensed or admitted insurers for purposes
of the Program. For these reasons, the definition of "insurer" in the final rule, as in the
interim final rule, includes those entities, including any captives, that are state-licensed or
admitted. Therefore, if a captive is not state licensed or admitted, then it is not in the
Program, unless subsequently brought in by any rules issued under section 103(f).

Pooling Arrangements and Joint Underwriting Associations

Treasury received comments requesting clarification on how insurance pooling
arrangements, such as joint underwriting associations, are treated under the Act. These
commenters found the interim final rule and previously issued interim guidance to be
unclear with regard to a) whether such entities are insurers under the Act, and b) if they

47

are insurers, the category of insurer under which they would belong (e.g., State licensed
or admitted, or federally approved). These commenters suggested that Treasury either
clarify that State authorized joint underwriting associations are State licensed and
admitted insurers under the Act, or directly inform a joint underwriting association of its
status under the Act. Some commenters also suggested that Treasury's treatment of
federally approved insurers (see next section) should be broadened to include all types of
coverage provided by this category of insurers.

The issue of Treasury's treatment of federally approved insurers is, for the most
part, separable from fundamental question of whether joint underwriting associations are
State licensed or admitted insurers. With regard to joint underwriting associations
operating in the United States, if such entities are considered to be State licensed or
approved insurers, then they must participate in the Program as insurers in this category
under the Act. The federally approved issue is not reached in this situation.

Treasury acknowledges that certain joint underwriting associations and other
entities may not fit neatly within what is traditionally thought of as the "State licensed or
admitted" market. To provide more clarity in the category of "State licensed or
admitted,"the final rule provides that, with regard to joint underwriting associations and
other pooling arrangements, such entities must meet all three of the following criteria to
be an insurer under the Program:

48

•

A n entity must have gone through a process to be licensed or admitted to engage

in the business of providing primary or excess insurance that is administered by
the State's insurance regulator. If such a process differs from what a State's
insurance regulator generally applies to insurance companies, such a process
should be similar in scope and content;

• An entity must generally be subject to State insurance regulation (including
financial reporting requirements) applicable to insurance companies within the
State; and

• An entity must be managed independently from other insurers that are
participating in the Program.

If a joint underwriting association, pooling arrangement or other entity is still
uncertain of its status as State licensed or admitted insurers under the Program, such
entities are encouraged to provide Treasury with an explanation of their particular
circumstances and how the criteria listed above apply or do not apply. After reviewing
this information, Treasury will directly contact such entities regarding their status under
the Program. These Treasury decisions also will be made available to the public.

Federally Approved Insurers

49

Treasury receivedfifteencomments regarding Treasury's treatment of federally
approved insurers in the interim final rule. Under the interim final rule, the scope of
insurance coverage ("insured losses") for federally approved insurers is only to the extent
of federal approval of the commercial property and casualty insurance coverage approved
by the Federal Agency in connection with maritime, energy or aviation activity. Most of
these commenters contended that Treasury's interpretation regarding the scope of
insurance coverage under the Program for federally approved insurers was too narrow
and that such an interpretation was counter to the intent of Congress.

The maritime shipping industry and their mutually owned insurance companies
(International Group of Protection and Indemnity Clubs) raised particular concerns that
Treasury's interpretation regarding federally approved insurers would unduly limit access
to the Program for the United States and world shipping fleets. As it relates to the
maritime industry, the United States Maritime Administration (MARAD) has in place
various mechanisms to approve underwriters providing insurance coverage for vessels
built or operated with subsidy or covered by vessel obligation guarantees issued pursuant
to Title XI of the Merchant Marine Act, 1936, as amended. (46 U.S.C. 1271-1279).
Commenters noted that vessels built with Title XI subsidies or guarantees make up a
small portion of the United States flag fleet. Therefore, to the extent that the portion of
United States flag fleet not subject to MARAD insurance approval was relying solely on
federally approved insurers for their insurance coverage, such vessels would currently
have limited access to federal payments under the Program. Commenters also noted that

50

a similar situation exists to the extent that foreignflagvessels are currently relying on
federally approved insurers for their insurance coverage.

MARAD has set forth eligibility criteria for underwriters of marine hull insurance
at 46 CFR 249.4 and 249.5. Broadly speaking, to be eligible under the MARAD program
an insurer must be: licensed to do business in the United States; an underwriter at
Lloyd's; a member company of the Institute of London Underwriters; or specifically
approved by MARAD. There is a fair degree of overlap between MARAD's eligibility
criteria for Marine Hull insurers and the definition of "insurer" under the Act. Under
sections 102(6)(A)(i-iv), the Act includes entities that are State licensed or admitted and
entities that are listed on the Quarterly Listing of Alien Insurers of the NAIC as
"insurers" under the Act. These insurers participate in the Program for all coverages that
fall within the definition of "commercial property and casualty" within the scope of the
definition of "insured loss" under the Act. Thus, insurers that fall within the first three of
MARAD's eligibility criteria are for the most part already eligible insurers under the Act
(although there may be some uncertainty regarding the Institute of London Underwriters
as it is our understanding that this group has merged with another organization to form
the International Underwriting Association). For insurers that MARAD specifically
approves as Marine Hull underwriters, based on the most recently available lists (NAIC's
Quarterly Listing of Alien Insurers - April 1, 2003, and MARAD Approval List - May
16, 2003), 13 out of the 18 MARAD approved insurers were listed on the NAIC's
Quarterly Listing of Alien Insurers, and 1 of the 5 insurers that were not currently on the
NAIC's Quarterly Listing of Alien Insurers was on the list in recent years. Thus, as it

51

relates to Marine Hull underwriters, Treasury's interpretation with regard to federally
approved insurers does not appear to have caused major disruptions in insurance
coverage. Treasury also notes that we did not receive any comments directly from
Marine Hull underwriters objecting to the treatment of federally approved insurers.

MARAD, as part of its general insurance information and requirements, also
accepts the International Group of Protection and Indemnity Clubs (International Group)
as providers of liability coverage. The International Group is made up of 13 independent
Protection and Indemnity Clubs. Each club is independently owned by its ship-owner
members. The International Group allows for the individual clubs to share claims,
purchase reinsurance as a group, and coordinate on maritime public policy issues. Unlike
the case with MARAD-approved hull insurance underwriters, of the 13 members of the
International Group only two qualify as eligible insurers under the Act in a category
separate from the federally approved insurer category. Hence, the bulk of the comments
Treasury received from the maritime community focused on the treatment of the
International Group under the interim final rule.

Treasury also received similar comments from the offshore oil and gas drilling
industry objecting to the interim final rule's interpretation regarding the participation of
federally approved insurers under the Act. The Department of Interior's Minerals
Management Service approves insurance coverage as one method covered offshore
facilities can use for demonstrating oil spill financial responsibility, and the Minerals
Management Service has procedures in place (30 CFR 253.29) regarding eligibility

52

criteria under their program. T o further understand the oil and gas drilling industry's
concerns, the Minerals Management Service provided Treasury with a list of insurers that
had been approved to provide coverage under the oil spill financial responsibility
program. Treasury, in consultation with the NAIC, identified 102 out of 105 insurers that
were approved by the Minerals Management Service as being eligible participants under
the Act because they either were State licensed or admitted or were on the NAIC's
Quarterly Listing of Alien Insurers. Thus, as it relates to insurance coverage for offshore
drilling interests, Treasury's interpretation with regard to federally approved insurers
does not appear to have caused disruptions in insurance coverage. Treasury did not
receive any comments from insurers providing coverage for offshore drilling interests
objecting to the treatment of federally approved insurers.

Treasury also received comments regarding the treatment of federally approved
insurers under the Department of Labor's authority to authorize workers' compensation
coverage under the Longshore and Harbor Worker's Act (33 USC 901) and its
extensions. The Department of Labor authorizes both insurance carriers (20 CFR
703.101) and self-insurers (20 CFR 703.301) for the purpose of meeting the requirements
of the Longshore and Harbor Worker's Act. Insurers that are authorized under 20 CFR
703.101 clearly meet the criteria of section 50.5(f)(1)(C) of being "approved or accepted
for the purpose of offering property and casualty insurance by a Federal agency in
connection with maritime, energy, or aviation activity." In this regard a key element is
that such insurers are "offering" insurance coverage.

53

In contrast, the Department of Labor and other Federal agencies m a y approve self
insurance as an acceptable means of meeting the financial requirements or
responsibilities of their respective programs. In this regard, self insurance is just another
means of establishing financial responsibility and is not a substitute for the requirement
that insurance is being "offered." Thus, self insurance arrangements approved by Federal
agencies are not included under section 50.5(f)(1)(C). However, Treasury may consider
self insurance arrangements for inclusion in the Program through Treasury's general
authority to consider such arrangements under section 102(6)(A)(v) of the Act, which is
also described in section 50.5(f)(1)(E) of the interim final rule. Treasury has not yet
taken any action regarding the inclusion of self insurance arrangements under the Act.

In addition to the general concerns noted above regarding the treatment of
federally approved insurers, airline insurance pools and other commenters (e.g., those
addressing issues related to nuclear insurers) noted that Federal approval may be for
amounts of insurance coverage that is less than what is normally provided by the
insurance industry. For example, commenters noted that standard airline liability limits
are $1.5 billion, while the Federal Aviation Administration's required liability coverage
is much lower. Likewise, commenters noted that policy limits on nuclear property
coverage generally exceed the mandated requirements of $1.06 billion per licensee.

After consideration of these comments by the maritime industry and their
mutually owned insurance companies and others, Treasury has decided not to make any

54

changes to the interimfinalrule's treatment of federally approved insurers for the
following reasons.

First, the interim final rule's treatment of federally approved insurers is in accord
with the statutory language of the Act in section 102(6)(A)(iii) ^approvedfor the
purpose o/offering property and casualty insurance by a Federal agency in connection
with maritime, energy or aviation activity"). While some commenters pointed to
congressional intent supporting a broader interpretation, no express language in the Act's
legislative history supports this view. Moreover, Treasury's treatment of federally
approved insurers in the interim final rule is consistent with the underlying reason for the
Federal government providing Federal agencies with the authority to approve insurers. In
general, the Federal government provides agencies with approval authority to address
important national interests or to protect the Federal government's interests. For
example, the Federal government requires that airlines maintain a minimum amount of
liability insurance coverage. In contrast, the Federal government has no similar overall
liability requirements for ocean going vessels, but such vessels are required to
demonstrate financial responsibility for oil spills. As an example of protecting the
Federal government's interest, MARAD approves insurance coverage for vessels that
were built with a government subsidy or guarantee. MARAD could have been granted
broader insurance approval authority than just federally subsidized vessels if there were a
clear national interest in ensuring that all ocean going vessels in U.S. waters had adequate
overall liability insurance coverage.

55

Second, Treasury's treatment of federally approved insurers is consistent with
Treasury's consideration of a pre-existing nexus (for example, the nexus of Statelicensing or NAIC approval for listing on the Quarterly Listing of Alien Insurers) to be
very important to the effective and efficient administration of the Program. Some
commenters criticized Treasury for not more fully explaining the importance of this
consideration.

The following three key factors highlight the importance of a pre-existing
regulatory nexus or structure for the administration of the Program.

Ongoing Data Requirements. As Program administrator, Treasury has chosen not
to impose new ongoing data reporting requirements on insurers. That does not
mean that validating and collecting certain data is not important to the Program.
The calculation of an insurer's DEP forms the basis for an insurer calculating its
deductible under the Program, and in the event that insurers would submit a claim
for payment under the Program, Treasury would expect to validate an insurer's
calculation of its deductible. Treasury believes that the existing ongoing data
reporting requirements of the State insurance regulators and the consolidated
reporting requirements as implemented by the NAIC form a sound basis for the
administration of the Program. Therefore, there was not a pressing need to
implement new ongoing data reporting requirements through Treasury (and to
create additional paperwork burdens for the insurance industry) for this temporary
government Program.

56

However, such ongoing data is useful and important, especially as it relates to
foreign insurers that are providing coverage on global risk policies. Global risk
polices (e.g., such as those provided to ocean going vessels) have historically not
allocated premium income to reflect the scope of insured losses covered under the
Act, which is a key measure in calculating an insurer's deductible. Treasury has
determined to utilize data collected by the NAIC from insurers on the Quarterly
Listing of Alien Insurers that captures the amount of premium income related to
the scope of insured loss under the Act. Federal agencies approving insurers
under section 102(6)(A)(iii), while generally having some type of financial
criteria for approving insurers, do not have in place any type of ongoing data
reporting requirements similar to that of the NAIC.

Ability to Impose Surcharges or Take Enforcement Actions. Many of the insurers
approved by Federal agencies may be outside the direct jurisdiction of the United
States. Treasury has little leverage vis a vis these insurers and this could make it
difficult for Treasury to impose surcharges in the case of any recoupment under
the Act or to take enforcement actions if needed. In contrast, if an insurer on the
NAIC's Quarterly Listing of Alien Insurers is not in compliance with provisions
of the Act, the insurer could suffer the consequences of losing its NAIC listing for
poor character, which in turn could adversely affect its U.S. business operations.
It is possible that a Federal agency could also revoke approval for noncompliance
with provisions of the Act. However, the limited nature of a Federal agency's

57

approval authority could somewhat lessen the impact of any such action and
Treasury has no authority to require such action by another federal agency.

Comparability among Federally Approved Insurers. Treasury strongly believes
that all federally approved insurers should be treated in a similar manner that is
consistent with the statute. For example, such consistency implies that the
mandatory participation requirements of the Act should be applied to all federally
approved insurers in a similar fashion. In that regard, Treasury would find it
difficult to justify one group of federally approved insurers having broader access
to the Program than the current interim final rule provides, while other groups
stayed with the current approach in the interim final rule.

Treasury has considered carefully the concerns raised by commenters regarding
the interim final rule's treatment of federally approved insurers. At this time, Treasury
has decided that no changes to the rule are warranted. It appears that many of the
insurers that have been approved by a Federal agency also qualify to participate in the
Program based on other criteria. Treasury also notes that obtaining a listing on the
NAIC's Quarterly Listing of Alien Insurers is an option that insurers can employ if they
are not satisfied with the treatment of federally approved insurers under the interim final
rule. Obtaining such a listing would satisfy the concerns we noted above, while at the
same time imposing limited burden on insurers. It is our understanding that perhaps the
major obstacle to obtaining a listing is setting up the necessary trust fund.

58

Treasury will continue to evaluate this issue as the Program matures. While
Treasury does not plan on making any changes to the treatment of federally approved
insurers at this time, Treasury would be open to considering alternatives if the three key
factors listed above - ongoing data reporting requirements, ability to impose surcharges
or take enforcement actions, and comparability among federally approved insurers could be addressed.

Other Insurer Criteria

Under a separate notice of proposed rulemaking published at 68 FR 9814
Treasury solicited public comment on whether the Secretary should prescribe other
criteria for certain insurers pursuant to the authority provided by section 102(6)(C) and, if
so, what criteria Treasury should prescribe. Specifically, Treasury solicited comment on
whether criteria should be developed to prevent newly formed insurance companies from
participating in the Program if such companies were established for the purpose of
evading the Act's deductible requirements.

A few commenters raised concerns that developing such criteria could limit the
development of new structures to provide terrorism risk insurance coverage. One
commenter acknowledged the concerns raised by Treasury and supported the interim
final rule's treatment of the deductible requirements for newly formed insurance
companies in section 50.5(g)(2) as an appropriate safeguard. Another commenter
suggested a set of general criteria that Treasury could look to as it considers this issue.

59

A s Treasury noted in the preamble to interimfinalrule, w e are seeking to balance the
goals of encouraging new sources of capital in the market for terrorism risk insurance
while also maintaining the integrity of the Program. Treasury is not proposing any
additional criteria at this time, but we will continue to monitor developments in the
market for terrorism risk insurance and the market's response to the Act.

Treasury also solicited comments on whether additional criteria should be
proposed for federally approved insurers. Some commenters suggested that additional
financial criteria could be applied if necessary, while one commenter suggested that the
Act does not give Treasury the authority to regulate insurance. Given that the final rule
retains the interim final rule's treatment of federally approved insurers, the scope of
potential problems related to the financial integrity of such insurers is somewhat limited.
Thus, Treasury is not proposing any additional criteria at this time, but we will continue
to study and monitor this issue.

F. Insurer Deductible (Section 50.5.g)

The interim final rule incorporated the statutory definition of "insurer deductible"
found in section 102(7) of the Act and set forth a procedure specifying how newly
formed insurance companies would calculate their deductible under the Program. In

particular, the interim final rule specified that for an insurer that came into existence after
November 26, 2002, the insurer deductible will be based on data for direct earned
premiums for the current Program Year. If the insurer has not had a full year of

60

operations during the applicable Program Year, the direct earned premiums for the
current Program Year will be annualized to determine the insurer deductible.

The two commenters who addressed this issue both indicated support for
Treasury's determination that premiums for new insurers would be annualized in the
calculation of their insurer deductible, and the language of the interim final rule is
incorporated without change into the final rule.

III. Procedural Requirements

The Act established a Program to provide for loss sharing payments by the
Federal Government for insured losses resulting from certified acts of terrorism. The Act
became effective immediately upon the date of enactment (November 26, 2002).
Preemptions of terrorism risk exclusions in policies, mandatory participation provisions,
disclosure and other requirements and conditions for federal payment contained in the
Act applied immediately to those entities that come within the Act's definition of
"insurer." Treasury has issued and will be issuing additional regulations to implement
the Program. This final rule provides critical information concerning the definitions of
Program terms that lays the groundwork for Treasury's implementation of the Program.
No one can predict if, or when, an act of terrorism may occur. There is an urgent need
for Treasury, as Program administrator, to lay the groundwork for Program
implementation through regulations to provide clarity and certainty concerning which
entities are required to participate in the Program; the scope and conditions of Program

61

coverage; and other implementation issues that immediately affect insurers, their
policyholders, State regulators and other interested parties. This includes the need to
supplement, or modify as necessary, the previously issued interim final rule.
Accordingly, pursuant to 5 U.S.C. 553(d)(3), Treasury has determined that there
is good cause for the final rule to become effective immediately upon publication.
This final rule is a significant regulatory action and has been reviewed by the
Office of Management and Budget under the terms of Executive Order 12866.
It is hereby certified that this final rule will not have a significant economic
impact on a substantial number of small entities. The Act requires all licensed or
admitted insurers to participate in the Program. This includes all insurers regardless of
size or sophistication. The Act also defines property and casualty insurance to mean
commercial lines without any reference to the size or scope of the commercial entity.
Although the Act affects small insurers, the final rule also gives insurers flexibility in
calculating their direct earned premium for policies that have both commercial and
personal exposures, and it provides a safe harbor to exclude policies that have incidental
coverage for commercial purposes. Accordingly, any economic impact associated with
the final rule flows from the Act and not the final rule. However, the Act and the
Program are intended to provide benefits to the U. S. economy and all businesses,
including small businesses, by providing a federal reinsurance backstop to commercial
property and casualty insurance policyholders and spreading the risk of insured loss
resulting from an act of terrorism.

62

The collection of information contained in § 50.8 of thisfinalrule has been
reviewed and approved by the Office of Management and Budget (OMB) in accordance
with the requirements of the Paperwork Reduction Act (44 U.S.C. 3507(j)) under control
number 1505-0190. An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid control number
assigned by OMB.

This information is required in order for Treasury to determine whether an insurer
has rebutted a presumption that the insurer exercises a controlling influence over the
management or policies of another insurer. The collection of information is mandatory
with respect to an insurer seeking to rebut a presumption. The estimated average burden

associated with the collection of information in this final rule is 40 hours per respondent.

Comments concerning the accuracy of this burden estimate and suggestions for
reducing this burden should be directed to the Office of Financial Institutions Policy,
Room 3160 Annex, Department of the Treasury, 1500 Pennsylvania Ave., N.W.,
Washington, DC 20220 and to OMB, Attention: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

List of Subjects in 31 CFR Part 50

Terrorism risk insurance.

63

Authority and Issuance
For the reasons set forth above, the interim final rule adding 31 CFR Part 50,
which was published at 68 FR 9804 on February 28, 2003, is adopted as a final rule with
the following changes:

PART 50 - TERRORISM RISK INSURANCE PROGRAM

1. The authority citation for 31 CFR Part 50 continues to read as follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-297, 116 Stat. 2322 (15
U.S.C. 6701 note).

2. Section 50.2 is added to read as follows:

§ 50.2 Responsible office.
The office responsible for the administration of the Terrorism Risk Insurance Act
in the Department of the Treasury is the Terrorism Risk Insurance Program Office. The
Treasury Assistant Secretary for Financial Institutions prescribes the regulations under
the Act.

3. Section 50.5(c), (d)(1), (f)(1), and (1) are revised to read as follows:

64

§ 50.5 Definitions.
* * * * *

(c)(1) Affiliate means, with respect to an insurer, any entity that controls, is controlled
by, or is under common control with the insurer. An affiliate must itself meet the
definition of insurer to participate in the Program.

(2) For purposes of paragraph (c)(1) of this section, an insurer has control over another
insurer for purposes of the Program if:
(i) The insurer directly or indirectly or acting through one or more other persons owns,
controls, or has power to vote 25 percent or more of any class of voting securities of the
other insurer;
(ii) The insurer controls in any manner the election of a majority of the directors or
trustees of the other insurer; or
(iii) The Secretary determines, after notice and opportunity for hearing, that an insurer
directly or indirectly exercises a controlling influence over the management or policies of
the other insurer, even if there is no control as defined in paragraph (c)(2)(i) or (c)(2)(ii)
of this section.

(3) An insurer described in paragraph (c)(2)(i) or (c)(2)(h) of this section is conclusively
deemed to have control.

65

(4) For purposes of a determination of controlling influence under paragraph (c)(2)(iii)
of this section, if an insurer is not described in paragraph (c)(2)(i) or (c)(2)(h) of this
section, the following rebuttable presumptions will apply:
(i) If an insurer controls another insurer under any State law, and at least one of the
factors listed in paragraph (c) (4)(iv) of this section applies, there is a rebuttable
presumption that the insurer that has control under State law exercises a controlling
influence over the management or policies of the other insurer for purposes of paragraph
(c)(2)(iii) of this section.
(ii) If an insurer provides 25 percent or more of another insurer's capital (in the case of a
stock insurer), policyholder surplus (in the case of a mutual insurer), or corporate capital
(in the case of other entities that qualify as insurers), and at least one of the factors listed
in paragraph (c)(4)(iv) of this section applies, there is a rebuttable presumption that the
insurer providing such capital, policyholder surplus, or corporate capital exercises a
controlling influence over the management or policies of the receiving insurer for
purposes of paragraph (c)(2)(iii) of this section.
(iii) If an insurer, at any time during a Program Year, supplies 25 percent or more of the
underwriting capacity for that year to an insurer that is a syndicate consisting of a group
including incorporated and individual unincorporated underwriters, and at least one of the
factors in paragraph (c)(4)(iv) of this section applies, there is a rebuttable presumption
that the insurer exercises a controlling influence over the syndicate for purposes of
paragraph (c)(2)(iii) of this section.
(iv) If paragraphs (c)(4)(i) through (c)(4)(iii) of this section are not applicable, but two or
more of the following factors apply to an insurer, with respect to another insurer, there is

66

a rebuttable presumption that the insurer exercises a controlling influence over the
management or policies of the other insurer for purposes of paragraph (c)(2)(iii) of this
section:
(A) The insurer is one of the two largest shareholders of any class of voting stock;
(B) The insurer holds more than 35 percent of the combined debt securities and equity of
the other insurer;
(C) The insurer is party to an agreement pursuant to which the insurer possesses a
material economic stake in the other insurer resulting from a profit-sharing arrangement,
use of common names, facilities or personnel, or the provision of essential services to the
other insurer;
(D) The insurer is party to an agreement that enables the insurer to influence a material
aspect of the management or policies of the other insurer;
(E) The insurer would have the ability, other than through the holding of revocable
proxies, to direct the votes of more than 25 percent of the other insurer's voting stock in
the future upon the occurrence of an event;
(F) The insurer has the power to direct the disposition of more than 25 percent of a class
of voting stock of the other insurer in a manner other than a widely dispersed or public
offering;
(G) The insurer and/or the insurer's representative or nominee constitute more than one
member of the other insurer's board of directors; or
(H) The insurer or its nominee or an officer of the insurer serves as the chairman of the
board, chairman of the executive committee, chief executive officer, chief operating

67

officer, chief financial officer or in any position with similar policymaking authority in
the other insurer.

(5) An insurer that is not described in paragraph (c)(2)(i) or (c)(2)(h) of this section may
request a hearing in which the insurer may rebut a presumption of controlling influence
under paragraph (c)(4)(i) through (c)(4)(iv) of this section or otherwise request a
determination of controlling influence by presenting and supporting its position through
written submissions to Treasury, and in Treasury's discretion, through informal oral
presentations, in accordance with the procedure in § 50.8.

(1) State licensed or admitted insurers. For a State licensed or admitted insurer that
reports to the NAIC, direct earned premium is the premium information for commercial
property and casualty insurance coverage reported by the insurer on column 2 of the
NAIC Exhibit of Premiums and Losses of the Annual Statement (commonly known as
Statutory Page 14). (See definition of property and casualty insurance).

(i) Premium information as reported to the NAIC should be included in the calculation of
direct earned premiums for purposes of the Program only to the extent of commercial
property and casualty coverage issued by the insurer against an insured loss under the
Program.

68

(ii) Premiums for personal property and casualty insurance coverage (coverage primarily
designed to cover personal, family or household risk exposures, with the exception of
coverage written to insure 1 to 4 family rental dwellings owned for the business purpose
of generating income for the property owner) or for insurance coverage for any loss that
would not be an insured loss under the Program, should be excluded in the calculation of
direct earned premiums for purposes of the Program.

(iii) Personal property and casualty insurance coverage that includes incidental coverage
for commercial purposes is primarily personal coverage, and therefore premiums may be
fully excluded by an insurer from the calculation of direct earned premium. For purposes
of the Program, commercial coverage is incidental if less than 25 percent of the total
direct earned premium is attributable to commercial coverage. Property and casualty
insurance coverage for any loss that would not be an insured loss under the Program that
includes incidental coverage for an insured loss under the Program is primarily nonProgram coverage, and therefore premiums may be fully excluded by an insurer from the
calculation of direct earned premium. For purposes of the Program, coverage for an
insured loss is incidental if less than 25 percent of the total direct earned premium is
attributable to such coverage.

(iv) If a property and casualty insurance policy covers both commercial and personal risk
exposures, insurers may allocate the premiums in accordance with the proportion of risk
between commercial and personal components in order to ascertain direct earned
premium. If a property and casualty insurance policy covers risk exposures for both

69

insured losses and losses that would not be insured losses under the Program, insurers
may allocate the premiums in accordance with the proportion of risk between the insured
loss and non-insured loss components in order to ascertain direct earned premium.

(f) Insurer means any entity, including any affiliate of the entity, that meets the following
requirements:

(l)(i) The entity must fall within at least one of the following categories:

(A) It is licensed or admitted to engage in the business of providing primary or excess
insurance in any State, (including, but not limited to, State licensed captive insurance
companies, State licensed or admitted risk retention groups, and State licensed or
admitted farm and county mutuals), and, if a joint underwriting association, pooling
arrangement, or other similar entity, then the entity must:

(1) Have gone through a process of being licensed or admitted to engage in the business
of providing primary or excess insurance that is administered by the State's insurance
regulator, which process generally applies to insurance companies or is similar in scope
and content to the process applicable to insurance companies;

70

(2) B e generally subject to State insurance regulation, including financial reporting
requirements, applicable to insurance companies within the State; and

(3) Be managed independently from other insurers participating in the Program;

(B) It is not licensed or admitted to engage in the business of providing primary or
excess insurance in any State, but is an eligible surplus line carrier listed on the Quarterly
Listing of Alien Insurers of the NAIC, or any successor to the NAIC;

(C) It is approved or accepted for the purpose of offering property and casualty insurance
by a Federal agency in connection with maritime, energy, or aviation activity, but only to
the extent of such federal approval of commercial property and casualty insurance
coverage offered by the insurer in connection with maritime, energy, or aviation activity;

(D) It is a State residual market insurance entity or State workers' compensation fund; or

(E) As determined by the Secretary, it falls within any other class or type of captive
insurer or other self-insurance arrangement by a municipality or other entity, to the extent
provided in Treasury regulations issued under section 103(f) of the Act.

(ii) If an entity falls within more than one category described in paragraph (f)(l)(i) of
this section, the entity is considered to fall within the first category within which it falls
for purposes of the Program.

71

(1) Property and casualty insurance means commercial lines of property and casualty
insurance, including excess insurance, workers' compensation insurance, and surety
insurance, and

(1) Means commercial lines within only the following lines of insurance from the
NAIC's Exhibit of Premiums and Losses (commonly known as Statutory Page 14): Line
1—Fire; Line 2.1—Allied Lines; Line 3—Farmowners Multiple Peril; Line 5.1—
Commercial Multiple Peril (non-liability portion); Line 5.2—Commercial Multiple Peril
(liability portion); Line 8—Ocean Marine; Line 9—Inland Marine; Line 16—Workers'
Compensation; Line 17—Other Liability; Line 18—Products Liability; Line 19.3—
Commercial Auto No-Fault (personal injury protection); Line 19.4—Other Commercial
Auto Liability; Line 21.2—Commercial Auto Physical Damage; Line 22—Aircraft (all
perils); Line 24—Surety; Line 26—Burglary and Theft; and Line 27—Boiler and
Machinery; and

(2) Does not include:

(i) Federal crop insurance issued or reinsured under the Federal Crop Insurance Act (7
U.S.C. 1501 et seq.)_ or any other type of crop or livestock insurance that is privately
issued or reinsured (including crop insurance reported under either Line 2.1—Allied

72

Lines or Line 2.2—Multiple Peril (Crop) of the NAIC's Exhibit of Premiums and Losses
(commonly known as Statutory Page 14);

(ii) Private mortgage insurance (as defined in section 2 of the Homeowners Protection
Act of 1988 (12 U.S.C. 4901) or title insurance;

(iii) Financial guaranty insurance issued by monoline financial guaranty insurance
corporations;

(iv) Insurance for medical malpractice;

(v) Health or life insurance, including group life insurance;

(vi) Flood insurance provided under the National Flood Insurance Act of 1968 (42 U.S.C.
4001 et seq.) or earthquake insurance reported under Line 12 of the NAIC's Exhibit of
Premiums and Losses (commonly known as Statutory Page 14); or

(vii) Reinsurance or retrocessional reinsurance.

4. Section 50.8 is added to Subpart A to read as follows:

73

§ 50.8 Procedure for requesting determinations of controlling influence.

(a) An insurer or insurers not having control over another insurer under § 50.5(c)(2)(i) or
(c)(2)(h) may make a written submission to Treasury to rebut a presumption of
controlling influence under § 50.5(c)(4)(i) through (iv) or otherwise to request a
determination of controlling influence. Such submissions shall be made to the Terrorism
Risk Insurance Program Office, Department of the Treasury, Suite 2110, 1425 New York
Ave NW, Washington, D.C. 20220. The submission should be entitled, "Controlling
Influence Submission," and should provide the full name and address of the submitting
insurer(s) and the name, title, address and telephone number of the designated contact
person(s) for such insurer(s).

(b) Treasury will review submissions and determine whether Treasury needs additional
written or orally presented information. In its discretion, Treasury may schedule a date,
time and place for an oral presentation by the insurer(s).

(c) An insurer or insurers must provide all relevant facts and circumstances concerning
the relationship(s) between or among the affected insurers and the control factors in
§ 50.5(c)(4)(i) through (iv); and must explain in detail any basis for why the insurer

believes that no controlling influence exists (if a presumption is being rebutted) in light of
the particular facts and circumstances, as well as the Act's language, structure and
purpose. Any confidential business or trade secret information submitted to Treasury
should be clearly marked. Treasury will handle any subsequent request for information

74

designated by an insurer as confidential business or trade secret information in
accordance with Treasury's Freedom of Information Act regulations at 31 C.F.R. Part 1.

(d) Treasury will review and consider the insurer submission and other relevant facts and
circumstances. Unless otherwise extended by Treasury, within 60 days after receipt of a
complete submission, including any additional information requested by Treasury, and
including any oral presentation, Treasury will issue a final determination of whether one
insurer has a controlling influence over another insurer for purposes of the Program. The
determination shall set forth Treasury's basis for its determination.

(e) This § 50.8 supersedes the Interim Guidance issued by Treasury in a notice published
on March 27, 2003 (68 FR 15039).

(Approved by the Office of Management & Budget under control number 1505-0190)

5. Section 50.9 is added to Subpart A to read as follows:

§ 50.9 Procedure for requesting general interpretations of statute.

Persons actually or potentially affected by the Act or regulations in this Part may request
an interpretation of the Act or regulations by writing to the Terrorism Risk Insurance
Program Office, Suite 2110, Department of the Treasury, 1425 New York Ave NW,
Washington, D.C. 20220, giving a detailed explanation of the facts and circumstances

75

and the reason w h y an interpretation is needed. A requester should segregate and mark
any confidential business or trade secret information clearly. Treasury in its discretion
will provide written responses to requests for interpretation. Treasury reserves the right
to decline to provide a response in any case. Except in the case of any confidential
business or trade secret information, Treasury will make written requests for
interpretations and responses publicly available at the Treasury Department Library, on
the Treasury website, or through other means as soon as practicable after the response has
been provided. Treasury will handle any subsequent request for information that had

76

been designated by a requester as confidential business or trade secret information in
accordance with Treasury's Freedom of Information Act regulations at 31 CFR Part 1.

Dated: July 7, 2003

W a y n e A. Abernathy
Assistant Secretary of the Treasury

77

JS-531: Treasury Calls for Large Position Reports

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
July 8, 2003
JS-531
Treasury Calls for Large Position Reports

The Treasury is calling for Large Position Reports from those entities whose
reportable position in the 3-5/8% Treasury Notes of May 2013 equals or exceeds $2
billion as of close of business Monday, July 7, 2003. This call for Large Position
Reports is a test. Entities with reportable positions in this note equal to or
exceeding this $2 billion threshold must report these positions to the Federal
Reserve Bank of N e w York. Entities with positions in this note below $2 billion are
not required to file Large Position Reports. Reports, which must include the
required position and administrative information, must be received by the
Government Securities Dealer Statistics Unit of the Federal Reserve Bank of N e w
York before noon Eastern time on Monday, July 14, 2003. Large Position Reports
may be filed by facsimile at (212) 720-5030 or delivered to the Bank at 33 Liberty
Street, 4th floor.
Details on Call for Large Position Reports
Security Description: 3-5/8% Treasury Notes of May 2013, Series B-2013
CUSIP Number: 912828 B A 7
CUSIP N u m b e r of STRIPS Principal Component: 912820 H X 8
Maturity Date: M a y 15, 2013
Date for Which Information Must B e Reported: July 7, 2003 as of C O B
Large Position Reporting Threshold: $2 Billion (Par Value)
Date Report Is Due: July 14, 2003, before noon Eastern time
This call for large position information is made under Treasury's large position
reporting rules (17 C F R Part 420). The notice calling for Large Position Reports is
also being published in the Federal Register. This press release and a copy of a
sample Large Position Report, which appears in Appendix B of the rules at 17 C F R
Part 420, are available at the Bureau of the Public Debt's Internet site at the
following address: www.publicdebt.treas.gov.
Questions about Treasury's large position reporting rules should be directed to
Public Debt's Government Securities Regulations Staff at (202) 691-3632.
Questions regarding the method of submission of Large Position Reports m a y be
directed to the Government Securities Dealer Statistics Unit of the Federal Reserve
Bank of N e w York at (212) 720-1449.

http://www.treas.gov/Dr_ess/releases/js531 .htm

4/26/2005

JS-532: Treasury and IRS Propose Regulations Affecting Optional Forms

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the Microsoft Word content on this page, download the free Microsoft Word
Viewer.
July 8, 2003
JS-532
Treasury and IRS Propose Regulations Affecting Optional Forms
of Payment from a Defined Contribution Plan

Today, the Treasury Department and the IRS issued proposed regulations to
conform with a change m a d e by the Economic Growth and Taxpayer Relief
Reconciliation Act of 2001 ( E G T R R A ) concerning optional forms of payment from a
defined contribution plan.
EGTRRA permits optional forms of payment to be eliminated from a defined
contribution plan if the plan offers a single-sum distribution form. In light of a
participant's ability to roll over a single-sum distribution from a defined contribution
plan into an individual retirement account and replicate virtually any form of
distribution available under the plan, regulations that were finalized in 2000 only
differ from section 411(d)(6)(E) by requiring advance notice to participants. These
proposed regulations would conform the 2000 regulations to the new E G T R R A
requirements by eliminating the advance notice.
The proposed regulations would be effective on publication of final regulations.
Related Documents:
• Reg 1120390-03

http://www.treas.gov/press/releases/js532.htm

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1
[REG-112039-03]
RIN 1545-BC35
Elimination of Forms of Distribution in Defined Contribution Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed regulations that would modify the
circumstances under which certain forms of distribution previously available are
permitted to be eliminated from qualified defined contribution plans. These proposed

regulations affect qualified retirement plan sponsors, administrators, and participants.
This document also provides notice of a public hearing on these proposed regulations.
DATES: Written and electronic comments and request for a public hearing must be
received by October 6, 2003.
ADDRESSES: Send submissions to: CC:PA:RU (REG-112039-03), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to: CC:PA:RU (REG-112039-03),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington,
DC. Alternatively, taxpayers may submit comments electronically directly to the IRS
Internet site at: www.irs.gov/regs. The public hearing will be held in room ,

1

Internal Revenue Building, 1111 Constitution Avenue NW., Washington, D C .
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Vernon S.
Carter, 202-622-6060; concerning submissions and the hearing, and/or to be placed on
the building access list to attend the hearing, LaNita VanDyke, 202-622-7190 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Explanation of Provisions
This document contains proposed amendments to 26 CFR part 1 under section
411(d)(6) of the Internal Revenue Code of 1986 (Code) as amended by the Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (115 Stat. 117). Section

411(d)(6)(A) of the Code generally provides that a plan will not be treated as satisfy

the requirements of section 411 if the accrued benefit of a participant is decreased b
plan amendment. Section 411(d)(6)(B) prior to amendment by EGTRRA provided that
an amendment is treated as reducing an accrued benefit if, with respect to benefits
accrued before the amendment is adopted, the amendment has the effect of either
eliminating or reducing an early retirement benefit or a retirement-type subsidy, or,
except as provided by regulations, eliminating an optional form of benefit.
The IRS published TD 8900 in the Federal Register on September 6, 2000 (65
FR 53901). TD 8900, which amended section §1.411 (d)-4 of the Income Tax
Regulations, added paragraph (e) of Q&A-2 to provide for additional circumstances
under which a defined contribution plan can be amended to eliminate or restrict a

participant's right to receive payment of accrued benefits under certain optional form
benefit.

2

Section 1.411(d)-4, Q&A-2(e)(1) provides that a defined contribution plan m a y be
amended to eliminate or restrict a participant's right to receive payment of accrued
benefits under a particular optional form of benefit without violating the section 411(d)(6)
anti-cutback rules if, once the plan amendment takes effect for a participant, the
alternative forms of payment that remain available to the participant include payment in
a single-sum distribution form that is "otherwise identical" to the eliminated or restricted
optional form of benefit. The amendment cannot apply to a participant for any
distribution with an annuity starting date before the earlier of the 90th day after the
participant receives a summary that reflects the plan amendment and that satisfies
Department of Labor's requirements for a summary of material modifications under 29
CFR 2520.104b-3, or the first day of the second plan year following the plan year in
which the amendment is adopted.Section §1.411(d)-4, Q&A-2(e)(2) provides that a
single-sum distribution form is "otherwise identical" to the optional form of benefit that is
being eliminated or restricted only if it is identical in all respects (or would be identical
except that it provides greater rights to the participant), except for the timing of
payments after commencement. A single-sum distribution form is not "otherwise
identical" to a specified installment form of benefit if the single-sum form:
• is not available for distribution on any date on which the installment form
could have commenced;
• is not available in the same medium as the installment form; or
• imposes any additional condition of eligibility.
Further, an otherwise identical distribution form need not retain any rights or features of
the eliminated or restricted optional form of benefit to the extent those rights or features

3

would not be protected from elimination under the anti-cutback rules. The single-sum
distribution form would not, however, be disqualified from being an otherwise identical
distribution form if the single-sum form provides greater rights to participants than did
the eliminated or restricted optional form of benefits.
Section 645(a)(1) of EGTRRA revised section 411(d)(6) in a manner that is
similar to §1.411(d)-4, Q&A-2(e), but without the advance notice condition. Section
411(d)(6)(E) of the Code provides that, except to the extent provided in regulations, a
defined contribution plan is not treated as reducing a participant's accrued benefit where
a plan amendment eliminates a form of distribution previously available under the plan if
a single-sum distribution is available to the participant at the same time as the form of
distribution eliminated by the amendment, and the single-sum distribution is based on
the same or greater portion of the participant's account as the form of distribution
eliminated by the amendment.
To reflect the addition of section 411(d)(6)(E) by EGTRRA, these proposed
regulations would amend §1.411 (d)-4, Q&A-2(e). Under these amendments, the
regulations would retain the rules under which a defined contribution plan may be
amended to eliminate or restrict a participant's right to receive payment of accrued
benefits under a particular optional form of benefit without violating the section 411(d)(6)
anti-cutback rules if, once the plan amendment takes effect for a participant, the
alternative forms of payment that remain available to the participant include payment in
a single-sum distribution. However, these proposed regulations would remove the 90day notice condition previously applicable to these plan amendments. 1

1 The Department of Labor has advised Treasury and the IRS that it should be noted that plans covered

4

Under section 101 of Reorganization Plan No. 4 of 1978 (43 F R 47713), the

Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed
in these regulations for purposes of the Employee Retirement Income Security Act of
1974 (ERISA), as well as the Code. Section 204(g)(2) of ERISA, as amended by
EGTRRA, provides a parallel rule to section 411(d)(6)(E) of the Code that applies under
Title I of ERISA, and authorizes the Secretary of the Treasury to provide exception to
this parallel ERISA requirement. Therefore, these regulations apply for purposes of the

parallel requirements of sections 204(g)(2) of ERISA, as well as for section 411(d)(6)(E)
of the Code.
Effective Date and Applicability Date
The proposed regulations are proposed to apply on the date of publication of final
regulations in the Federal Register.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulation does not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section
7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment on its impact
by Title I of ERISA will continue to be subject to the requirement under Title I that plan amendments be
described in a timely summary of material modifications ( S M M ) or a revised summary plan description
(SPD) to be distributed to plan participants and beneficiaries in accordance with applicable Department of
Labor disclosure rules (see 29 C F R 2520.104b-3)."

5

on small business.
Drafting Information
The principal author of these regulations is Vernon S. Carter of the Office of the
Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).
However, other personnel from the IRS and Treasury participated in their development.
List of Subjects in 26 CFR Parts 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
Paragraph 1. The authority citation for part 1 is amended to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.411(d)-4, Q&A-2(e) also issued under 26 U.S.C. 411(d)(6)(E). * * *
Par. 2. Section 1.411(d)-4, Q&A-2(e) is revised to read as follows:
§1.411 (d)-4 Section 411 (d)(6) protected benefits.
*****

A_0. * * *

(e) Permitted plan amendments affecting alternative forms of payment under
defined contribution plans-(1) General rule. A defined contribution plan does not

6

violate the requirements of section 411(d)(6) merely because the plan is a m e n d e d to
eliminate or restrict the ability of a participant to receive payment of accrued benefits
under a particular optional form of benefit if, after the plan amendment is effective with
respect to the participant, the alternative forms of payment available to the participant
include payment in a single-sum distribution form that is otherwise identical to the
optional form of benefit that is being eliminated or restricted.
(2) Otherwise identical single-sum distribution. For purposes of this paragraph
(e), a single-sum distribution form is otherwise identical to an optional form of benefit
that is eliminated or restricted pursuant to paragraph (e)(1) of this Q&A-2 only if the
single-sum distribution form is identical in all respects to the eliminated or restricted
optional form of benefit (or would be identical except that it provides greater rights to the
participant) except with respect to the timing of payments after commencement. For
example, a single-sum distribution form is not otherwise identical to a specified
installment form of benefit if the single-sum distribution form is not available for
distribution on the date on which the installment form would have been available for
commencement, is not available in the same medium of distribution as the installment
form, or imposes any condition of eligibility that did not apply to the installment form.
However, an otherwise identical distribution form need not retain rights or features of
the optional form of benefit that is eliminated or restricted to the extent that those rights
or features would not be protected from elimination or restriction under section 411(d)(6)
or this section.
(3) Example. The following example illustrates the application of this paragraph
(e):

7

Example, (i) P is a participant in Plan M, a qualified profit-sharing plan with a
calendar plan year that is invested in mutual funds. The distribution forms available to P
under Plan M include a distribution of P's vested account balance under Plan M in the
form of distribution of various annuity contract forms (including a single life annuity and
a joint and survivor annuity). The annuity payments under the annuity contract forms
begin as of the first day of the month following P's severance from employment (or as of
the first day of any subsequent month, subject to the requirements of section 401(a)(9)).
P has not previously elected payment of benefits in the form of a life annuity, and Plan
M is not a direct or indirect transferee of any plan that is a defined benefit plan or a
defined contribution plan that is subject to section 412. Distributions on the death of a
participant are m a d e in accordance with plan provisions that comply with section
401(a)(11)(B)(iii)(l). O n M a y 2, 2004, Plan M is a m e n d e d so that, after the a m e n d m e n t
is effective, P is no longer entitled to any distribution in the form of the distribution of an
annuity contract. However, after the a m e n d m e n t is effective, P is entitled to receive a
single-sum cash distribution of P's vested account balance under Plan M payable as of
the first day of the month following P's severance from employment (or as of the first
day of any subsequent month, subject to the requirements of section 401 (a)(9)). The
amendment does not apply to P if P elects to have annuity payments begin before July
1,2004.
(ii) Plan M does not violate the requirements of section 411(d)(6) (or section
401(a)(11)) merely because, as of July 1, 2004, the plan a m e n d m e n t has eliminated P's
option to receive a distribution in any of the various annuity contract forms previously
available.

8

(4) Effective date. This paragraph (e) is applicable on the date of publication of
final regulations in the Federal Register.
*****

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.

on-ic i.

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EMBARGOED UNTIL 11:00 A.M.
July 7, 2003

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Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $17,000 million to
refund an estimated $22,001 million of publicly held 4-week Treasury bills maturing
July 10, 2003, and to pay down approximately $5,001 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $13,393 million of the Treasury bills maturing
on July 10, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

0O0

Attachment

J"S S33

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED JULY 10, 2003
July 7, 2003
Offering Amount $17, 000 million
Maximum Award (35% of Offering Amount)...$ 5,950 million
Maximum Recognized Bid at a Single Rate.. $ 5,950 million
NLP Reporting Threshold
$ 5, 950 million
NLP Exclusion Amount
$11,200 million
Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NG 2
Auction date
July 8 , 2003
Issue date
July 10 , 2003
Maturity date
August 7, 2003
Original issue date
February 6, 2003
Currently outstanding
$43, 681 million
Minimum bid amount and multiples....$1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.

DEPARTMENT

TREASURY

OF

THE

!•'<•>

_t

TREASURY

NEWS

OFI-'It I. O . I'.'BI.U A H A I k S i .500 I T N N S Y I A A M A A\ INI I., \.W. • W A S H INC 1 O N . l>.t .• 2022(1 •.2U2: <I2 2-2<>MI

EMBARGOED UNTIL 11:00 A.M.
July 7, 2003

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 10-YEAR INFLATION-INDEXED NOTES
The Treasury will auction $11,000 million of 10-year inflation-indexed
notes to raise new cash.
Amounts bid by Federal Reserve Banks for their own accounts will be added
to the offering.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of the auction. These noncompetitive
bids will have a limit of $100 million per account and will be accepted in the order
of smallest to largest, up to the aggregate award limit of $1,000 million.
The auction will be conducted in the single-price auction format. All
competitive and noncompetitive awards will be at the highest yield of accepted
competitive tenders. The allocation percentage applied to bids awarded at the
highest yield will be rounded up to the next hundredth of a whole percentage
point, e.g., 17.13%.
The notes being offered today are eligible for the STRIPS program.
This offering of Treasury securities is governed by the terms and
conditions set forth in the Uniform Offering Circular for the Sale and Issue of
Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as
amended).
Details about the security are given in the attached offering highlights.
oOo
Attachment

C
o

53z7

HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
10-YEAR INFLATION-INDEXED NOTES TO BE ISSUED JULY 15, 2003
July 7, 2003
Offering Amount $11,000 million
Maximum Award (35% of Offering Amount)
Maximum Recognized Bid at a Single Rate
NLP Reporting Threshold
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Real yield
Interest payment dates
Minimum bid amount and multiples
Accrued interest
Premium or discount
STRIPS Information:
Minimum amount required
Corpus CUSIP number
Due date(s) and CUSIP number(s)
for additional TIIN(s)

$ 3,850 million
$ 3,850 million
$ 3,850 million
10-year inflationindexed notes
C-2013
912828 BD 1
July 9, 2003
July 15, 2003
July 15, 2003
July 15, 2013
Determined based on the highest accepted
competitive bid
Determined at auction
January 15 and July 15
$1,000
None
Determined at auction
$1, 000
912820 JA 6
January 15, 2013 - - 912833 ZK 9
July 15, 2013
912833 ZL 7

Submission of Bids:
Noncompetitive bids:
Accepted in full up to $5 million at the highest accepted yield.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids
submitted through the Federal Reserve Banks as agents for FIMA accounts.
Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal
Reserve Banks as agents for FIMA accounts will not exceed $1,000 million. A
single bid that would cause the limit to be exceeded will be partially accepted
in the amount that brings the aggregate award total to the $1,000 million limit.
However, if there are two or more bids of equal amounts that would cause the
limit to be exceeded, each will be prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a real yield with three decimals, e.g., 3.123%.
(2) Net long position for each bidder must be reported when the sum of the total bid amount, at all
yields, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders: Prior to 12:00 noon eastern daylight saving time on auction day.
Competitive tenders: Prior to 1:00 p.m. eastern daylight saving time on auction day.
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of
full par amount with tender. TreasuryDirect customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.
Indexing Information: CPI Base Reference Period 1982-1984
Ref CPI 07/15/2003
Index Ratio 07/15/2003

183.66452
1.00000

DEPARTMENT

OF T H E

TREASURY

TREASURY |Ml N E W S
OTI'll I- o r N HI.H

\. F M K S * 1500 PI'\N S Y I.YA N I i AVKM/lv. VAV. • \ M M I IN C [ O N . I).C..» 24.2_.il • (2lJ 2 I fi22.20.vll

EMBARGOED UNTIL 11:00 A.M.
July 3, 2003

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $35,000
million to refund an estimated $29,721 million of publicly held 13-week and 26-week
Treasury bills maturing July 10, 2003, and to raise new cash of approximately $5,279
million. Also maturing is an estimated $22,001 million of publicly held 4-week
Treasury bills, the disposition of which will be announced July 7, 2003.
The Federal Reserve System holds $13,393 million of the Treasury bills maturing
on July 10, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held July 8, 2003. Amounts awarded
to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,169 million into the 13-week bill and $674 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo

Attachment

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED JULY 10, 2003
July 3, 2003
Offering Amount $17,000 million $18,000 million
Maximum Award (35% of Offering Amount)
$
Maximum Recognized Bid at a Single Rate
$
NLP Reporting Threshold
$
NLP Exclusion Amount
$
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples

5,950
5,950
5,950
5,600

million
million
million
million

$ 6,300 million
$ 6,300 million
$ 6,300 million
None

91-day bill
912795 NR 8
July 7, 2003
July 10, 2003
October 9, 2003
April 10, 2003
$21,511 million
$1,000

182-day bill
912795 PE 5
July 7, 2003
July 10, 2003
January 8, 2004
July 10, 2003
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
_ ,
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105-6.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender. TreasuryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
July 07, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 91-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

July 10, 2003
October 09, 2003
912795NR8

High Rate: 0.890% Investment Rate 1/: 0.907% Price: 99.775
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 17.50%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

31,564,969
1,508,093
208,000

$

15,283,919
1,508,093
208,000

SUBTOTAL 33,281,062 17,000,012 2/
Federal Reserve 5,510,996 5,510,996
TOTAL $ 38,792,058 $ 22,511,008
Median rate 0.870%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.840%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 33,281,062 / 17,000,012 = 1.96
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,246,611,000

http://www.publicdebt.treas.gov

v y ^N*--f3^

PUBLIC DEBT N E W S
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
July 07, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

July 10, 2003
January 08, 2004
912795PE5

High Rate: 0.940% Investment Rate 1/: 0.960% Price: 99.525
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 78.08%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

34,819,125
942,649
25,000

$

17,032,805
942,649
25,000

SUBTOTAL 35,786,774 18,000,454 2/
Federal Reserve 6,056,277 6,056,277
TOTAL $ 41,843,051 $ 24,056,731
Median rate 0.935%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.920%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 35,786,774 / 18,000,454 = 1.99
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $72 0,011,000

http://www.publicdebt.treas.gov

tfs-£37

JS-538: Treasury A n n o u n c e s Entry into Force of Protocol A m e n d i n g Bilateral I n c o m e Ta... Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
July 8, 2003
JS-538
Treasury Announces Entry into Force of Protocol Amending Bilateral Income
Tax Treaty with Mexico
The Treasury Department announced today that the Protocol amending the
existing bilateral income tax treaty with Mexico entered into force on July
3rd. The Protocol, which w a s signed in Mexico City on November 26,
2002, is only the third agreement entered into by the United States that
eliminates source-country withholding taxes on certain intercompany
dividends. This elimination of withholding taxes represents an elimination of
potential tax barriers that will serve to further encourage cross-border
investment between the United States and Mexico. The Protocol also
includes provisions that modernize the treaty to take account of
developments in the tax laws and treaty policies of both countries since the
treaty entered into force in 1993.
Under the terms of the Protocol, each country was required to notify the
other w h e n its constitutional and statutory requirements for entry into force
had taken place, and the Protocol w a s to enter into force upon the second
of such notifications. This process w a s completed by delivery of the second
such notification on July 3, 2003.
With the entry into force of the protocol, the new provisions relating to the
withholding tax on dividends will be effective for dividends paid or credited
on or after September 1, 2003. All other provisions of the Protocol will be
effective with respect to taxable periods beginning on or after January 1,
2004.

http://www__treas.sov/Dress/releases/js538.htm

4/26/2005

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
July 08, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

July 10, 2003
August 07, 2003
912795NG2

High Rate: 0.890% Investment Rate 1/: 0.903% Price: 99.931
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 52.08%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type

Tendered

Competitive
Noncompetitive
FIMA (noncompetitive)

$

SUBTOTAL
Federal Reserve
TOTAL

$

36,561, 642
43, 853
0

Accepted
$

16,956, 422
43, 853
0

36,605, 495

17,000, 275

1,825, 572

1,825, 572

38,431, 067

$

18,825, 847

Median rate
0.880%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.870%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 36,605,495 / 17,000,275 = 2.15
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

(fS - S3?

bureau of the Public Debt: Public Debt Announces Activity for Securities in the STRIPS Program For J... Page 1 ol

B u r e a u of *h'

Public
i_.',' 'tea states, ueparrmenr

or r.;c treasury

Public Debt Announces Activity for Securities In the STRIPS Program
1003
:

OR IMMEDIATE RELEASE

uly 7, 2 0 0 3
he Bureau of the Public Debt announced activity for the month of June 2003, of securities within the Separate Trading of Registered
nterest and Principal of Securities program (STRIPS).
In T h o u s a n d s
Principal Outstanding (Eligible Securities)

$2,368,630,428

Held in Unstripped Form

$2,192,334,932

Held in Stripped Form

$176,295,496

Reconstituted in June

$20,579,819

he accompanying table, gives a breakdown of STRIPS activity by individual loan description. The balances in this table are subject to
udit and subsequent revision. These monthly figures are included in Table V of the Monthly Statement of the Public Debt, entitled
Holdings of Treasury Securities in Stripped Form."
he STRIPS table, along with the n e w Monthly Statement of the Public Debt, is available on Public Debt's Internet site at:
/ww.publicdebt.treas.gov. A wide range of information about the public debt and Treasury securities is also available at the site.
Intellectual Property | Privacy & Security Notices | Terms & Conditions | Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated September 27, 2004

-SPo

JS-541: Secretary John W . S n o w Testimony Advocating the R e n e w a l of the Fair Credit R... P a g e 1 of 4

PRESS R O O M

FROM THE OFFICE OF PUBLIC AFFAIRS
July 9, 2003
JS-541
Treasury Secretary John W. Snow
Testimony Advocating the Renewal of the Fair Credit Reporting Act
Before the
Committee on Financial Services
United States House of Representatives
Washington, DC

Thank you, Chairman Oxley, Chairman Bachus, and Ranking M e m b e r
Frank for this opportunity to testify today. Also, thank you for your very
constructive hearings on the Fair Credit Reporting Act (FCRA) and
consumer protections. Since April, Chairman Bachus alone has held 6
hearings and called 75 witnesses before his subcommittee. In addition, I
have been impressed by the hard work reflected in the Bachus-Hooley bill,
about which I will have more to say later in m y testimony. W e appreciate
your efforts on this very important issue.
All consumers have two important interests, the promotion of which is the
central purpose of the F C R A . All consumers have an interest in improved
access to credit and other financial services. And all consumers have an
interest in the accuracy and security of their financial information. The
Administration proposes to remove the sunsets on the uniform standards
and focus these standards and the F C R A even more on meeting these two
key consumer interests.
A hallmark of our country is readily available credit. In fact, it is not too
much to say that ready access to credit on competitive terms is an integral
part of the economic security and well-being of American families. All over
the country, Americans depend on competitive credit markets to realize the
dream of h o m e ownership, to finance their cars, and to pay for college. For
example, more than two-thirds of Americans now o w n their o w n home, and
9 out of 10 h o m e s are purchased with a mortgage. As another example,
consumer credit helps finance the vast majority of the 15-17 million cars
and trucks that consumers purchase annually.
The FCRA, with its uniform national standards for information sharing,
operates to expand the opportunity for consumers to access credit and
financial services - they m a k e your reputation as a borrower portable, so
that you don't have to establish your good n a m e from scratch in every city
you visit, or every store where you shop.
The Council of Economic Advisers estimates that, if states passed laws
that significantly deviated from the national uniform standards of the Fair
Credit Reporting Act, 280,000 h o m e mortgage applications that are n o w
approved each year would be denied - that's $22 billion in n e w mortgages
annually. Access to accurate and reliable financial information is
particularly important for approving loans to first-time h o m e buyers, for
example.
This democratization of credit has especially benefited minority and lower
income families. For example, from 1995 to 2001, the percentage of
http://www.treas.eov/press/releases/js541 .htm 4/26/2005

JS-541: Secretary John W . S n o w Testimony Advocating the R e n e w a l of the Fair Credit R... P a g e 2 of 4
minorities holding mortgages increased significantly - one-sixth of
minorities w h o qualified for mortgages in 2001 would not have qualified in
1995, a higher rate of improvement in h o m e ownership than for families
overall. In addition, the percentage of minority families with credit cards
has risen substantially. From 1995 to 2001, the percentage of African
American families holding credit cards rose from 3 9 . 4 % to 55.8%. More
generally, since, 1970, credit access by U.S. households in the bottom half
of income distribution has experienced the most rapid growth. National
uniform standards help all Americans participate more fully in the miracle of
modern credit markets. W e need to accelerate that process and do
nothing to slow it down.
Perhaps the most serious threat to financial consumers today is identity
theft. Identity thieves are clever, adaptable, and heartless. Indeed, m a n y
identity thieves specifically target the most vulnerable m e m b e r s of society families of the recently deceased, seniors, hospital patients, and m e n and
w o m e n serving our nation overseas. These schemes c o m e in m a n y
forms. Let m e share with you three illustrative cases.

• In M a y of 2002, a N e w Jersey w o m a n received a notice from a
North Carolina police department. The notice said that her
husband had just committed a traffic violation in North Carolina.
The problem? The woman's husband died 8 months earlier in the
World Trade Center on September 11, 2001. Renewing her hope
that her husband w a s alive, this w o m a n contacted the police
department that issued the notice, only to discover that a thief had
stolen her husband's identity.
• A c o m m o n scam involves identity thieves posing as officials of
banks or government agencies. The thieves call the victims and
demand personal information for official purposes such as IRS
audits. Indeed, an identity thief has impersonated one of m y staff.
W e learned about the impersonation only because an alert citizen
called the Treasury Department to verify that the request for
information w a s legitimate.
• Another scam is as audacious as it is heartless. Identity thieves
impersonate hospital employees, walk into hospital rooms with a
clipboard, and request personal information from patients.
Unsuspecting patients can emerge from the hospital only to find
that they have been victims of identity theft.

M a n y Americans have worked hard for years to build and keep good credit
histories. In today's information-driven economy, one of your most
important personal assets is your reputation, your credit history. O n e
recent study estimates that nearly 12 million Americans have already
b e c o m e victims of identity theft. W e shouldn't tolerate the theft of 12
million reputations any more than w e would the burglary of 12 million
homes. According to s o m e estimates, identity theft will claim as m a n y as
one million n e w victims this year.
Further, one of the most distressing aspects of identity theft is how quickly
an identity thief can d a m a g e your credit history and h o w long it can take to
undo the damage. A recent General Accounting Office study found that
victims spent on average 175 hours trying to recover from the crime. In
m a n y cases, recovery can take even longer, and involve thousands of
dollars in legal and other expenses. The costs are so significant that a
market in identity theft insurance is n o w developing.
http://www.treas.gov/press/releases/js541 .htm

4/26/2005

JS-541: Secretary John W . S n o w Testimony Advocating the R e n e w a l of the Fair Credit R... P a g e 3 of 4
Although our national information sharing system can and should be
improved to do more in the fight against identity theft, it is important to
understand that national standards for sharing such information are already
an important tool in the fight against identity theft. W h e n a thief tries to
steal your identity and open an account in your n a m e , he is posing as you,
hiding behind a m a s k that he has constructed out of bits of information
about your identity. Bankers or merchants can stop the would-be thief right
in the act, before the crime is committed, if they have timely access to the
right information. With the right information about your true identity,
financial institutions can ask validating questions and peer behind the
thief's mask. In other words, your banker can stop the identity thief if your
banker is more familiar with you than the thief is. National uniform
standards m a k e timely access to full and accurate information possible,
giving financial institutions the tools to stop m a n y identity theft assaults
before they can succeed.
The Administration has proposed several ways to make the Fair Credit
Reporting Act an even more effective instrument to protect consumer
financial data from fraud and abuse, enhancing the quality and integrity of
that information, while at the s a m e time expanding consumer access to
credit and other financial services.
First of all, in achieving these important goals of the Fair Credit Reporting
Act w e would be wise to engage the consumers themselves. A basic tool
to place in the hands of consumers is expanded access to free annual
credit reports upon request. Consumers should be offered the opportunity
to review their credit reports for accuracy and completeness. Consumers
also should be provided more information about their credit scores, and
h o w they can improve their credit profiles. W e believe that this proposal
will not only help stop identity theft, but that it will lead to improvement in
the overall quality of the information in the credit reporting system. After
all, no one has a stronger interest in ensuring the accuracy of their credit
reports than consumers themselves. A s the overall quality of the
information improves, everyone will benefit - consumers, merchants,
financial institutions, and the economy as a whole.
In addition, we recommend that the uniform standards include a national
security alert system. Under such a system, consumers w h o have been
victimized or are in danger of being victimized can put banks and
merchants on their guard against any further efforts to impersonate the
consumer, thus making it m u c h harder to steal one's identity.
We also propose that the Fair Credit Reporting Act promote best practices
for the sharing of credit information - including the blocking of fraudulent
account information immediately upon notice, before bad information
becomes too widely disseminated and exasperatingly difficult to remove.
Similarly, we propose to codify a policy for credit bureaus to share
information immediately w h e n an identity theft is discovered, the one-callfor-all standard.
In addition, we propose that the bank regulators be put on the watch for
patterns followed by identity thieves, red flags that indicate the likelihood of
fraudulent activity. The regulators would provide notice of these red flags
to the institutions that they supervise and put them on the watch for these
telltale signs. Further, the regulators would verify in their bank
examinations that these warning signs are being heeded, fining those
institutions that ignore them, resulting in customer losses. I regard this
proposal to be a very important part of the package. O n e of the challenges
in fighting identity theft is that identity thieves are adaptable. They are
always looking for w a y s to exploit systems and procedures that w e set up
to thwart them. It is important, therefore, that regulators and financial
institutions be equally adept in catching them. This proposal gives
http://www.treas.gov/press/releases/js541.htm

4/26/2005

JS-541: Secretary John W . S n o w Testimony Advocating the R e n e w a l of the Fair Credit R... P a g e 4 of 4
regulators the flexibility to adapt to new identity theft schemes and to
establish procedures to thwart them and foil the efforts of the would-be
thieves, and it gives financial institutions increased incentives to be on
guard as well.
We also propose that the Fair Credit Reporting Act be amended to direct
the Federal Trade Commission and bank regulators to m a k e it easier for
consumers to say no to unsolicited credit offers. Too often, consumers'
options are hidden from view or are too difficult to understand or execute,
and that should be fixed. Consumers obtain important economic benefits
from pre-screened offers of credit, but their rights should be m a d e more
apparent.
These are a few highlights of the package of proposals we have offered,
that would build upon and amplify the use of the F C R A to promote
consumer access to credit within a context of improved accuracy and
security of personal financial information. Enactment of this package will
m a k e our national information sharing system even more a servant of
consumer interests.
Given the important role that the national standards of the Fair Credit
Reporting Act play in expanding access to credit and maintaining the
accuracy and security of consumers' information, it should c o m e as no
surprise that national information sharing standards benefit our economy
as a whole. It s e e m s so basic that w e take it for granted, but an integral
part of our economy's success is our confidence in financial services such
as bank services, insurance, and investment products. Our credit markets
helped the American economy weather the serious shocks we've
experienced over the last three years - a recession, 9-11, homeland
security, corporate accounting fraud and so on.
And there should be no doubt that the national uniform standards of the
Fair Credit Reporting Act help m a k e our credit market more robust.
According to the Council of Economic Advisors, if the national standards
were to expire, and states adopted new laws currently under consideration,
a minimum of 3.5% of loans currently approved would be denied to
maintain the s a m e level of credit risk. That is, at least $270 billion of the
current total of just under $8 trillion in consumer credit outstanding could
ultimately be in jeopardy.
I congratulate the sponsors of the Bachus-Hooley bill, for I believe that in
terms of goals and approach, as well as in m a n y details, it is akin to what
the Administration has proposed. W e look forward to working with this
Committee and the sponsors of the Bachus-Hooley bill to m o v e a strong
package of reforms forward, to ensure that the Fair Credit Reporting Act
becomes an even more effective tool for meeting the financial interests of
American consumers. Accomplishing this task is vital to the future of our
economy. With improved national standards, w e can m a k e great strides to
protect our citizens against identity theft, while holding open the doors of
credit to m a n y more American families of every income and
background.
Thank you.

http://www.treas.gov/press/releases/js541 .htm

4/26/2005

JS-542: Secretary S n o w Praises Under Secretary Peter Fisher for Leadership and Accomp... Page 1 of 2

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
July 9, 2003
JS-542
Treasury Secretary Snow Praises Under Secretary Peter Fisher
for Leadership and Accomplishments While Serving in Bush Administration
Four N e w Treasury Officials N a m e d Today
Treasury Secretary John W . S n o w today praised the leadership and
accomplishments of Under Secretary for Domestic Finance Peter R. Fisher during
his service to the Bush Administration. Mr. Fisher, w h o was sworn in August 9,
2001, today submitted his resignation to the President, effective October 10, 2003.
The White House today announced that President Bush intends to nominate Susan
C. Schwab as Treasury Deputy Secretary and Kenneth H. M. Leet as Treasury
Under Secretary for Domestic Finance. The Treasury Department also announced
the appointments of two Deputy Assistant Secretaries.
"Peter has shown outstanding leadership within Treasury and the Administration on
a wide variety of issues over the past several years," said Secretary Snow. "His
expertise in financial markets has been invaluable as w e faced challenges related
to the terrorist attacks of Sept. 11 and the management of the nation's debt during
shifting economic times.
"Peter's efforts to continually improve and streamline federal financial policies and
practices has greatly benefited the taxpayer, and his significant contributions to the
government are to be commended. His experience and insight will be missed, and I
wish him the best in his future endeavors."
Mr. Fisher's major accomplishments during his tenure as Under Secretary include
his efforts after September 11, 2001 to reopen U.S. financial markets, stabilize the
airline industry, enact terrorism risk insurance and to promote the investment and
job creation that are the engine of the U.S. economy's growth.
In addition, Mr. Fisher played a key role in developing Administration policy on
deposit insurance reform; disclosures of government-sponsored enterprises; the
Fair Credit Reporting Act and the fight against identity theft; and the accuracy and
transparency of pension plan funding.
Mr. Fisher also focused on the long-term cost of borrowing that led to improvements
in federal debt management ~ resulting in the elimination of the 30-year bond,
developing the market for Treasury Inflation-Indexed Securities, increasing market
transparency, and improving Treasury auction performance.
On July 28th, Charles G. Schott will join the department as Deputy Assistant
Secretary for Trade and Investment in the Office of International Affairs, where he
will be responsible for policy development and analysis on financial services and
investment trade issues. A former Deputy Assistant Secretary of C o m m e r c e for
Communications and Information under President Reagan, Mr. Schott w a s most
recently a Managing Director of Paradigm Partners, LLC, N e w Canaan, CT, where
he had been employed since 1997. H e previously served as Vice President of
Hearst N e w Media & Technology (1993-97) and as a special consultant for
McKinsey & Company, Inc. (1992-93). His government service includes stints at the
U.S. Federal Communications Commission (1989-91, 1984-86) and the Department
of Commerce's National Telecommunications & Information Administration (198689). H e practiced law at Dewey Ballantine (1978-81). Mr. Schott received his
undergraduate degree from Stanford University, his law degree from University of
Michigan Law School, and an M B A from Stanford University Graduate School of
Business.
http://www.treas.ffov/nress/releases/js542.htm

4/76/700 S

JS-542: Secretary S n o w Praises Under Secretary Peter Fisher for Leadership and Accomp... Page 2 of 2
Also on July 28th, Courtney Clelan will join the Treasury as a Deputy Assistant
Secretary of Legislative Affairs, and will be responsible for the department's
congressional relations pertaining to banking and finance issues. Ms. Clelan most
recently served as the Counsel and Manager of Congressional Affairs for the
Consumer Bankers Association, Washington, D C , where she has been employed
since M a y 2001. Previously, she worked as an investment advisor for T R o w e
Price Associates (2000-01), clerked in the law offices of Eugene A. Seidel (199800) and clerked in the North Carolina District Attorney's Office (1999). Ms. Clelan
received her undergraduate degree from the University of Maryland and her law
degree from the University of Baltimore School of Law.

Fisher Resignation Letter
White House Announcements

http://www.treas.gov/press/releases/js542.htm

4/26/7005

JS-543: Peter Fisher's Letter of Resignation to President B u s h

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
July 9, 2003
JS-543
Peter Fisher's Letter of Resignation to President Bush
July 9, 2003
President George W. Bush
The White House
Washington, D.C. 20500
Dear Mr. President:
I have come to the conclusion that it will be best for my family to return to New
Jersey and, therefore, I write to submit m y resignation as Under Secretary of the
Treasury for Domestic Finance.
Thank you for the privilege and the honor of serving the American people in your
Administration. Thank you for your leadership and the example of your
extraordinary sense of purpose and sense of perspective as to w h o m it is that w e
are here to serve.
I am proud to have contributed to some of the particular accomplishments of the
past three years, especially our efforts after September the eleventh to reopen our
financial markets, stabilize the airline industry, enact terrorism risk insurance, and to
promote the investment and job creation that are the engine of our economy's
growth.
I am also proud of the work of the Office of Domestic Finance, and of the Treasury's
extraordinary staff, in our stewardship of the government's financial accounts, in
financing the government's borrowing needs at the lowest cost over time, and in
promoting both the resilience of our financial sector and the efficiency with which
our collective savings are converted into investment.
I look forward to working with Secretary Snow to manage an effective transition for
m y successor however best I can. In anticipation of this, I propose that m y
resignation be effective the tenth of October.
Thank you again for the privilege of serving under your leadership.
Sincerely,

Peter R. Fisher

http://www.treas.gov/press/releases/js543.htm

4/26/2005

JS-544: White House Announcement of Intent to Nominate T w o Individuals

Page 1 of 2

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
July 9, 2003
JS-544
White House Announcement of Intent to Nominate Two Individuals
(Schwab,Leet) to
Serve in the Administration
THE WHITE HOUSE
Office of the Press Secretary
FOR IMMEDIATE RELEASE
July 9, 2003
President George W. Bush today announced his intention to nominate one
individual to serve in his administration:
The President intends to nominate Susan C. Schwab of Maryland, to be Deputy
Secretary of the Treasury. Dr. Schwab is currently Dean of the University of
Maryland School of Public Affairs. Until 1995, she was Director of Corporate
Business Development at Motorola, Inc., in Schaumburg, Illinois. Dr. Schwab w a s
appointed by President George H.W. Bush in 1989 to serve as Assistant Secretary
of C o m m e r c e and Director General of the U.S. & Foreign Commercial Service of
the U.S. Department of Commerce. Before joining the Commerce Department, Dr.
Schwab worked for Senator John C. Danforth of Missouri from 1981 until 1989.
While working for Senator Danforth, Dr. Schwab served as legislative director, chief
economist, and legislative assistant for international trade. Dr. Schwab worked at
the American Embassy of Tokyo as a trade policy officer from 1979 until 1981.
From 1977 until 1979, she served as a trade negotiator at the Office of the U.S.
Trade Representative.
Dr. Schwab received her Bachelor's degree from Williams College and a Master's
degree in Development Policy from Stanford University. She earned her Ph.D. at
George Washington University School of Business and Public Management.

THE WHITE H O U S E

Office of the Press Secretary
FOR IMMEDIATE RELEASE
July 9, 2003
President George W. Bush today announced his intention to nominate one
individual to serve in his administration:
The President intends to nominate Kenneth Leet of Massachusetts, to be Under
Secretary of the Treasury for Domestic Finance. Mr. Leet currently serves as
Managing Director of the Investment Banking Division at the Goldman Sachs
Group, Inc. Prior to becoming Managing Director of the Investment Banking
Division, Mr. Leet served as the firm's Managing Director of the Mergers &
Acquisitions Department. Mr. Leet has also served as the Vice President of the
Leveraged Finance / Principal Investing and as Associate in the Mergers &
Acquisitions Department. Earlier in his career, Mr. Leet worked as a Principal at
Odyssey Partners and as a lending officer at Manufacturers Hanover Trust.

http://www.treas.gov/press/releases/js544.htm

4/26/2005

JS-544: White House Announcement of Intent to Nominate T w o Individuals

Page 2 of 2

Mr. Leet earned his Bachelor's degree from Brown University and his M.B.A from
Harvard Graduate School of Business.
Mr. Leet serves on the Board of Directors of the Dana-Farber Cancer Institute. He
is also founder of the Immunotherapy Research Fund and a trustee of the Rudolph
Rupert Foundation, a small cancer research trust. In addition, Mr. Leet is on the
Board of Directors and a Trustee of The Old Vic, a London-based theatre company.

http://www.treas.gov/press/releases/js544.htm

4/26/700S

•KLS5 ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
July 1,2003
2003-7-1-15-31-15-6018
U.S. International Reserve Position

The Treasury Department today released U.S. reserve assets data for the latest week. A s indicated in this table, U.S. reserve assets
totaled $81,453 million as of the end of that week, compared to $82,350 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)

June 20, 2003

June 27, 2003

82,350

81,453

TOTAL
1. Foreign Currency Reserves ]

Euro

Yen

TOTAL

Euro

Yen

TOTAL

a. Securities

7,724

13,286

21,010

7,585

13,139

20,723
0

0

Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS

12,556

2,668

15,224

12,353

2,638

14,991

b.ii. Banks headquartered in the U.S.

0

0

b.ii. Of which, banks located abroad

0

0

b.iii. Banks headquartered outside the U.S.

0

0

b.iii. Of which, banks located in the U.S.

0

0

23,335

23,084

3. Special Drawing Rights (SDRs)

11,737

11,611

4. Gold Stock3

11,044

11,044

0

0

2. IMF Reserve Position
2

5. Other Reserve Assets

II. Predetermined Short-Term Drains on Foreign Currency Assets
June 20, 2003
Euro
1. Foreign currency loans and securities

Yen

June 27, 2003

TOTAL

Euro

0

2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:

jssi^

Yen

TOTAL
0

2. a. Short positions

0

2. b. Long positions

0

0

3. Other

0

0

0

III. Contingent Short-Term Net Drains on Foreign Currency Assets
June 20, 2003
Euro
1. Contingent liabilities in foreign currency

Yen

June 27, 2003

TOTAL
0

Euro

Yen

TOTAL
0

l.a. Collateral guarantees on debt due within 1
year
Lb. Other contingent liabilities
2. Foreign currency securities with embedded
options

0

0

3. Undrawn, unconditional credit lines

0

0

0

0

3.a. With other central banks
3.b. With banks and otherfinancialinstitutions
Headquartered in the U.S.
3.c. With banks and otherfinancialinstitutions
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Written puts

Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency

Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.

federal financing Dank
'.W-HIM'iTih DC ?'i??n

N

FEDERAL FINANCING BANK
2003 PRESS RELEASE
M a y 2003

Gary Burner, Manager, Federal Financing Bank (FFB) announced the
following activity for the month of May 2003.
FFB holdings of obligations issued, sold or guaranteed by other
Federal agencies totaled $36.4 billion on May 31, 2003, posting an increase
of $574.9 million from the level on April 30, 2003. This net change was the
result of an increase in holdings of government-guaranteed loans of $574.9
million. The FFB made 36 disbursements and received 10 prepayments
during the month of May.
Below are tables presenting FFB May loan activity and FFB holdings
as of May 31, 2003.

FEDERAL FINANCING BANK
May 2003 ACTIVITY

BORROWER

\j

'5-5

Date

Amount of
Advance

Final
Maturity

Interest
Rate

Interest
Rate

GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION

Semi-

San Francisco O B

5/14

$116,242.52

8/1/2005

1.672%

San Francisco Bldg
Lease

5/15

$3,172,613.21

8/1/2005

1.591%

SemiAnnually

$55,131.09

1/2/2032

4.266%

SemiAnnually

Annually

DEPARTMENT OF EDUCATION
Virginia Union University 5/16
RURAL UTILITIES SERVICE
5/01

$1,203,633.00

12/31/2019

3.835%

Quarterly

Blue Grass Energy #674 5/02

$5,000,000.00

9/30/2003

1.114%

Quarterly

San Patricio Elec. #675 5/02

$1,015,000.00

1/2/2035

4.643%

Quarterly

Interstate Tele #661

Thumb Electric #767

5/02

$475,000.00

9/30/2003

1.114%

Quarterly

Victory Electric #782

5/02

$1,000,000.00

12/31/2035

4.663%

Quarterly

Nueces Electric #774

5/05

$462,000.00

12/31/2035

4.542%

Quarterly

East Kentucky Power
#828

5/06

$4,300,000.00

12/31/2024

4.317%

Quarterly

Orange County Elec.
#771

5/06

$750,000.00

9/30/2004

1.365%

Quarterly

Pee Dee Elec. #547

5/06

$550,000.00

6/30/2006

2.027%

Quarterly

South Slope
Cooperative #741

5/06

$2,484,000.00

1/2/2018

3.770%

Quarterly

Rutherford Electric #779 5/05

$3,879,000.00

12/31/2035

4.549%

Quarterly

Habersham Electric
Mem. #200

5/12

$6,900,000.00

9/30/2003

1.230%

Quarterly

S. Illinois Power #202

5/12

$56,684,000.00

1/3/2033

4.452%

Quarterly

Bailey County Elec.
#856

5/13

$615,000.00

9/30/2003

1.117%

Quarterly

Buckeye Power #203

5/15

$26,000,000.00

12/31/2025

3.901%

Quarterly

Whetstone Valley #891

5/16

$500,000.00

12/31/2036

4.356%

Quarterly

Hancock-Wood Elec.
#842

5/19

$1,500,000.00

12/31/2036

4.317%

Quarterly

Wheatland Rural Elec.
#800

5/19

$819,000.00

12/31/2035

4.297%

Quarterly

North Central Elec. #638 5/21

$1,500,000.00

1/2/2035

4.196%

Quarterly

Oglethorpe Power #202

5/21

$282,834,000.00

12/31/2025

3.769%

Quarterly

Oglethorpe Power #202

5/21

$168,684,000.00

12/31/2025

3.769%

Quarterly

S. Illinois Power #818

5/21

$4,053,000.00

1/3/2034

4.173%

Quarterly

S. Illinois Power #819

5/21

$4,770,000.00

12/31/2030

4.088%

Quarterly

Ellerby Telephone #635

5/22

$167,578.00

12/31/2019

3.447%

Quarterly

K E M Electric #537

5/23

$168,000.00

1/3/2034

4.102%

Quarterly

Carroll Elec. #618

5/28

$500,000.00

1/3/2034

4.188%

Quarterly

Central Georgia Elec.
#201

5/28

$3,694,000.00

6/30/2015

3.557%

Quarterly

Central Georgia Elec.
#201

5/28

$3,694,000.00

6/30/2015

3.557%

Quarterly

Mille Lacs Electric #769

5/28

$700,000.00

12/31/2035

4.231%

Quarterly

Runestone Electric
Assoc. #886

5/28

$1,500,000.00

9/30/2003

1.090%

Quarterly

United Elec. Coop. #870 5/28

$3,000,000.00

12/31/2003

1.096%

Quarterly

5/29

$196,000.00

12/31/2030

4.141%

Quarterly

Comanche County Elec.
5/29
#765

$806,000.00

12/31/2035

4.269%

Quarterly

Charles Mix Elec. #630

Return To top

FEDERAL FINANCING BANK HOLDINGS MAY 2003
(in millions of dollars)
May 31, 2003

Program

April 30, 2003

Monthly Net
Change
5/01/03-5/31/03

Fiscal Year Net
Change
10/01/02-5/31/03

AGENCY DEBT:
U.S. Postal Service
Subtotal"
AGENCY ASSETS:
FmHA-RDIF
FmHA-RHIF

$7,273.4

$7,273.4

$0.0

($3,840.6)

$7,273.4

$7,273.4

$0.0

($3,840.6)

$950.0

$950.0

$0.0

$0.0

$2,530.0

$2,530.0

$0.0

($375.0)

$4,270.2

$4,270.2

$0.0

$0.0

$7,750.2

$7,750.2

$0.0

($375.0)

$1,790.1

$1,802.8

($12.7)

($132.4)

$76.2

$76.2

$0.1

$7.6

$3.8

$3.8

($0.1)

($1.3)

DHUD-Public Housing Notes

$1,133.2

$1,133.2

$0.0

($74.1)

General Services Administration+

$2,168.8

$2,169.5

($0.7)

($36.8)

$10.1

$10.1

$0.0

($1.3)

$705.3

$705.3

$0.0

($75.4)

Rural Utilities Service-CBO
Subtotal*

GOVERNMENT-GUARANTEED

LENDING:

DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Community Dev. Block Grant

DOI-Virgin Islands
DON-Ship Lease Financing

Rural Utilities Service

$15,383.4

$14,793.0

$590.4

$85.3

$87.3

($2.0)

$3.2

$3.2

$0.0

Subtotal*

$21,359.3

$20,784.4

$574.9

Grand total*

$36,383.0

$35,808.0

$574.9

SBA-State/Local Development Cos.
DOT-Section 511

*figures may not total due to rounding; +does not include capitalized interest

Return To top

Return to 2003 Press Releases
Return to PRESS RELEASES
Last Updated on 2/10/04

$994.2
($3,221.4)

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - W A S H I N G T O N

DC

FOR IMMEDIATE RELEASE CONTACT: Office of Financing
July 09, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 10-YEAR INFLATION-INDEXED NOTES
Interest Rate: 1 7/8% Issue Date: July 15, 2003
Series:
C-2013
Dated Date:
CUSIP N o :
912828BD1
Maturity Date:
T U N Conversion Factor per $1,000 =
5.104415376 1/

July 15, 2003
July 15, 2013

High Yield: 1.999% Price: 98.881
All noncompetitive and successful competitive bidders were awarded
securities at the high yield.
Tenders at the high yield were
allotted
85.08%.
All tenders at lower yields were accepted in

full.

AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender

Competitive
Noncompetitive
FIMA (noncompetitive)

$

$

10,560,• 130
439, 871
0
11,000, 001 2/
0

0

Reserve

TOTAL

23,572, 952
439, .871
0
24,012, 823

SUBTOTAL
Federal

Accepted

Tendered

Type

$

2 4 , 0 1 2 , 823

$

11,000, 001

Median yield
1.980%:
5 0 % of the amount of accepted competitive tenders
was tendered at or b e l o w that rate.
Low yield
1.950%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 24,012,823 / 11,000,001 = 2.18
1/ This factor is used to calculate the Adjusted Values for any TUN face
amount and will be m a i n t a i n e d to 2-decimals on Book-entry s y s t e m s .
2/ Awards to TREASURY DIRECT = $96,695,000

http://www.publicdebt.treas.gov

fs - &7

JS-548: Treasury and I R S Propose Regulations Affecting Notarization Requirements

P a g e 1 of 1

PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the Microsoft Word content on this page, download the free Microsoft Word
Viewer.
July 9, 2003
JS-548

Treasury and IRS Propose Regulations Affecting Notarization
Requirements for Section 1042 Transactions
Today, the Treasury Department and the IRS issued proposed regulations
affecting notarization requirements for sales to employee stock ownership
plans ( E S O P s ) and reinvestment of proceeds under section 1042.
Section 1042 allows a taxpayer or executor to defer recognition of longterm capital gain on the sale of "qualified securities" to an employee stock
ownership plan ( E S O P ) or eligible worker owned cooperative if the
taxpayer purchases qualified replacement property within the period
beginning 3 months before and ending 12 months after the sale. The
proposed regulations would liberalize a procedural rule by permitting
taxpayers to notarize a statement of purchase for the qualified replacement
property as late as the time the taxpayer's income tax return is filed for the
taxable year of the purchase, instead of the current regulatory rule which
requires that such notarization be done within 30 days of the date of
purchase.
When finalized, these regulations will replace the existing regulations for
taxable years of sellers ending from and after the date of adoption as final
regulations. However, in the meantime, taxpayers can rely upon these
proposed regulations for guidance with respect to all open tax years.

Related Documents:
• The text of the proposed regulations

http://www.treas.gov/press/releases/is548.htm

4/26/2005

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-121122-03]
RIN 1545-BC11
Notarized Statements of Purchase Under Section 1042
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains proposed amendments to the temporary
regulations under section 1042 of the Internal Revenue Code of 1986. The proposed

regulations would affect taxpayers making an election to defer the recognition of gai
under section 1042 on the sale of stock to an employee stock ownership plan. The
proposed regulations provide guidance on the notarization requirements of the
temporary regulations.
DATES: Written and electronic comments and requests for a public hearing must be
received by October 7, 2003.
ADDRESSES: Send submissions to: CC:ITA:RU (REG-121122-03), room 5226, Internal
Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Monday through Friday between the hours of 8
a.m. and 4 p.m. to: CC:PA:RU (REG-121122-03), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers

may submit comments electronically directly to the IRS Internet site at
www.irs.gov/reqs.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, John T.

Ricotta at (202) 622-6060 (not a toll-free number); concerning submissions or hearin
requests, Sonya Cruse, (202) 622-7180 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the requirement of §1.1042-

1T, A-3(b) of the Temporary Income Tax regulations that a statement of purchase for
qualified replacement property be notarized within 30 days of the date of purchase
the property (30-day notarization requirement).
The temporary regulations under section 1042 were published in TD 8073 on
February 4, 1986 (EE-63-84) (51 FR 4312) as part of a package of temporary

regulations addressing effective dates and other issues under the Tax Reform Act of
1984. The text of the temporary regulations also served as a notice of proposed
rulemaking (EE-96-85) (51 FR 4391). A public hearing was held on June 26, 1986,
concerning the proposed regulations.
Explanation of Provisions
Overview
Section 1042(a) provides that a taxpayer or executor may elect in certain cases

not to recognize long-term capital gain on the sale of qualified securities to an e
stock ownership plan (ESOP) (as defined in section 4975(e)(7)) or eligible worker

owned cooperative (as defined in section 1042(c)(2)) if the taxpayer purchases qual

-3replacement property (as defined in section 1042(c)(4)) within the replacement period of
section 1042(c)(3) and the requirements of section 1042(b) and §1.1042-1T of the
Temporary Income Tax Regulations are satisfied.
Section 1042(c)(1) provides that the term qualified securities m e a n s employer
securities (as defined in section 409(1)) which are issued by a domestic C corporation
that has no stock outstanding that is readily tradable on an established securities
market and which were not received by the taxpayer in a distribution from a plan
described in section 401(a) or in a transfer pursuant to an option or other right to
acquire stock to which section 83, 422, or 423 applied.
A sale of qualified securities meets the requirements of section 1042(b) if: (1) the
qualified securities are sold to an E S O P (as defined in section 4975(e)(7)), or an eligible
worker owned cooperative; (2) the plan or cooperative o w n s (after application of section
318(a)(4)), immediately after the sale, at least 30 percent of (a) each class of
outstanding stock of the corporation (other than stock described in section 1504(a)(4))
which issued the securities or (b) the total value of all outstanding stock of the
corporation (other than stock described in section 1504(a)(4)); (3) the taxpayer files with
the Secretary a verified written statement of the employer w h o s e employees are
covered by the E S O P or an authorized officer of the cooperative consenting to the
application of sections 4978 and 4979A (which provide for excise taxes on certain
dispositions or allocations of securities acquired in a sale to which section 1042 applies)
with respect to such employer or cooperative; and (4) the taxpayer's holding period with
respect to the qualified securities is at least three years (determined as of the time of
the sale).

-4The taxpayer must purchase qualified replacement property within the
replacement period, which is defined in section 1042(c)(3) as the period which begins
three months before the date on which the sale of qualified securities occurs and ends
12 months after the date of such sale.
Section 1042(c)(4)(A) defines qualified replacement property as any security
issued by a domestic operating corporation which did not, for the taxable year preceding
the taxable year in which such security w a s purchased, have passive investment
income (as defined in section 1362(d)(3)(C)) in excess of 25 percent of the gross
receipts of such corporation for such preceding taxable year, and is not the corporation
which issued the qualified securities which such security is replacing or a m e m b e r of the
s a m e controlled group of corporations (within the meaning of section 1563(a)(1)) as
such corporation.
Section 1042(c)(4)(B) defines an operating corporation as a corporation more
than 50 percent of the assets of which, at the time the security w a s purchased or before
the close of the replacement period, were used in the active conduct of a trade or
business.
Section 1.1042-1T A-3(a) of the Temporary Income Tax Regulations states that
the election is to be m a d e in a statement of election attached to the taxpayer's income
tax return filed on or before the due date (including extensions of time) for the taxable
year in which the sale occurs.
Section 1.1042-1T A-3(b) states that the statement of election must provide that
the taxpayer elects to treat the sale of securities as a sale of qualified securities under
section 1042(a) and must contain the following information: (1) A description of the

-5qualified securities sold, including the type and number of shares; (2) The date of the
sale of the qualified securities; (3) The adjusted basis of the qualified securities; (4) The
amount realized upon the sale of the qualified securities; (5) The identity of the E S O P or
eligible worker-owned cooperative to which the qualified securities were sold; and (6) If
the sale w a s part of a single interrelated transaction under a prearranged agreement
between taxpayers involving other sales of qualified securities, the n a m e s and taxpayer
identification numbers of the other taxpayers under the agreement and the number of
shares sold by the other taxpayers.
Section 1.1042-1T, A-3(b) further provides that, if the taxpayer has purchased
qualified replacement property at the time of the election, the taxpayer must attach as
part of the statement of election a statement of purchase describing the qualified
replacement property, the date of the purchase, and the cost of the property, and
declaring such property to be qualified replacement property with respect to the sale of
qualified securities.
The statement of purchase must be notarized no later than 30 days after the
purchase. The purpose of the statement of purchase is to identify qualified replacement
property with respect to a sale of qualified securities. The qualified replacement
property will have its cost basis reduced under section 1042(d) to reflect the gain on the
sale of qualified securities that is being deferred by the taxpayer. Upon subsequent
disposition of the qualified replacement property by the taxpayer, the deferred gain will
be recognized by the taxpayer under section 1042(e). Under section 1042(f), the filing
of the statement of purchase of qualified replacement property (or a statement of the
taxpayer's intention not to purchase replacement property) will begin the statutory

-6period for assessment of any deficiency with respect to gain arising from the sale of the
qualified securities. The purpose of the 30-day notarization requirement is to provide a
contemporaneous identification of replacement property.
However, the 30-day notarization requirement leads to frequent mistakes by
taxpayers and their advisors. Taxpayers are often unaware of this requirement and
become aware of it only w h e n they prepare their tax returns for the year of sale to the
E S O P . By this time, the 30-day period is typically past because purchases of
replacement property m a y have been m a d e up to one year before. A number of private
letter rulings have been issued granting relief to taxpayers in these situations as long as
the statements were notarized shortly after the taxpayer b e c a m e aware of the
requirement and it w a s represented that the property listed w a s the only replacement
property purchased for this sale.
A number of commentators on the temporary and proposed regulations criticized
this requirement as without statutory authority, a trap for the unwary, and inconsistent
with the definition of the qualified replacement period in section 1042(c)(3).
Proposed A m e n d m e n t to the Regulations
In order to facilitate taxpayer compliance with the temporary regulations
concerning identification of qualified replacement property through notarization of the
statements of purchase, the proposed a m e n d m e n t to the temporary regulations would
modify §1.1042-1T, A-3(b) to provide that the notarization requirements for the
statement of purchase are satisfied if the taxpayer's statement of purchase is notarized
not later than the time the taxpayer files the income tax return for the taxable year in
which the sale of qualified securities occurred in any case in which any qualified

-7replacement property w a s purchased by such time and during the qualified replacement
period. If qualified replacement property w a s purchased after such filing date and
during the qualified replacement period, the statement of purchase must be notarized
not later than the time the taxpayer's income tax return is filed for the taxable year
following the year for which the election under section 1042(a) w a s made.
Proposed Effective Date
The proposed amendments to the temporary regulations would apply to taxable
years of sellers ending on or after the date of publication of the Treasury decision
adopting these amendments as final regulations in the Federal Register. However,
taxpayers m a y rely upon these proposed regulations for guidance with respect to all
open taxable years pending the issuance of final regulations. If, and to the extent,
future guidance is more restrictive than the guidance in these proposed regulations, the
future guidance will be applied without retroactive effect.
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
assessment is not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations,
and because these regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue Code, these proposed regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

-8C o m m e n t s and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and 8 copies) or electronic
comments that are submitted timely to the IRS. The IRS and Treasury Department
request comments on the clarity of the proposed rules and how they can be m a d e
easier to understand. All comments will be available for public inspection and copying.
A public hearing will be scheduled if requested in writing by any person that timely
submits written comments. If a public hearing is scheduled, notice of the date, time,
and place for the public hearing will be published in the Federal Register.
Drafting Information
The principal author of these regulations is John T. Ricotta of the Office of the
Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).
However, other personnel from The IRS and Treasury participated in their development.
List of Subjects in 26 C F R Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed A m e n d m e n t s to The Regulations
Accordingly, 26 C F R part 1 is 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 * * *

-9Par. 2. In §1.1042-1T, A-3, in the undesignated paragraph following paragraph
(b)(6), the penultimate sentence is removed and three sentences added in its place to
read as follows:
$1.1042-1T Questions and Answers relating to the sales of stock to employee stock
ownership plans or certain cooperatives (temporary).
*****

Q-3. ***

A-3. * * * Such statement of purchase must be notarized not later than the time
the taxpayer files the income tax return for the taxable year in which the sale of qualified
securities occurred in any case in which any qualified replacement property w a s
purchased by such time and during the qualified replacement period. If qualified
replacement property is purchased after such filing date but during the qualified
replacement period, the statement of purchase must be notarized not later than the time
the taxpayer's income tax return is filed for the taxable year following the year for which
the election under section 1042(a) w a s made. The previous two sentences apply to
taxable years of sellers ending on or after the date final regulations are published in the
Federal Register. * * *
*****

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.

JS-549: Secretary S n o w to Travel to United Kingdom and Germany

Page 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
July 10, 2003
JS-549
Secretary Snow to Travel to United Kingdom and Germany
Treasury Secretary John Snow will travel to London, England and Frankfurt,
Germany, July 15 through July 18, 2003. Secretary Snow will discuss the state of
the global economy, with particular attention to growth prospects in Europe. In
addition to meetings with the official economic teams of the United Kingdom and
Germany, he will meet separately with economists, and leaders in industry, banking
and finance. Secretary Snow will emphasize the importance of flexibility in
economic policy needed for increased productivity, economic growth and job
creation.

http://www.treas.gov/press/releases/is549.htm

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1)1 I It I' O F 1*1 BI.K

\t'K\IKS • 1500 .'IX^VI.. \ M \ \> T.M I . V H . • X\ \.M I IN (
_ T O N . I >.C '.• 2«___M1 m i __!• _ fi22-20hll

EMBARGOED UNTIL 11:00 A.M.
July 10, 2003

CONTACT:

Office of Financing
202/691-3550

TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $34,000
million to refund an estimated $29,717 million of publicly held 13-week and 26-week
Treasury bills maturing July 17, 2003, and to raise new cash of approximately $4,283
million. Also maturing is an estimated $13,000 million of publicly held 4-week
Treasury bills, the disposition of which will be announced July 14, 2003.
The Federal Reserve System holds $13,683 million of the Treasury bills maturing
on July 17, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held July 15, 2003. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $1,003 million into the 13-week bill and $805 million into the 26week bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo

Attachment

JS Sfr

HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED JULY 17, 2 0 03
July 10, 2003
Offering Amount
$16,000
Maximum Award (35% of Offering Amount)
$ 5,600
Maximum Recognized Bid at a Single Rate .... $ 5,600
NLP Reporting Threshold
$ 5,600
NLP Exclusion Amount
$ 5,200
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples

million
million
million
million
million

91-day bill
912795 NS 6
July 14, 2003
July 17, 2003
October 16, 2003
April 17, 2003
$20,338 million
$1,000

$18,000
$ 6,300
$ 6,300
$ 6,300
None

million
million
million
million

182-day bill
912795 PF 2
July 14, 2003
July 17, 2003
January 15, 2 004
July 17, 2003
$1,000

The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender. TreasuryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.

F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the Microsoft Word content on this page, download the free Microsoft Word
Viewer.
July 10, 2003
JS-551
Treasury and IRS Finalize Regulations for Deferred Compensations
plans for Employees
of State and Local Government and Tax-Exempt Employers
Today, the Treasury Department and the IRS issued final regulations governing
deferred compensation plans under section 457 These include 401 k-type plans
established by state or local government employers permitting their employees to
save on a pre-tax basis, as well as deferred compensation plans of tax-exempt
employers. These eligible governmental plans hold about 100 billion dollars in
retirement savings, which is about 5 percent of the more than 2 trillion dollars in the
nation's 401 k-type savings. The regulations were developed taking into account
the recommendations of the state and local governments that sponsor these plans.
The existing regulations for 457 plans have not been changed since 1982. Since
then, there have been a large number of important statutory changes. The new
regulations replace the 1982 regulations, incorporate the guidance the IRS has
issued since 1982, and address a wide variety of open issues. The regulations are
generally effective for years that begin after 2001.
Related Documents:
• TD9075 Final RegsV

Vittrr/Vwww treas.gov/nress/releases/is551 .htm

4/26/2005

[4830-01-p]
DEPARTMENT OF TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9075]
RIN 1545-AX52
Compensation Deferred Under Eligible Deferred Compensation Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations that provide guidance on deferred

compensation plans of state and local governments and tax-exempt entities. The regulations
reflect the changes made to section 457 by the Tax Reform Act of 1986, the Small Business

Protection Act of 1996, the Taxpayer Relief Act of 1997, the Economic Growth and Tax Relie
Reconciliation Act of 2001, the Job Creation and Worker Assistance Act of 2002, and other

legislation. The regulations also make various technical changes and clarifications to the

existing final regulations on many discrete issues. These regulations provide the public w
guidance necessary to comply with the law and will affect plan sponsors, administrators,
participants, and beneficiaries.
DATES: Effective Date: July 11, 2003.
Applicability Date: These regulations apply to taxable years beginning after December

31, 2001. See "Effective date of the regulations" for additional information concerning th
applicability of these regulations.

1

F O R F U R T H E R INFORMATION C O N T A C T : Cheryl Press, (202) 622-6060 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act

The collection of information contained in these final regulations has been rev

approved by the Office of Management and Budget in accordance with the Paperwor

Act (44 U.S.C. 3507) under control number 1545-1580. Responses to this collecti
information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond t

collection of information unless the collection of information displays a valid
assigned by the Office of Management and Budget.
The estimated burden per respondent varies from .033 hour to 2 hours per trust

established depending upon individual respondents' circumstances, with an estim

one hour for each trust established, and from 20 hours to 50 hours per applicat

a custodian with an estimated average of 35 hours for each application submitte
custodian.

Comments concerning the accuracy of this burden estimate and suggestions for re

this burden should be sent to the Internal Revenue Service, Attn: IRS Reports C

Officer, W:CAR:MP:T:T:SP Washington, DC 20224, and to the Office of Management a

Budget, Attn: Desk Officer for the Department of the Treasury, Office of Inform
Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be retained as

2

their contents m a y become material in the administration of any internal revenue law. Generally,
tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.
Background
Section 131 of the Revenue Act of 1978 (92 Stat. 2779) added section 457 to the Internal
Revenue Code of 1954. On September 27, 1982, final regulations (TD 7836, 1982-2 C.B. 91)
under section 457 (the 1982 regulations) were published in the Federal Register (47 FR 42335).
The 1982 regulations provided guidance for complying with the changes to the applicable tax
law made by the Revenue Act of 1978 relating to deferred compensation plans maintained by
state and local governments and rural electric cooperatives.
Section 1107 of the Tax Reform Act of 1986 (100 Stat. 2494) extended section 457 to
tax-exempt organizations. Section 6064 of the Technical and Miscellaneous Act of 1988 (102
Stat. 3700) codified certain exceptions for certain plans. Notice 88-68, 1988-1 C.B. 556,
addressed the treatment of nonelective deferred compensation of nonemployees, and provided an
exception under which section 457 does not to apply to certain church plans.
Section 1404 of the Small Business Job Protection Act of 1996 (110 Stat. 1755) added
section 457(g) which requires that section 457(b) plans maintained by state and local
government employers hold all plan assets and income in trust, or in custodial accounts or

annuity contracts (described in section 401(f) of the Internal Revenue Code), for the exclusive
benefit of participants and beneficiaries.
Section 1071 of the Taxpayer Relief Act of 1997 (111 Stat. 788) permits certain accrued
benefits to be cashed out.
Sections 615, 631, 632, 634, 635, 641, 647, and 649 of the Economic Growth and Tax

3

Relief Reconciliation Act of 2001 ( E G T R R A ) (115 Stat. 38) included increases in elective
deferral limits, repeal of the rules coordinating the section 457 plan limit with contributions

certain other types of plans, catch-up contributions for individuals age 50 or over, extension o
qualified domestic relation order rules to section 457 plans, rollovers among various qualified
plans, section 403(b) contracts and individual retirement arrangements (IRAs), and transfers to
purchase service credits under governmental pension plans.
Section 41 l(o)(8) and (p)(5) of the Job Creation and Worker Assistance Act of 2002 (116

Stat. 21) clarified certain provisions in EGTRRA concerning section 457 plans, including the use
of certain compensation reduction elections to be taken into account in determining includible
compensation.
On May 8, 2002, a notice of proposed rulemaking (REG-105 885-99) was published in
the Federal Register (67 FR 30826) to issue new regulations under section 457, including
amending the 1982 regulations to conform them to the legislative changes that had been made to
section 457 since 1982.
Following publication of the proposed regulations, comments were received and a public
hearing was held on August 28, 2002. After consideration of the comments received, the
proposed regulations are adopted by this Treasury decision, subject to a number of changes that
are generally summarized below.
Summary of Comments Received and Changes Made
1. Excess Deferrals
The proposed regulations addressed the income tax treatment of excess deferrals and the
effect of excess deferrals on plan eligibility under section 457(b). The proposed regulations

4

provided that an eligible governmental plan m a y self-correct and distribute excess deferrals and

continue to satisfy the eligibility requirements of section 457(b) (including the distribution rule
and the funding rules) by reason of a distribution of excess deferrals. However, the proposed
regulations provided that if an excess deferral arose under an eligible plan of a tax-exempt
employer, the plan was no longer an eligible plan.
Commentators objected to the less favorable treatment for eligible plans of tax-exempt
employers.
After consideration of the comments received, the regulations extend self-correction for
excess deferrals to eligible plans of tax-exempt employers. If there is an excess deferral under
such plan, the plan may distribute to a participant any excess deferrals (and any income allocable
to such amount) not later than the first April 15 following the close of the taxable year of the
excess deferrals, comparable to the rules for qualified plans under section 402(g). In such a case,
the plan will continue to be treated as an eligible plan. However, in accordance with section

457(c), any excess deferral is included in the gross income of a participant for the taxable year of

the excess deferral. If an excess deferral is not corrected by distribution, the plan is an ineligib
plan under which benefits are taxable in accordance with ineligible plan rules.
The income tax treatment and payroll tax reporting of distributions of excess deferrals
from eligible section 457(b) governmental plans are similar to the treatment and reporting of
distribution of excess deferrals from tax-qualified plans. Such amounts should be reported on
Form 1099 and taxed in the year of distribution to the extent of distributed earnings on the
excess deferrals. For eligible section 457(b) tax-exempt plans, the excess deferrals are subject to

income tax in the year of distribution to the extent of distributed earnings on the excess deferrals

5

and such earnings should be reported on F o r m W - 2 for the year of distribution. See also Notice
2003-20, 2003-19 I.R.B. 894, for information regarding the withholding and reporting
requirements applicable to eligible plans generally.
2. Aggregation Rules in the Proposed Regulations
The proposed regulations included several rules that aggregate multiple plans for
purposes of meeting the eligibility requirements of section 457(b). These regulations retain all
of these rules. For example, the regulations provide that in any case in which multiple plans are
used to avoid or evade the eligibility requirements under the regulations, the Commissioner may

apply the eligibility requirements as if the plans were a single plan. Also, an eligible employer i
required to have no more than one normal retirement age for each participant under all of the
eligible plans it sponsors. In addition, all deferrals under all eligible plans under which an
individual participates by virtue of his or her relationship with a single employer are treated as
though deferred under a single plan for purposes of determining excess deferrals. Finally, annual
deferrals under all eligible plans are combined for purposes of determining the maximum
deferral limits.
Few comments were received with respect to the aggregation rules under the proposed
regulations. However, one commentator requested that, where it is determined that multiple
eligible plans maintained by a single employer, which have been aggregated pursuant to the
proposed regulations, contain excess deferrals, the employer have the ability to disaggregate
those plans solely for the purpose of either (1) distributing the excess deferrals under the selfcorrecting mechanism or (2) limiting the characterization of such plans as "ineligible" to the

one(s) that actually contain the excess deferrals. Taking into account the ability for all eligible

6

plans to self-correct by distribution, these regulations retain without material revision the
aggregation rules that were in the proposed regulations.
3. Deferral of Sick, Vacation, and Back Pay
The proposed regulations would have allowed an eligible plan to permit participants to
elect to defer compensation, including accumulated sick and vacation pay and back pay, only if
an agreement providing for the deferral is entered into before the beginning of the month in
which the amounts would otherwise be paid or made available and the participant is an employee
in that month. Comments requested that terminating participants be allowed to elect deferral for
accumulated sick and vacation pay and back pay even if the participant is not employed at the
time of the deferral.
The final regulations retain the rule under which the deferral election must be made
during employment and before the beginning of the month when the compensation would have
been payable. However, the regulations include a special rule that allows an election for sick

pay, vacation pay, or back pay that is not yet payable (subject of course to the maximum deferral
limitations of section 457 in the year of deferral). Under the special rule, an employee who is
retiring or otherwise having a severance from employment during a month may nevertheless
elect to defer, for example, his or her unused vacation pay after the beginning of the month,
provided that the vacation pay would otherwise have been payable before the employee has a
severance from employment and the election is made before the date on which the vacation pay
would otherwise have been payable.
4. Unforeseeable Emergency Distributions
The proposed regulations added examples that would illustrate when an unforeseeable

7

emergency occurred. In particular, one example provided that the need to pay for the funeral
expenses of a family member may constitute an unforeseeable emergency. Several
commentators requested clarification in the final regulations of the definition of family member.
The regulations have been modified to define a family member as a spouse or dependent as
defined in section 152(a).
5. Plan Terminations, Plan-to-Plan Transfers, and Rollovers
The regulations include certain rules regarding plan terminations, plan-to-plan transfers,
and rollovers. These topics have been affected by the statutory changes that impose a trust
requirement on eligible governmental plans. The direct rollovers that were permitted by
EGTRRA beginning in 2002 for eligible governmental plans provide participants affected by
these types of events the ability to retain their retirement savings in a funded, tax-deferred
savings vehicle by rollover to an IRA, qualified plan, or section 403(b) contract. The regulations
provide a outline for the different plan termination and plan-to-plan transfer alternatives
available to sponsors of eligible governmental plans in these situations.
a. Plan terminations
The regulations allow a plan to have provisions permitting plan termination whereupon
amounts can be distributed without violating the distribution requirements of section 457. Under

the regulations, an eligible plan is terminated only if all amounts deferred under the plan are pai

to participants as soon as administratively practicable. If the amounts deferred under the plan are
not distributed, the plan is treated as a frozen plan and must continue to comply with all of the
applicable statutory requirements necessary for plan eligibility.

b. Plan-to-plan transfers among eligible governmental plans and purchase of permissive service
8

credit by plan-to-plan transfer
The proposed regulations would have allowed plan-to-plan transfers between eligible
governmental plans under new circumstances, as well as the purchase of permissive service
credits by transfer from an eligible governmental plan to a governmental defined benefit plan,
but only if the transfers were made by plans within the same State. Commentators objected to
the requirement under the new transfer rules that the transfers be to plans within the same State.
Upon consideration of the comments received, the regulations allow transfers among

eligible governmental plans in three situations. In each case, the transferor plan must provide for
transfers, the receiving plan must provide for the receipt of transfers, and the participant or
beneficiary whose amounts deferred are being transferred must be entitled to an amount deferred
immediately after the transfer that is at least equal to the amount deferred with respect to that
participant or beneficiary immediately before the transfer. Transfers are permitted among
eligible governmental plans in the following three cases:
A person-by-person transfer is permitted for any beneficiary and for any
participant who has had a severance from employment with the transferring
employer and is performing services for the entity maintaining the receiving plan
(whether or not the other plan is within the same State).
No severance from employment is required if the entire plan's assets for all
participants and beneficiaries are transferred to another eligible governmental
plan within the same State.
No severance from employment is required for a transfer from one eligible
governmental plan of an employer to another eligible governmental plan of the

9

same employer.
The final regulations also allow a plan-to-plan transfer from an eligible governmental
plan to a governmental defined benefit plan for permissive service credit, without regard to
whether the defined benefit plan is maintained by a governmental entity that is in the same State.
In addition, language that was in an example which implied that section 415(n) (which
addresses the application of maximum benefit limitations with respect to certain contributions)
might apply to such a transfer has been eliminated because Treasury and the IRS have concluded
that section 415(n) does not apply to such a transfer in any case in which the actuarial value of
the benefit increase that results from the transfer does not exceed the amount transferred.
c. Plan-to-plan transfers among eligible plans of tax-exempt entities
The regulations retain the rule from the 1982 regulations allowing a plan-to-plan transfer
after a participant has had a severance from employment.
d. Rollovers
The proposed regulations specified the treatment of amounts rolled into or out of an
eligible governmental plan and stated that amounts rolled into the plan are treated as amounts
deferred under the plan for purposes of the regulations. Some commentators requested that
consideration be given to allowing eligible governmental plans to have the same flexibility that
they claimed was permitted for qualified plans with respect to the timing of distributions of
rolled-in assets. Specifically, these commentators requested the ability for an eligible
governmental plan to allow a participant to receive a distribution of rolled-in assets even though
the participant may not yet be eligible for a distribution of other assets held under the plan.
Commentators pointed out that, since section 402(c)(10) allows an eligible governmental plan to

10

accept a rollover contribution only if the rolled-in assets from other plan types are separately
accounted for (in order to apply the section 72(t) early withdrawal income tax for distributions
from these assets), this ability should not cause administrative problems for plan sponsors.
Commentators also asserted that the flexibility to design an eligible governmental plan to permit
such distributions would be beneficial to its participants.
These regulations do not permit an eligible governmental plan to distribute rolled-in
assets to a participant who is not yet eligible for a distribution until future guidance of general
applicability is published that addresses this issue. Treasury and the IRS intend to issue, in the
near future, guidance of general applicability resolving this issue in coordination with the
applicable rules for qualified plans and section 403(b) contracts.
Commentators also requested clarification on the order of accounts for partial
distributions to participants who have rolled-in assets that are subject to the early withdrawal
income tax. They requested that consideration be given in final regulations to clarifying that the
participant may be treated as receiving a partial distribution first from other plan assets to
minimize the early withdrawal income tax that would otherwise apply. These regulations clarify
that, if a rollover is received by an eligible governmental plan from an IRA, qualified plan, or
section 403(b) contract, then distributions from the eligible governmental plan are subject to the
early withdrawal income tax in accordance with the plan's method of accounting, i.e., for
purposes of applying the section 72(t) early withdrawal income tax, a distribution is treated as
made from an eligible governmental plan's separate account for rollovers from an IRA, qualified
plan, or section 403(b) contract only if the plan accounts for the distribution as a distribution
from that account. Thus, for example, an eligible governmental plan may provide that any

11

unforeseeable emergency withdrawal is m a d e from other accounts to the extent possible, in
which event the early withdrawal tax will not apply assuming that the plan only debits such other
accounts to reflect the distribution.
The proposed regulations had requested comments on the issue of separate accounting for

rolled-in amounts and asked if there are any special characteristics that would be lost if multiple
types of separate accounts were not maintained. Commentators asked for the regulations to
permit maintenance of a single rollover account for all amounts that are rolled into the eligible
governmental plan. These regulations require separate accounting only to the extent mandated
by section 402(c)(10), i.e., only for rollovers from IRAs, qualified plans and section 403(b)
contracts. Section 72(t)(9) provides that the early withdrawal income tax applies to distributions
from rollovers attributable to IRAs, qualified plans, and section 403(b) contracts. Thus, if an
eligible governmental plan accepts a rollover from another eligible governmental plan of an
amount that was originally deferred under an eligible governmental plan and commingles that
rollover in the same separate account that includes a rollover amount from an IRA, qualified
plan, or section 403(b) contract, then distributions from that account will be subject to the early
withdrawal income tax. Accordingly, in order to avoid this result, eligible governmental plans
may choose to establish three separate accounts for a participant even though these regulations
only require that a single separate rollover account be maintained for all amounts that are rolled
into an eligible governmental plan: first, an account for all amounts deferred under that plan;
second, an account for any rollover from another eligible governmental plan (disregarding any
amounts that originated from an IRA, qualified plan, or section 403(b) contract); and third, an
account for any rollover amount from an IRA, qualified plan, or section 403(b) contract

12

(including any amounts rolled over from another eligible governmental plan that originated from
an IRA, qualified plan, or section 403(b) contract). These regulations include an example
illustrating that the early withdrawal income tax would not apply to a partial distribution from
plan with such accounts assuming that the plan debits either of the first two such other accounts
to reflect the distribution.
6. Ineligible Plans
The proposed regulations included guidance regarding ineligible plans under section
457(f). Section 457(f) generally provides that, in the case of an agreement or arrangement for
the deferral of compensation, the deferred compensation is included in gross income when
deferred or, if later, when the rights to payment of the deferred compensation cease to be subject
to a substantial risk of forfeiture. Section 457(f) was in section 457 when it was added to the
Code in 1978 for governmental employees, and extended to employees of tax-exempt
organizations (other than churches or certain church-controlled organizations) in 1986, because
unfunded amounts held by a tax-exempt entity compound tax free like an eligible plan, a
qualified plan, or a section 403(b) contract. Section 457(f) was viewed as essential in order to
provide an incentive for employers that are not subject to income taxes to adopt an eligible plan,
a qualified plan, or a section 403(b) contract.1
Section 457(f) does not apply to an eligible plan, a qualified plan, a section 403(b)

contract, a section 403(c) contract, a transfer of property described in section 83, a trust to wh
section 402(b) applies, or a qualified governmental excess benefit arrangement described in

1 See generally the Report to the Congress on the Tax Treatment of Deferred
Compensation under Section 457, Department of the Treasury, January 1992 (available
from the Office of Tax Policy, R o o m 5315, Treasury Department, 1500 Pennsylvania

13

section 415(m). The proposed regulations stated that section 457(f) applies if the date on which
there is no substantial risk of forfeiture with respect to the compensation deferred precedes the
date on which there is a transfer of property to which section 83 applies. The proposed
regulations included several examples, including an example illustrating that section 457(f) does
not fail to apply merely because benefits are subsequently paid by a transfer of property.
Comments were requested on the coordination of sections 457(f) and 83 under the proposed
regulations.
In response, a number of commentators objected to the proposed coordination of sections
457(f) and 83, including arguing that the proposed regulation would place tax-exempt
organizations at a competitive disadvantage when it comes to attracting and retaining executive
talent because it would effectively eliminate the use of discounted mutual fund options as a tax
effective component of total compensation. Some commentators also asserted that the proposed
regulations were ambiguous as to their applicability to steeply discounted mutual fund options,
and recommended that, if the provision is not removed, at a minimum future guidance should be
more specific.
The final regulations retain the interpretation of the coordination of sections 457(f) and
83 that was in the proposed regulations, and also clarify the application of the rule by adding an
example involving an option grant. The regulations also include a clarification that, when
benefits are paid or made available under an ineligible plan, the amount included in gross income
is equal to the amount paid or made available, but only to the extent that the amount exceeds the

Avenue NW, Washington DC 20220).

14

amount the participant included in gross income when he or she obtained a vested right to the
benefit.
7. Severance Pay and Other Exceptions
In 2000, the IRS issued Announcement 2000-1 (2000-1 C.B. 294), which provided
interim guidance on certain broad-based, nonelective plans of a state or local government that
were in existence before 1999. Comments were requested on arrangements, such as those
maintained by certain state or local governmental educational institutions, under which
supplemental compensation is payable as an incentive to terminate employment, or as an
incentive to retain retirement-eligible employees, to ensure an appropriate workforce during
periods in which a temporary surplus or deficit in workforce is anticipated. Treasury and the
IRS continue to be interested in receiving comments on this issue, which should be sent to the
following address: Internal Revenue Service, Attn: CC:DOM:CORP:R (Section 457 Plans),
Room 5201, P. O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Written comments
may be hand delivered Monday through Friday between 8 a.m. and 4 p.m. to: Internal Revenue
Service, Courier's Desk, Attn: CC:PA:RU (Section 457 Plans), 1111 Constitution Avenue, NW.,
Washington, DC 20224. Alternatively, written comments may be submitted electronically via
the Internet by selecting the "Tax Regs" option on the IRS Home Page, or by submitting them

directly to the IRS Internet site at: http://www.irs.gov/tax_regs/reglist.html. Comments should
be received by October 9, 2003.
8. Effective Date of the Regulations
The proposed regulations included a general effective date under which the regulations
would have applied to taxable years beginning after December 31, 2001. This is the general

15

effective date for the changes m a d e in section 457 by E G T R R A . Commentators did not express
concern about this effective date and some commentators also stated that eligible governmental
plans have adopted plan amendments to address the changes that have been allowed by
EGTRRA, so that it would be appropriate to have the final regulations effective date coincide
with the effective date for EGTRRA.
These regulations are generally applicable to taxable years beginning after December 31,

2001, subject to certain specific transition rules. Under one of these transition rules, for taxab
years beginning after December 31, 2001, and before January 1, 2004, a plan will not fail to be
an eligible plan if it is operated in accordance with a reasonable, good faith interpretation of
section 457(b). Whether a plan is operated in accordance with a reasonable, good faith
interpretation of section 457(b) will generally be determined based on all of the relevant facts
and circumstances, including the extent to which the employer has resolved unclear issues in its
favor. The regulations state that a plan will be deemed to be operated in accordance with a
reasonable, good faith interpretation of section 457(b) if it is operated in accordance with the
terms of these regulations. The IRS will also deem a plan to be operated in accordance with a
reasonable, good faith interpretation of section 457(b) if it is operated in accordance with the
terms of the 1982 regulations as in effect for taxable years beginning before January 1, 2002 (to
the extent those 1982 regulations are consistent with subsequent changes in law, including
EGTRRA) or in accordance with the terms of the 2001 proposed regulations. However, a plan
will be deemed not to be operated in accordance with a reasonable, good faith interpretation of
section 457(b) if it is operated in a manner that is inconsistent with the terms of the 1982
regulations as in effect for taxable years beginning before January 1, 2002 (to the extent those

16

1982 regulations are consistent with subsequent changes in law, including E G T R R A ) except to
the extent permitted under either these final regulations or the 2001 proposed regulations.
Further, there is a special delayed effective date for the rule under which an eligible
governmental plan cannot distribute rollover account benefits to a participant who is not yet

eligible for a distribution. Thus, this rule is not applicable until years beginning after December
31, 2003, since this issue is expected to be resolved before that date.
The regulations also retain the rule in the proposed regulations under which the
regulations do not apply with respect to an option that lacked a readily ascertainable fair market
value (within the meaning of section 83(e)(3)) at grant that was granted on or before May 8,
2002. Thus, the status of such an option under section 457(f) would be determined without
regard to these regulations.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as
defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has
also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter

5) does not apply to these regulations. It is hereby certified that the collection of information i
these regulations will not have a significant economic impact on a substantial number of small
entities. The collection of information in the regulations is in section 1.457-8(a)(3)(ii)(B) and
consists of the requirement that a custodian of a custodial account may be a person other than a
bank only if the person demonstrates to the satisfaction of the Commissioner that the manner in
which the person will administer the custodial account will be consistent with the requirement of
section 457(g)(1) and (3) of the Code. This certification is based on the fact that the cost of

17

submitting this information is small, even for small entities. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
List of Subjects
26 CFR Parti
Income taxes; Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is 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. Sections 1.457-1, 1.457-2, 1.457-3 and 1.457-4 are revised to read as follows:
§1.457-1 General overviews of section 457.
Section 457 provides rules for nonqualified deferred compensation plans established by
eligible employers as defined under §1.457-2(d). Eligible employers can establish either
deferred compensation plans that are eligible plans and that meet the requirements of section
457(b) and §§1.457-3 through 1.457-10, or deferred compensation plans or arrangements that do

not meet the requirements of section 457(b) and §§1.457-3 through 1.457-10 and that are subject

18

to tax treatment under section 457(f) and §1.457-11.
§1.457-2 Definitions.
This section sets forth the definitions that are used under §§1.457-1 through 1.457-11.
(a) Amount(s) deferred. Amount(s) deferred means the total annual deferrals under an
eligible plan in the current and prior years, adjusted for gain or loss. Except as provided at
§§1.457-4(c)(l)(iii) and 1.457-6(a), amount(s) deferred includes any rollover amount held by an
eligible plan as provided under §1.457-10(e).
(b) Annual deferral(s)—(1) Annual deferral(s) means, with respect to a taxable year, the
amount of compensation deferred under an eligible plan, whether by salary reduction or by
nonelective employer contribution. The amount of compensation deferred under an eligible plan
is taken into account as an annual deferral in the taxable year of the participant in which
deferred, or, if later, the year in which the amount of compensation deferred is no longer subject
to a substantial risk of forfeiture.
(2) If the amount of compensation deferred under the plan during a taxable year is not
subject to a substantial risk of forfeiture, the amount taken into account as an annual deferral is
not adjusted to reflect gain or loss allocable to the compensation deferred. If, however, the
amount of compensation deferred under the plan during the taxable year is subject to a
substantial risk of forfeiture, the amount of compensation deferred that is taken into account as
an annual deferral in the taxable year in which the substantial risk of forfeiture lapses must be
adjusted to reflect gain or loss allocable to the compensation deferred until the substantial risk
forfeiture lapses.
(3) If the eligible plan is a defined benefit plan within the meaning of section 414(j), the

19

annual deferral for a taxable year is the present value of the increase during the taxable year of

the participant's accrued benefit that is not subject to a substantial risk of forfeiture (disregar
any such increase attributable to prior annual deferrals). For this purpose, present value must be
determined using actuarial assumptions and methods that are reasonable (both individually and
in the aggregate), as determined by the Commissioner.
(4) For purposes solely of applying § 1.457-4 to determine the maximum amount of the
annual deferral for a participant for a taxable year under an eligible plan, the maximum amount
is reduced by the amount of any deferral for the participant under a plan described at paragraph

(k)(4)(i) of this section (relating to certain plans in existence before January 1, 1987) as if tha
deferral were an annual deferral under another eligible plan of the employer.
(c) Beneficiary. Beneficiary means a person who is entitled to benefits in respect of a
participant following the participant's death or an alternate payee as described in §1.457-10(c).
(d) Catch-up. Catch-up amount or catch-up limitation for a participant for a taxable year
means the annual deferral permitted under section 414(v) (as described in §1.457-4(c)(2)) or
section 457(b)(3) (as described in §1.457-4(c)(3)) to the extent the amount of the annual deferral
for the participant for the taxable year is permitted to exceed the plan ceiling applicable under
section 457(b)(2) (as described in §1.457-4(c)(l)).
(e) Eligible employer. Eligible employer means an entity that is a State that establishes a
plan or a tax-exempt entity that establishes a plan. The performance of services as an
independent contractor for a State or local government or a tax-exempt entity is treated as the
performance of services for an eligible employer. The term eligible employer does not include a
church as defined in section 3121(w)(3)(A), a qualified church-controlled organization as

20

defined in section 3121 (w)(3)(B), or the Federal government or any agency or instrumentality
thereof. Thus, for example, a nursing home which is associated with a church, but which is not
itself a church (as defined in section 3121(w)(3)(A)) or a qualified church-controlled
organization as defined in section 3121(w)(3)(B)), would be an eligible employer if it is a taxexempt entity as defined in paragraph (m) of this section.
(f) Eligible plan. An eligible plan is a plan that meets the requirements of §§ 1.457-3
through 1.457-10 that is established and maintained by an eligible employer. An eligible
governmental plan is an eligible plan that is established and maintained by an eligible employer
as defined in paragraph (1) of this section. An arrangement does not fail to constitute a single
eligible governmental plan merely because the arrangement is funded through more than one

trustee, custodian, or insurance carrier. An eligible plan of a tax-exempt entity is an eligible pl
that is established and maintained by an eligible employer as defined in paragraph (m) of this
section.
(g) Includible compensation. Includible compensation of a participant means, with
respect to a taxable year, the participant's compensation, as defined in section 415(c)(3), for
services performed for the eligible employer. The amount of includible compensation is
determined without regard to any community property laws.
(h) Ineligible plan. Ineligible plan means a plan established and maintained by an
eligible employer that is not maintained in accordance with §§1.457-3 through 1.457-10. A plan
that is not established by an eligible employer as defined in paragraph (e) of this section is
neither an eligible nor an ineligible plan.
(i) Nonelective employer contribution. A nonelective employer contribution is a

21

contribution m a d e by an eligible employer for the participant with respect to which the
participant does not have the choice to receive the contribution in cash or property. Solely for
purposes of section 457 and §§1.457-2 through 1.457-11, the term nonelective employer
contribution includes employer contributions that would be described in section 401(m) if they
were contributions to a qualified plan.
(j) Participant. Participant in an eligible plan means an individual who is currently
deferring compensation, or who has previously deferred compensation under the plan by salary
reduction or by nonelective employer contribution and who has not received a distribution of his
or her entire benefit under the eligible plan. Only individuals who perform services for the
eligible employer, either as an employee or as an independent contractor, may defer
compensation under the eligible plan.
(k) Plan. Plan includes any agreement or arrangement between an eligible employer and
a participant or participants (including an individual employment agreement) under which the
payment of compensation is deferred (whether by salary reduction or by nonelective employer
contribution). The following types of plans are not treated as agreements or arrangement under
which compensation is deferred: a bona fide vacation leave, sick leave, compensatory time,

severance pay, disability pay, or death benefit plan described in section 457(e)(l l)(A)(i) and a

plan paying length of service awards to bona fide volunteers (and their beneficiaries) on account
of qualified services performed by such volunteers as described in section 457(e)(l l)(A)(ii).
Further, the term plan does not include any of the following (and section 457 and §§1.457-2
through 1.457-11 do not apply to any of the following)-(1) Any nonelective deferred compensation under which all individuals (other than those

22

w h o have not satisfied any applicable initial service requirement) with the same relationship with
the eligible employer are covered under the same plan with no individual variations or options
under the plan as described in section 457(e)(12), but only to the extent the compensation is
attributable to services performed as an independent contractor;
(2) An agreement or arrangement described in §1.457-11(b);
(3) Any plan satisfying the conditions in section 1107(c)(4) of the Tax Reform Act of
1986 (100 Stat. 2494) (TRA '86) (relating to certain plans for State judges); and
(4) Any of the following plans or arrangements (to which specific transitional statutory
exclusions apply)-(i) A plan or arrangement of a tax-exempt entity in existence prior to January 1, 1987, if
the conditions of section 1107(c)(3)(B) of the TRA '86, as amended by section 1011(e)(6) of
Technical and Miscellaneous Revenue Act of 1988 (102 Stat. 3700) (TAMRA), are satisfied (see
§ 1.457-2(b)(4) for a special rule regarding such plan);
(ii) A collectively bargained nonelective deferred a compensation plan in effect on
December 31, 1987, if the conditions of section 6064(d)(2) of TAMRA are satisfied;
(iii) Amounts described in section 6064(d)(3) of TAMRA (relating to certain nonelective
deferred compensation arrangements in effect before 1989); and
(iv) Any plan satisfying the conditions in section 1107(c)(4) or (5) of TRA '86 (relating
to certain plans for certain individuals with respect to which the Service issued guidance before
1977).
(1) State. State means a State (treating the District of Columbia as a State as provided
under section 7701(a)(10)), a political subdivision of a State, and any agency or instrumentality

23

of a State.
(m) Tax-exempt entity. Tax-exempt entity includes any organization exempt from tax
under subtitle A of the Internal Revenue Code, except that a governmental unit (including an
international governmental organization) is not a tax-exempt entity.
(n) Trust. Trust means a trust described under section 457(g) and § 1.457-8. Custodial

accounts and contracts described in section 401(f) are treated as trusts under the rules described
in§1.457-8(a)(2).
§ 1.457-3 General introduction to eligible plans.
(a) Compliance in form and operation. An eligible plan is a written plan established and
maintained by an eligible employer that is maintained, in both form and operation, in accordance
with the requirements of §§1.457-4 through 1.457-10. An eligible plan must contain all the
material terms and conditions for benefits under the plan. An eligible plan may contain certain

optional features not required for plan eligibility under section 457(b), such as distributions fo
unforeseeable emergencies, loans, plan-to-plan transfers, additional deferral elections,

acceptance of rollovers to the plan, and distributions of smaller accounts to eligible participant
However, except as otherwise specifically provided in §§1.457-4 through 1.457-10, if an eligible
plan contains any optional provisions, the optional provisions must meet, in both form and
operation, the relevant requirements under section 457 and §§1.457-2 through 1.457-10.
(b) Treatment as single plan. In any case in which multiple plans are used to avoid or
evade the requirements of §§1.457-4 through 1.457-10, the Commissioner may apply the rules
under §§1.457-4 through 1.457-10 as if the plans were a single plan. See also §1.457-4(c)(3)(v)
(requiring an eligible employer to have no more than one normal retirement age for each

24

participant under all of the eligible plans it sponsors), the second sentence of §1.457-4(e)(2)

(treating deferrals under all eligible plans under which an individual participates by virtue of h
or her relationship with a single employer as a single plan for purposes of determining excess
deferrals), and §1.457-5 (combining annual deferrals under all eligible plans).
§1.457-4 Annual deferrals, deferral limitations, and deferral agreements under eligible plans.
(a) Taxation of annual deferrals. Annual deferrals that satisfy the requirements of
paragraphs (b) and (c) of this section are excluded from the gross income of a participant in the
year deferred or contributed and are not includible in gross income until paid to the participant
the case of an eligible governmental plan, or until paid or otherwise made available to the
participant in the case of an eligible plan of a tax-exempt entity. See §1.457-7.
(b) Agreement for deferral. In order to be an eligible plan, the plan must provide that
compensation may be deferred for any calendar month by salary reduction only if an agreement
providing for the deferral has been entered into before the first day of the month in which the
compensation is paid or made available. A new employee may defer compensation payable in
the calendar month during which the participant first becomes an employee if an agreement
providing for the deferral is entered into on or before the first day on which the participant
performs services for the eligible employer. An eligible plan may provide that if a participant
enters into an agreement providing for deferral by salary reduction under the plan, the agreement
will remain in effect until the participant revokes or alters the terms of the agreement.
Nonelective employer contributions are treated as being made under an agreement entered into
before the first day of the calendar month.
(c) Maximum deferral limitations-(l) Basic annual limitation, (i) Except as described in

25

paragraphs (c)(2) and (3) of this section, in order to be an eligible plan, the plan must provide

that the annual deferral amount for a taxable year (the plan ceiling) may not exceed the lesser o

(A) The applicable annual dollar amount specified in section 457(e)(15): $11,000 for
2002; $12,000 for 2003; $13,000 for 2004; $14,000 for 2005; and $15,000 for 2006 and
thereafter. After 2006, the $15,000 amount is adjusted for cost-of-living in the manner described
in paragraph (c)(4) of this section; or
(B) 100 percent of the participant's includible compensation for the taxable year.
(ii) The amount of annual deferrals permitted by the 100 percent of includible
compensation limitation under paragraph (c)(l)(i)(B) of this section is determined under section
457(e)(5) and §1.457-2(g).
(iii) For purposes of determining the plan ceiling under this paragraph (c), the annual
deferral amount does not include any rollover amounts received by the eligible plan under
§1.457-10(e).
(iv) The provisions of this paragraph (c)(1) are illustrated by the following examples:
Example 1 (i) Facts. Participant A, who earns $14,000 a year, enters into a salary
reduction agreement in 2006 with A's eligible employer and elects to defer $13,000 of A's
compensation for that year. Participant A is not eligible for the catch-up described in paragraph
(c)(2) or (3) of this section, participates in no other retirement plan, and has no other income
exclusions taken into account in computing includible compensation.
(ii) Conclusion. The annual deferral limit for A in 2006 is the lesser of $15,000 or 100
percent of includible compensation, $14,000. A's annual deferral of $13,000 is permitted under
the plan because it is not in excess of $14,000 and thus does not exceed 100 percent of A's
includible compensation.
Example 2. (i) Facts. Assume the same facts as in Example 1, except that A's eligible
employer provides an immediately vested, matching employer contribution under the plan for
participants w h o m a k e salary reduction deferrals under A's eligible plan. The matching

26

contribution is equal to 100 percent of elective contributions, but not in excess of 10 percent of
compensation (in A's case, $1,400).
(ii) Conclusion. Participant A's annual deferral exceeds the limitations of this
paragraph (c)(1). A's m a x i m u m deferral limitation in 2006 is $14,000. A's salary reduction
deferral of $13,000 combined with A's eligible employer's nonelective employer contribution of
$1,400 exceeds the basic annual limitation of this paragraph (c)(1) because A's annual deferrals
total $14,400. A has an excess deferral for the taxable year of $400, the amount exceeding A's
permitted annual deferral limitation. The $400 excess deferral is treated as described in
paragraph (e) of this section.
Example 3. (i) Facts. Beginning in year 2002, Eligible Employer X contributes $3,000
per year forfiveyears to Participant B's eligible plan account. B's interest in the account vests
in 2006. B has annual compensation of $50,000 in each of thefiveyears 2002 through 2006.
Participant B is 41 years old. B is not eligible for the catch-up described in paragraph (c)(2) or
(3) of this section, participates in no other retirement plan, and has no other income exclusions
taken into account in computing includible compensation. Adjusted for gain or loss, the value of
B's benefit w h e n B's interest in the account vests in 2006 is $17,000.
(ii) Conclusion. Under this vesting schedule, $17,000 is taken into account as an annual
deferral in 2006. B's annual deferrals under the plan are limited to a m a x i m u m of $15,000 in
2006. Thus, the aggregate of the amounts deferred, $17,000, is in excess of the B's m a x i m u m
deferral limitation by $2,000. The $2,000 is treated as an excess deferral described in paragraph
(e) of this section.
(2) Age 50 catch-up—(0 In general. In accordance with section 414(v) and the
regulations thereunder, an eligible governmental plan may provide for catch-up contributions for
a participant who is age 50 by the end of the year, provided that such age 50 catch-up
contributions do not exceed the catch-up limit under section 414(v)(2) for the taxable year. The
maximum amount of age 50 catch-up contributions for a taxable year under section 414(v) is as
follows: $1,000 for 2002; $2,000 for 2003; $3,000 for 2004; $4,000 for 2005; and $5,000 for

2006 and thereafter. After 2006, the $5,000 amount is adjusted for cost-of-living. For additional
guidance, see regulations under section 414(v).
(ii) Coordination with special section 457 catch-up. In accordance with sections
414(v)(6)(C) and 457(e)(18), the age 50 catch-up described in this paragraph (c)(2) does not

27

apply for any taxable year for which a higher limitation applies under the special section 457
catch-up under paragraph (c)(3) of this section. Thus, for purposes of this paragraph (c)(2)(ii)
and paragraph (c)(3) of this section, the special section 457 catch-up under paragraph (c)(3) of
this section applies for any taxable year if and only if the plan ceiling taking into account
paragraph (c)(1) of this section and the special section 457 catch-up described in paragraph

(c)(3) of this section (and disregarding the age 50 catch-up described in this paragraph (c)(2)) i
larger than the plan ceiling taking into account paragraph (c)(1) of this section and the age 50
catch-up described in this paragraph (c)(2) (and disregarding the special section 457 catch-up
described in paragraph (c)(3) of this section). Thus, if a plan so provides, a participant who is
eligible for the age 50 catch-up for a year and for whom the year is also one of the participant's

last three taxable years ending before the participant attains normal retirement age is eligible f
the larger of—
(A) The plan ceiling under paragraph (c)(1) of this section and the age 50 catch-up

described in this paragraph (c)(2) (and disregarding the special section 457 catch-up described in
paragraph (c)(3) of this section) or
(B) The plan ceiling under paragraph (c)(1) of this section and the special section 457
catch-up described in paragraph (c)(3) of this section (and disregarding the age 50 catch-up
described in this paragraph (c)(2)).
(iii) Examples. The provisions of this paragraph (c)(2) are illustrated by the following
examples:
Example 1. (i) Facts. Participant C, who is 55, is eligible to participate in an eligible
governmental plan in 2006. The plan provides a normal retirement age of 65. The plan provides
limitations on annual deferrals up to the m a x i m u m permitted under paragraphs (c)(1) and (3) of
this section and the age 50 catch-up described in this paragraph (c)(2). For 2006, C will receive
28

compensation of $40,000 from the eligible employer. C desires to defer the m a x i m u m amount
possible in 2006. The applicable basic dollar limit of paragraph (c)(l)(i)(A) of this section is
$15,000 for 2006 and the additional dollar amount permitted under the age 50 catch-up is $5,000
for 2006.
(ii) Conclusion. C is eligible for the age 50 catch-up in 2006 because C is 55 in 2006.
However, C is not eligible for the special section 457 catch-up under paragraph (c)(3) of this
section in 2006 because 2006 is not one of the last three taxable years ending before C attains
normal retirement age. Accordingly, the m a x i m u m that C m a y defer for 2006 is $20,000.
Example 2. (i) Facts. The facts are the same as in Example 1, except that, in 2006, C
will attain age 62. The m a x i m u m amount that C can elect under the special section 457 catch-up
under paragraph (c)(3) of this section is $2,000 for 2006.
(ii) Conclusion. The maximum that C may defer for 2006 is $20,000. This is the sum of
the basic plan ceiling under paragraph (c)(1) of this section equal to $15,000 and the age 50
catch-up equal to $5,000. The special section 457 catch-up under paragraph (c)(3) of this section
is not applicable since it provides a smaller plan ceiling.
Example 3. (i) Facts. The facts are the same as in Example 2, except that the maximum
additional amount that C can elect under the special section 457 catch-up under paragraph (c)(3)
of this section is $7,000 for 2006.
(ii) Conclusion. The maximum that C may defer for 2006 is $22,000. This is the sum of
the basic plan ceiling under paragraph (c)(1) of this section equal to $15,000, plus the additional
special section 457 catch-up under paragraph (c)(3) of this section equal to $7,000. The
additional dollar amount permitted under the age 50 catch-up is not applicable to C for 2006
because it provides a smaller plan ceiling.
(3) Special section 457 catch-up—(T) In general. Except as provided in paragraph

(c)(2)(h) of this section, an eligible plan may provide that, for one or more of the participant'
last three taxable years ending before the participant attains normal retirement age, the plan
ceiling is an amount not in excess of the lesser of—
(A) Twice the dollar amount in effect under paragraph (c)(l)(i)(A) of this section; or
(B) The underutilized limitation determined under paragraph (c)(3)(H) of this section.
(ii) Underutilized limitation. The underutilized amount determined under this paragraph
(c)(3)(h) is the sum of—

29

(A) The plan ceiling established under paragraph (c)(1) of this section for the taxable
year; plus (B) The plan ceiling established under paragraph (c)(1) of this section (or under
section 457(b)(2) for any year before the applicability date of this section) for any prior taxable
year or years, less the amount of annual deferrals under the plan for such prior taxable year or
years (disregarding any annual deferrals under the plan permitted under the age 50 catch-up
under paragraph (c)(2) of this section).
(iii) Determining underutilized limitation under paragraph (c)(3)(ir.(B) of this section. A

prior taxable year is taken into account under paragraph (c)(3)(ii)(B) of this section only if it i
year beginning after December 31, 1978, in which the participant was eligible to participate in
the plan, and in which compensation deferred (if any) under the plan during the year was subject

to a plan ceiling established under paragraph (c)(1) of this section. This paragraph (c)(3)(iii) is
subject to the special rules in paragraph (c)(3)(iv) of this section.
(iv) Special rules concerning application of the coordination limit for years prior to 2002
for purposes of determining the underutilized limitation—(A) General rule. For purposes of
determining the underutilized limitation for years prior to 2002, participants remain subject to
the rules in effect prior to the repeal of the coordination limitation under section 457(c)(2).
Thus, the applicable basic annual limitation under paragraph (c)(1) of this section and the special
section 457 catch-up under this paragraph (c)(3) for years in effect prior to 2002 are reduced, for
purposes of determining a participant's underutilized amount under a plan, by amounts excluded
from the participant's income for any prior taxable year by reason of a nonelective employer
contribution, salary reduction or elective contribution under any other eligible section 457(b)
plan, or a salary reduction or elective contribution under any 401(k) qualified cash or deferred

30

arrangement, section 402(h)(1)(B) simplified employee pension ( S A R S E P ) , section 403(b)
annuity contract, and section 408(p) simple retirement account, or under any plan for which a
deduction is allowed because of a contribution to an organization described in section 501(c)(18)
(pre-2002 coordination plans). Similarly, in applying the section 457(b)(2)(B) limitation for
includible compensation for years prior to 2002, the limitation is 33 1/3 percent of the
participant's compensation includible in gross income.
(B) Coordination limitation applied to participant. For purposes of determining the
underutilized limitation for years prior to 2002, the coordination limitation applies to pre-2002
coordination plans of all employers for whom a participant has performed services, whether or
not those are plans of the participant's current eligible employer. Thus, for purposes of
determining the amount excluded from a participant's gross income in any prior taxable year

under paragraph (c)(3)(ii)(B) of this section, the participant's annual deferrals under an eligible
plan, and salary reduction or elective deferrals under all other pre-2002 coordination plans, must
be determined on an aggregate basis. To the extent that the combined deferrals for years prior to
2002 exceeded the maximum deferral limitations, the amount is treated as an excess deferral
under paragraph (e) of this section for those prior years.
(C) Special rule where no annual deferrals under the eligible plan. A participant who,
although eligible, did not defer any compensation under the eligible plan in any year before 2002
is not subject to the coordinated deferral limit, even though the participant may have deferred
compensation under one of the other pre-2002 coordination plans. An individual is treated as not

having deferred compensation under an eligible plan for a prior taxable year if all annual deferral

under the plan are distributed in accordance with paragraph (e) of this section. Thus, to the extent

31

that a participant participated solely in one or more of the other pre-2002 coordination plans
during a prior taxable year (and not the eligible plan), the participant is not subject to the
coordinated limitation for that prior taxable year. However, the participant is treated as having

deferred an amount in a prior taxable year, for purposes of determining the underutilized limitatio
for that prior taxable year under this paragraph (c)(3)(iv)(C), to the extent of the participant's
aggregate salary reduction contributions and elective deferrals under all pre-2002 coordination
plans up to the maximum deferral limitations in effect under section 457(b) for that prior taxable
year. To the extent an employer did not offer an eligible plan to an individual in a prior given
year, no underutilized limitation is available to the individual for that prior year, even if the
employee subsequently becomes eligible to participate in an eligible plan of the employer.
(D) Examples. The provisions of this paragraph (c)(3)(iv) are illustrated by the following
examples:
Example 1. (i) Facts. In 2001 and in years prior to 2001, Participant D earned $50,000 a
year and was eligible to participate in both an eligible plan and a section 401(k) plan. However, D
had always participated only in the section 401(k) plan and had always deferred the m a x i m u m
amount possible. For each year before 2002, the m a x i m u m amount permitted under section 401(k)
exceeded the limitation of paragraph (c)(3)(i) of this section. In 2002, D is in the 3-year period
prior to D's attainment of the eligible plan's normal retirement age of 65, and D n o w wants to
participate in the eligible plan and m a k e annual deferrals of up to $30,000 under the plan's special
section 457 catch-up provisions.
(ii) Conclusion. Participant D is treated as having no underutilized amount under
paragraph (c)(3)(ii)(B) of this section for 2002 for purposes of the catch-up limitation under
section 457(b)(3) and paragraph (c)(3) of this section because, in each of the years before 2002, D
has deferred an amount equal to or in excess of the limitation of paragraph (c)(3)(i) of this section
under all of D's coordinated plans .
Example 2. (i) Facts. Assume the same facts as in Example 1, except that D only deferred
$2,500 per year under the section 401(k) plan for one year before 2002.
(ii) Conclusion. D is treated as having an underutilized amount under paragraph
(c)(3)(ii)(B) of this section for 2002 for purposes of the special section 457 catch-up limitation.

32

This is because D has deferred an amount for prior years that is less than the limitation of
paragraph (c)(l)(i) of this section under all of D's coordinated plans.
Example 3. (i) Facts. Participant E, who earned $15,000 for 2000, entered into a salary
reduction agreement in 2000 with E's eligible employer and elected to defer $3,000 for that year
under E's eligible plan. For 2000, E's eligible employer provided an immediately vested,
matching employer contribution under the plan for participants w h o m a k e salary reduction
deferrals under E's eligible plan. The matching contribution was equal to 67 percent of elective
contributions, but not in excess of 10 percent of compensation before salary reduction deferrals (in
E's case, $1,000). For 2000, E was not eligible for any catch-up contribution, participated in no
other retirement plan, and had no other income exclusions taken into account in computing taxable
compensation.
(ii) Conclusion. Participant E's annual deferral equaled the maximum limitation of
section 457(b) for 2000. E's m a x i m u m deferral limitation in 2000 was $4,000 because E's
includible compensation was $12,000 ($15,000 minus the deferral of $3,000) and the applicable
limitation for 2000 was one third of the individual's includible compensation (one-third of $12,000
equals $4,000). E's salary reduction deferral of $3,000 combined with E's eligible employer's
matching contribution of $1,000 equals the limitation of section 457(b) for 2000 because E's
annual deferrals totaled $4,000. E's underutilized amount for 2000 is zero.
(v) Normal retirement age—(A) General rule. For purposes of the special section 457
catch-up in this paragraph (c)(3), a plan must specify the normal retirement age under the plan. A

plan may define normal retirement age as any age that is on or after the earlier of age 65 or the a

at which participants have the right to retire and receive, under the basic defined benefit pension
plan of the State or tax-exempt entity (or a money purchase pension plan in which the participant

also participates if the participant is not eligible to participate in a defined benefit plan), imme

retirement benefits without actuarial or similar reduction because of retirement before some later
specified age, and that is not later than age 70 XA. Alternatively, a plan may provide that a
participant is allowed to designate a normal retirement age within these ages. For purposes of the
special section 457 catch-up in this paragraph (c)(3), an entity sponsoring more than one eligible
plan may not permit a participant to have more than one normal retirement age under the eligible
plans it sponsors.

33

(B) Special rule for eligible plans of qualified police orfirefighters.A n eligible plan with

participants that include qualified police or firefighters as defined under section 415(b)(2)(H)(ii

may designate a normal retirement age for such qualified police or firefighters that is earlier tha
the earliest normal retirement age designated under the general rule of paragraph (c)(3)(i)(A) of

this section, but in no event may the normal retirement age be earlier than age 40. Alternatively, a
plan may allow a qualified police or firefighter participant to designate a normal retirement age
that is between age 40 and age 70 Vi.
(vi) Examples. The provisions of this paragraph (c)(3) are illustrated by the following
examples:
Example 1. (i) Facts. Participant F, who will turn 61 on April 1, 2006, becomes eligible
to participate in an eligible plan on January 1, 2006. The plan provides a normal retirement age of
65. The plan provides limitations on annual deferrals up to the m a x i m u m permitted under
paragraphs (c)(1) through (3) of this section. For 2006, F will receive compensation of $40,000
from the eligible employer. F desires to defer the m a x i m u m amount possible in 2006. The
applicable basic dollar limit of paragraph (c)(l)(i)(A) of this section is $15,000 for 2006 and the
additional dollar amount permitted under the age 50 catch-up in paragraph (c)(2) of this section for
an individual w h o is at least age 50 is $5,000 for 2006.
(ii) Conclusion. F is not eligible for the special section 457 catch-up under paragraph
(c)(3) of this section in 2006 because 2006 is not one of the last three taxable years ending before
F attains normal retirement age. Accordingly, the m a x i m u m that F m a y defer for 2006 is $20,000.
See also paragraph (c)(2)(iii) Example 1 of this section.
Example 2. (i) Facts. The facts are the same as in Example 1 except that, in 2006, F elects
to defer only $2,000 under the plan (rather than the m a x i m u m permitted amount of $20,000). In
addition, assume that the applicable basic dollar limit of paragraph (c)(l)(i)(A) of this section
continues to be $15,000 for 2007 and the additional dollar amount permitted under the age 50
catch-up in paragraph (c)(2) of this section for an individual w h o is at least age 50 continues to be
$5,000 for 2007. In F's taxable year 2007, which is one of the last three taxable years ending
before F attains the plan's normal retirement age of 65, F again receives a salary of $40,000 and
elects to defer the m a x i m u m amount permissible under the plan's catch-up provisions prescribed
under paragraph (c) of this section.
(ii) Conclusion. For 2007, which is one of the last three taxable years ending before F
attains the plan's normal retirement age of 65, the applicable limit on deferrals for F is the larger of

34

the amount under the special section 457 catch-up or $20,000, which is the basic annual limitation
($15,000) and the age 50 catch-up limit of section 414(v) ($5,000). For 2007, F's special section
457 catch-up amount is the lesser of two times the basic annual limitation ($30,000) or the s u m of
the basic annual limitation ($15,000) plus the $13,000 underutilized limitation under paragraph
(c)(3)(h) of this section (the $15,000 plan ceiling in 2006, minus the $2,000 contributed for F in
2006), or $28,000. Thus, the m a x i m u m amount that F m a y defer in 2007 is $28,000.
Example 3. (i) Facts. The facts are the same as in Examples 1 and 2, except that F does
not make any contributions to the plan before 2010. In addition, assume that the applicable basic
dollar limitation of paragraph (c)(l)(i)(A) of this section continues to be $15,000 for 2010 and the
additional dollar amount permitted under the age 50 catch-up in paragraph (c)(2) of this section for
an individual w h o is at least age 50 continues to be $5,000 for 2010. In F's taxable year 2010, the
year in which F attains age 65 (which is the normal retirement age under the plan), F desires to
defer the m a x i m u m amount possible under the plan. F's compensation for 2010 is again $40,000.
(ii) Conclusion. For 2010, the maximum amount that F may defer is $20,000. The special
section 457 catch-up provisions under paragraph (c)(3) of this section are not applicable because
2010 is not a taxable year ending before the year in which F attains normal retirement age.
(4) Cost-of-living adjustment. For years beginning after December 31, 2006, the $15,000
dollar limitation in paragraph (c)(l)(i)(A) of this section will be adjusted to take into account
increases in the cost-of-living. The adjustment in the dollar limitation is made at the same time

and in the same manner as under section 415(d) (relating to qualified plans under section 401(a)),
except that the base period is the calendar quarter beginning July 1, 2005 and any increase which
is not a multiple of $500 will be rounded to the next lowest multiple of $500.
(d) Deferral of sick, vacation, and back pay under an eligible plan—(1) In general. An
eligible plan may provide that a participant may elect to defer accumulated 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 provide, 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 otherwise
be paid or made available and the participant is an employee in that month. In the case of

35

accumulated sick pay, vacation pay, or back pay that is payable before the participant has a
severance from employment, the requirements of the preceding sentence are deemed to be satisfied

if the agreement providing for the deferral is entered into before the amount is currently availa
(as defined in regulations under section 401(k)).
(2) Examples. The provisions of this paragraph (d) are illustrated by the following
examples:
Example 1. (i) Facts. Participant G, who is age 62 in 2003, is an employee who
participates in an eligible plan providing a normal retirement age of 65. Under the terms of G's
employer's eligible plan and G's sick leave plan, G may, during November of 2003 (which is one
of the three years prior to normal retirement age), make a one-time election to contribute amounts
representing accumulated sick pay to the eligible plan in December of 2003 (within the m a x i m u m
deferral limitations). Alternatively, such amounts m a y remain in the "bank" under the sick leave
plan. N o cash out of the sick pay is available until the month in which a participant ceases to be
employed by the employer. The total value of G's accumulated sick pay (determined, in
accordance with the terms of the sick leave plan, by reference to G's current salary) is $4,000 in
December of 2003.
(ii) Conclusion. Under the terms of the eligible plan and sick leave plan, G may elect
before December of 2003 to defer the $4,000 value of accumulated sick pay under the eligible
plan, provided that G's other annual deferrals to the eligible plan for 2003, w h e n added to the
$4,000, do not exceed G's m a x i m u m deferral limitation for the year.
Example 2. (i) Facts. Same facts as in Example 1, except that G will separate from
service on January 17, 2004, and elects, on January 4, 2004, to defer G's accumulated sick and
vacation pay (which totals $12,000) that is payable on January 15, 2004.
(ii) Conclusion. G may elect before January 15, 2004 to defer the accumulated sick and
vacation pay under the eligible plan, even if the election is made after the beginning of January,
because the agreement providing for the deferral is entered into before the amount is currently
available and G does not cease to be an employee before the amount is currently available. G will
have $12,000 of includible compensation in 2004 because the deferral is taken into account in the
definition of includible compensation.
Example 3. (i) Facts. Employer X maintains an eligible plan and a vacation leave plan.
Under the terms of the vacation leave plan, employees generally accrue three weeks of vacation
per year. U p to one week's unused vacation m a y be carried over from one year to the next, so that
in any single year an employee m a y have a m a x i m u m of four weeks vacation time. At the
beginning of each calendar year, under the terms of the eligible plan (which constitutes an

36

agreement providing for the deferral), the value of any unused vacation time from the prior year in
excess of one w e e k is automatically contributed to the eligible plan, to the extent of the
employee's m a x i m u m deferral limitations. Amounts in excess of the m a x i m u m 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 in the calendar year the contribution is made. N o amounts contributed
to the eligible plan will be considered m a d e available to a participant in X's eligible plan.
(e) Excess deferrals under an eligible plan--(l) In general. Any amount deferred under an

eligible plan for the taxable year of a participant that exceeds the maximum deferral limitations se
forth in paragraphs (c)(1) through (3) of this section, and any amount that exceeds the individual

limitation under §1.457-5, constitutes an excess deferral that is taxable in accordance with §1.45711 for that taxable year. Thus, an excess deferral is includible in gross income in the taxable year
deferred or, if later, the first taxable year in which there is no substantial risk of forfeiture.
(2) Excess deferrals under an eligible governmental plan other than as a result of the
individual limitation. In order to be an eligible governmental plan, the plan must provide that any
excess deferral resulting from a failure of a plan to apply the limitations of paragraphs (c)(1)
through (3) of this section to amounts deferred under the eligible plan (computed without regard to

the individual limitation under §1.457-5) will be distributed to the participant, with allocable net
income, as soon as administratively practicable after the plan determines that the amount is an
excess deferral. For purposes of determining whether there is an excess deferral resulting from a

failure of a plan to apply the limitations of paragraphs (c)(1) through (3) of this section, all pla
under which an individual participates by virtue of his or her relationship with a single employer
are treated as a single plan (without regard to any differences in funding). An eligible
governmental plan does not fail to satisfy the requirements of paragraphs (a) through (d) of this

37

section or §§1.457-6 through 1.457-10 (including the distribution rules under §1.457-6 and the
funding rules under §1.457-8) solely by reason of a distribution made under this paragraph (e)(2).

If such excess deferrals are not corrected by distribution under this paragraph (e)(2), the plan will
be an ineligible plan under which benefits are taxable in accordance with §1.457-11.
(3) Excess deferrals under an eligible plan of a tax-exempt employer other than as a result

of the individual limitation. If a plan of a tax-exempt employer fails to comply with the limitations
of paragraphs (c)(1) through (3) of this section, the plan will be an ineligible plan under which
benefits are taxable in accordance with §1.457-11. However, a plan may distribute to a participant
any excess deferrals (and any income allocable to such amount) not later than the first April 15
following the close of the taxable year of the excess deferrals. In such a case, the plan will
continue to be treated as an eligible plan. However, any excess deferral is included in the gross
income of a participant for the taxable year of the excess deferral. If the excess deferrals are not
corrected by distribution under this paragraph (e)(3), the plan is an ineligible plan under which
benefits are taxable in accordance with § 1.457-11. For purposes of determining whether there is
an excess deferral resulting from a failure of a plan to apply the limitations of paragraphs (c)(1)
through (3) of this section, all eligible plans under which an individual participates by virtue of
or her relationship with a single employer are treated as a single plan.
(4) Excess deferrals arising from application of the individual limitation. An eligible plan

may provide that an excess deferral that is a result solely of a failure to comply with the individua
limitation under §1.457-5 for a taxable year may be distributed to the participant, with allocable
net income, as soon as administratively practicable after the plan determines that the amount is an

excess deferral. An eligible plan does not fail to satisfy the requirements of paragraphs (a) through

38

(d) of this section or §§1.457-6 through 1.457-10 (including the distribution rules under §1.457-6

and the funding rules under §1.457-8) solely by reason of a distribution made under this paragraph

(e)(4). Although a plan will still maintain eligible status if excess deferrals are not distribute
under this paragraph (e)(4), a participant must include the excess amounts in income as provided
in paragraph (e)(1) of this section.
(5) Examples. The provisions of this paragraph (e) are illustrated by the following
examples:
Example 1. (i) Facts. In 2006, the eligible plan of State Employer X in which Participant
H participates permits a m a x i m u m deferral of the lesser of $15,000 or 100 percent of includible
compensation. In 2006, H , w h o has compensation of $28,000, nevertheless defers $16,000 under
the eligible plan. Participant H is age 45 and normal retirement age under the plan is age 65. For
2006, the applicable dollar limit under paragraph (c)(l)(i)(A) of this section is $15,000. Employer
X discovers the error in January of 2007 w h e n it completes H's 2006 F o r m W - 2 and promptly
distributes $1,022 to H (which is the sum of the $1,000 excess and $22 of allocable net income).
(ii) Conclusion. Participant H has deferred $1,000 in excess of the $15,000 limitation
provided for under the plan for 2006. The $1,000 excess must be included by H in H's income for
2006. In order to correct the failure and still be an eligible plan, the plan must distribute the excess
deferral, with allocable net income, as soon as administratively practicable after determining that
the amount exceeds the plan deferral limitations. In this case, $22 of the distribution of $1,022 is
included in H's gross income for 2007 (and is not an eligible rollover distribution). If the excess
deferral were not distributed, the plan would be an ineligible plan with respect to which benefits
are taxable in accordance with § 1.457-11.
Example 2. (i) Facts. The facts are the same as in Example 1, except that X uses a number
of separate arrangements with different trustees and annuity insurers to permit employees to defer
and H elects deferrals under several of the funding arrangements none of which exceeds $15,000
for any individual funding arrangement, but which total $16,000.
(ii) Conclusion. The conclusion is the same as in Example 1.
Example 3. (i) Facts. The facts are the same as in Example 1, except that H's deferral
under the eligible plan is limited to $ 11,000 and H also makes a salary reduction contribution of
$5,000 to an annuity contract under section 403(b) with the same Employer X.
(ii) Conclusion. H's deferrals are within the plan deferral limitations of Employer X.
Because of the repeal of the application of the coordination limitation under former paragraph (2)

39

of section 457(c), H's salary reduction deferrals under the annuity contract are no longer
considered in determining H's applicable deferral limits under paragraphs (c)(1) through (3) of this
section.
Example 4. (i) Facts. The facts are the same as in Example 1, except that H's deferral
under the eligible governmental plan is limited to $14,000 and H also makes a deferral of $4,000
to an eligible governmental plan of a different employer. Participant H is age 45 and normal
retirement age under both eligible plans is age 65.
(ii) Conclusion. Because of the application of the individual limitation under §1.457-5, H
has an excess deferral of $3,000 (the sum of $14,000 plus $4,000 equals $18,000, which is $3,000
in excess of the dollar limitation of $15,000). The $3,000 excess deferral, with allocable net
income, m a y be distributed from either plan as soon as administratively practicable after
determining that the combined amount exceeds the deferral limitations. If the $3,000 excess
deferral is not distributed to H, each plan will continue to be an eligible plan, but the $3,000 must
be included by H in H's income for 2006.
Example 5. (i) Facts. Assume the same facts as in Example 3 , except that H's deferral
under the eligible governmental plan is limited to $14,000 and H also makes a deferral of $4,000
to an eligible plan of Employer Y , a tax-exempt entity.
(ii) Conclusion. The results are the same as in Example 3, namely, because of the
application of the individual limitation under §1.457-5, H has an excess deferral of $3,000. If the
$3,000 excess deferral is not distributed to H, each plan will continue to be an eligible plan, but the
$3,000 must be included by H in H's income for 2006.
Example 6. (i) Facts. Assume the same facts as in Example 5, except that X is a taxexempt entity and thus its plan is an eligible plan of a tax-exempt entity.
(ii) Conclusion. The results are the same as in Example 5, namely, because of the
application of the individual limitation under §1.457-5, H has an excess deferral of $3,000. If the
$3,000 excess deferral is not distributed to H , each plan will continue to be an eligible plan, but the
$3,000 must be included by H into H's income for 2006.
Par. 3. Sections 1.457-5 through 1.457-12 are added to read as follows:
§1.457-5 Individual limitation for combined annual deferrals under multiple eligible plans
(a) General rule. The individual limitation under section 457(c) and this section equals the

basic annual deferral limitation under §1.457-4(c)(l)(i)(A), plus either the age 50 catch-up amoun
under §1.457-4(c)(2), or the special section 457 catch-up amount under §1.457-4(c)(3), applied by

40

taking into account the combined annual deferral for the participant for any taxable year under all
eligible plans. While an eligible plan may include provisions under which it will limit deferrals to
meet the individual limitation under section 457(c) and this section, annual deferrals by a

participant that exceed the individual limit under section 457(c) and this section (but do not excee
the limits under § 1.457-4(c)) will not cause a plan to lose its eligible status. However, to the
extent the combined annual deferrals for a participant for any taxable year exceed the individual
limitation under section 457(c) and this section for that year, the amounts are treated as excess
deferrals as described in §1.457-4(e).
(b) Limitation applied to participant. The individual limitation in this section applies to
eligible plans of all employers for whom a participant has performed services, including both
eligible governmental plans and eligible plans of a tax-exempt entity and both eligible plans of the
employer and eligible plans of other employers. Thus, for purposes of determining the amount
excluded from a participant's gross income in any taxable year (including the underutilized
limitation under §1.457-4 (c)(3)(ii)(B)), the participant's annual deferral under an eligible plan,
and the participant's annual deferrals under all other eligible plans, must be determined on an
aggregate basis. To the extent that the combined annual deferral amount exceeds the maximum

deferral limitation applicable under §1.457-4 (c)(l)(i)(A), (c)(2), or (c)(3), the amount is treated a
an excess deferral under §1.457-4(e).
(c) Special rules for catch-up amounts under multiple eligible plans. For purposes of
applying section 457(c) and this section, the special section 457 catch-up under §1.457-4 (c)(3) is
taken into account only to the extent that an annual deferral is made for a participant under an
eligible plan as a result of plan provisions permitted under §1.457-4 (c)(3). In addition, if a

41

participant has annual deferrals under more than one eligible plan and the applicable catch-up

amount under §1.457-4 (c)(2) or (3) is not the same for each such eligible plan for the taxable ye

section 457(c) and this section are applied using the catch-up amount under whichever plan has the
largest catch-up amount applicable to the participant.
(d) Examples. The provisions of this section are illustrated by the following examples:
Example 1. (i) Facts. Participant F is age 62 in 2006 and participates in two eligible plans
during 2006, Plans J and K, which are each eligible plans of two different governmental entities.
Each plan includes provisions allowing the m a x i m u m annual deferral permitted under §1.4574(c)(1) through (3). For 2006, the underutilized amount under §1.457-4 (c)(3)(ii)(B) is $20,000
under Plan J and is $40,000 under Plan K. Normal retirement age is age 65 under both plans.
Participant F defers $15,000 under each plan. Participant F's includible compensation is in each
case in excess of the deferral. Neither plan designates the $15,000 contribution as a catch-up
permitted under each plan's special section 457 catch-up provisions.
(ii) Conclusion. For purposes of applying this section to Participant F for 2006, the
m a x i m u m exclusion is $20,000. This is equal to the sum of $15,000 plus $5,000, which is the age
50 catch-up amount. Thus, F has an excess amount of $10,000 which is treated as an excess
deferral for Participant F for 2006 under §1.457-4(e).
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 governmental 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)(l)(i)(A) is $15,000. For 2006, the
additional age 50 catch-up limitation that applies to Participant E under all four plans under
§1.457.4 (c)(2) is $5,000. Further, for 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
underutilized limitation under §1.457-4 (c)(3)(ii)(B) is $7,000; under Plan X , the underutilized
limitation under §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 under 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 m a x i m u m deferral limitation
under §1.457-4 (c)(1) through (3), and to defer no amount under Plans W , X , and Z. The $23,000
m a x i m u m amount is equal to the s u m 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. Alternatively, Participant E could instead elect
to defer the following combination of amounts: an aggregate total of $20,000 to any of the four

42

plans; or $22,000 to Plan W and none 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 m a x i m u m amount or E was a n e w participant) or an amount
not in excess of $5,000, the m a x i m u m 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.
§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 unforeseeable emergency), paragraph (e) of this section (relating to distribution
of small accounts), §1.457-10(a) (relating to plan terminations), or §1.457-10(c) (relating to
domestic relations orders), amounts deferred under an eligible governmental plan may not be paid
to a participant or beneficiary before the participant has a severance from employment with the

eligible employer or when the participant attains age 70 !/_>, if earlier. For rules relating to l
see paragraph (f) of this section. This section does not apply to distributions of excess amounts
under § 1.457-4(e). However, except to the extent set forth by the Commissioner in revenue

rulings, notices, and other guidance published in the Internal Revenue Bulletin, this section appl

to amounts held in a separate account for eligible rollover distributions maintained by an eligib
governmental plan as described in § 1.457-10(e)(2).
(b) Severance from employment—d) Employees. An employee has a severance from
employment with the eligible employer if the employee dies, retires, or otherwise has a severance
from employment with the eligible employer. See regulations under section 401(k) for additional
guidance concerning severance from employment.
(2) Independent contractors—(i) In general. An independent contractor is considered to
have a severance from employment with the eligible employer upon the expiration of the contract

43

(or in the case of more than one contract, all contracts) under which services are performed for the
eligible employer if the expiration constitutes a good-faith and complete termination of the
contractual relationship. An expiration does not constitute a good faith and complete termination
of the contractual relationship if the eligible employer anticipates a renewal of a contractual
relationship or the independent contractor becoming an employee. For this purpose, an eligible
employer is considered to anticipate the renewal of the contractual relationship with an
independent contractor if it intends to contract again for the services provided under the expired
contract, and neither the eligible employer nor the independent contractor has eliminated the
independent contractor as a possible provider of services under any such new contract. Further, an
eligible employer is considered to intend to contract again for the services provided under an
expired contract if the eligible employer's doing so is conditioned only upon incurring a need for
the services, the availability of funds, or both.
(ii) Special rule. Notwithstanding paragraph (b)(2)(i) of this section, the plan is considered
to satisfy the requirement described in paragraph (a) of this section that no amounts deferred under
the plan be paid or made available to the participant before the participant has a severance from
employment with the eligible employer if, with respect to amounts payable to a participant who is
an independent contractor, an eligible plan provides that—
(A) No amount will be paid to the participant before a date at least 12 months after the day
on which the contract expires under which services are performed for the eligible employer (or, in
the case of more than one contract, all such contracts expire); and
(B) No amount payable to the participant on that date will be paid to the participant if, after

the expiration of the contract (or contracts) and before that date, the participant performs services

44

for the eligible employer as an independent contractor or an employee.
(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 requirements of paragraph (c)(2) of this section.
(2) Requirements--,!) Unforeseeable emergency defined. An unforeseeable emergency

must be defined in the plan as a severe financial hardship of the participant or beneficiary resulti
from an illness or accident of the participant or beneficiary, the participant's or beneficiary's
spouse, or the participant's or beneficiary's dependent (as defined in section 152(a)); loss of the
participant's or beneficiary's property due to casualty (including the need to rebuild 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 beneficiary'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 of prescription drug medication, may
constitute an unforeseeable emergency. Finally, the need to pay for the funeral expenses of a
spouse or a dependent (as defined in section 152(a)) 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 distribution standard. Whether a participant or beneficiary is
faced with an unforeseeable emergency permitting a distribution under this paragraph (c) is to be

45

determined based on the relevant facts and circumstances of each case, but, in any case, a
distribution on account of unforeseeable emergency may not be made to the extent that such
emergency is or may be relieved through reimbursement or compensation from insurance or
otherwise, by liquidation 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.
(hi) Distribution necessary to satisfy emergency need. Distributions because of an
unforeseeable emergency must be limited to the amount reasonably necessary to satisfy the
emergency need (which may include any amounts necessary to pay any federal, state, or local
income taxes or penalties reasonably anticipated to result from the distribution).
(d) Minimum required distributions for eligible plans. In order to be an eligible plan, a
plan must meet the distribution requirements of section 457(d)(1) and (2). Under section
457(d)(2), a plan must meet the minimum distribution requirements of section 401(a)(9). See
section 401(a)(9) and the regulations thereunder for these requirements. Section 401(a)(9) requires
that a plan begin lifetime distributions to a participant no later than April 1 of the calendar year
following the later of the calendar year in which the participant attains age 70 Vi or the calendar
year in which the participant retires.
(e) Distributions of smaller accounts—(1) In general. An eligible plan may provide for a

distribution of all or a portion of a participant's benefit if this paragraph (e)(1) is satisfied. T
paragraph (e)(1) is satisfied if the participant's total amount deferred (the participant's total
account balance) which is not attributable to rollover contributions (as defined in section

41 l(a)(l 1)(D)) is not in excess of the dollar limit under section 41 l(a)(l 1)(A), no amount has be
deferred under the plan by or for the participant during the two-year period ending on the date of

46

the distribution, and there has been no prior distribution under the plan to the participant under this
paragraph (e). An eligible plan is not required to permit distributions under this paragraph (e).
(2) Alternative provisions possible. Consistent with the provisions of paragraph (e)(1) of
this section, a plan may provide that the total amount deferred for a participant or beneficiary will

be distributed automatically to the participant or beneficiary if the requirements of paragraph (e)(1
of this section are met. Alternatively, if the requirements of paragraph (e)(1) of this section are
met, the plan may provide for the total amount deferred for a participant or beneficiary to be
distributed to the participant or beneficiary only if the participant or beneficiary so elects. The

plan is permitted to substitute a specified dollar amount that is less than the total amount deferred.
In addition, these two alternatives can be combined; for example, a plan could provide for
automatic distributions for up to $500, but allow participants or beneficiary to elect a distribution
if the total account balance is above $500.
(f) Loans from eligible plans--(l) Eligible plans of tax-exempt entities. If a participant or
beneficiary receives (directly or indirectly) any amount deferred as a loan from an eligible plan of
a tax-exempt entity, that amount will be treated as having been paid or made available to the
individual as a distribution under the plan, in violation of the distribution requirements of section
457(d).
(2) Eligible governmental plans. The determination of whether the availability of a loan,
the making of a loan, or a failure to repay a loan made from a trustee (or a person treated as a
trustee under section 457(g)) of an eligible governmental plan to a participant or beneficiary is

treated as a distribution (directly or indirectly) for purposes of this section, and the determinatio
of whether the availability of the loan, the making of the loan, or a failure to repay the loan is in

47

any other respect a violation of the requirements of section 457(b) and the regulations, depends on
the facts and circumstances. Among the facts and circumstances are whether the loan has a fixed
repayment schedule and bears a reasonable rate of interest, and whether there are repayment
safeguards to which a prudent lender would adhere. Thus, for example, a loan must bear a

reasonable rate of interest in order to satisfy the exclusive benefit requirement of section 457(
and §1.457-8(a)(l). See also §1.457-7(b)(3) relating to the application of section 72(p) with

respect to the taxation of a loan made under an eligible governmental plan, and §1.72(p)-l relati
to section 72(p)(2).
(3) Example. The provisions of paragraph (f)(2) of this section are illustrated by the
following example:
Example, (i) Facts. Eligible Plan X of State Y is funded through Trust Z. Plan X permits
an employee's account balance under Plan X to be paid in a single s u m at severance from
employment with State Y. Plan X includes a loan program under which any active employee with
a vested account balance m a y receive a loan from Trust Z. Loans are m a d e pursuant to plan
provisions regarding loans that are set forth in the plan under which loans bear a reasonable rate of
interest and are secured by the employee's account balance. In order to avoid taxation under
§1.457-7(b)(3) and section 72(p)(l), the plan provisions limit the amount of loans and require
loans to be repaid in level installments as required under section 72(p)(2). Participant J's vested
account balance under Plan X is $50,000. J receives a loan from Trust Z in the amount of $5,000
on December 1, 2003, to be repaid in level installments made quarterly over the 5-year period
ending on November 30, 2008. Participant J makes the required repayments until J has a
severance from employment from State Y in 2005 and subsequently fails to repay the outstanding
loan balance of $2,250. The $2,250 loan balance is offset against J's $80,000 account balance
benefit under Plan X , and J elects to be paid the remaining $77,750 in 2005.
(ii) Conclusion. The making of the loan to J will not be treated as a violation of the
requirements of section 457(b) or the regulations. The cancellation of the loan at severance from
employment does not cause Plan X to fail to satisfy the requirements for plan eligibility under
section 457. In addition, because the loan satisfies the m a x i m u m amount and repayment
requirements of section 72(p)(2), J is not required to include any amount in income as a result of
the loan until 2005, w h e n J has income of $2,250 as a result of the offset (which is a permissible
distribution under this section) and income of $77,750 as a result of the distribution m a d e in
2005.

48

§1.457-7 Taxation of distributions under eligible plans.
(a) General rules for when amounts are included in gross income. The rules for
determining when an amount deferred under an eligible plan is includible in the gross income of a
participant or beneficiary depend on whether the plan is an eligible governmental plan or an

eligible plan of a tax-exempt entity. Paragraph (b) of this section sets forth the rules for an elig
governmental plan. Paragraph (c) of this section sets forth the rules for an eligible plan of a taxexempt entity.
(b) Amounts included in gross income under an eligible governmental plan—(1) Amounts
included in gross income in year paid under an eligible governmental plan. Except as provided in
paragraphs (b)(2) and (3) of this section (or in §1.457-10(c) relating to payments to a spouse or
former spouse pursuant to a qualified domestic relations order), amounts deferred under an eligible
governmental plan are includible in the gross income of a participant or beneficiary for the taxable
year in which paid to the participant or beneficiary under the plan.
(2) Rollovers to individual retirement arrangements and other eligible retirement plans. A

trustee-to-trustee transfer in accordance with section 401(a)(31) (generally referred to as a direct
rollover) from an eligible government plan is not includible in gross income of a participant or
beneficiary in the year transferred. In addition, any payment made from an eligible government
plan in the form of an eligible rollover distribution (as defined in section 402(c)(4)) is not
includible in gross income in the year paid to the extent the payment is transferred to an eligible
retirement plan (as defined in section 402(c)(8)(B)) within 60 days, including the transfer to the
eligible retirement plan of any property distributed from the eligible governmental plan. For this
purpose, the rules of section 402(c)(2) through (7) and (9) apply. Any trustee-to-trustee transfer

49

under this paragraph (b)(2) from an eligible government plan is a distribution that is subject to the
distribution requirements of § 1.457-6.
(3) Amounts taxable under section 72(p)(l). In accordance with section 72(p), the amount
of any loan from an eligible governmental plan to a participant or beneficiary (including any
pledge or assignment treated as a loan under section 72(p)(l)(B)) is treated as having been

received as a distribution from the plan under section 72(p)(l), except to the extent set forth in
section 72(p)(2) (relating to loans that do not exceed a maximum amount and that are repayable in

accordance with certain terms) and §1.72(p)-l. Thus, except to the extent a loan satisfies section
72(p)(2), any amount loaned from an eligible governmental plan to a participant or beneficiary
(including any pledge or assignment treated as a loan under section 72(p)(l)(B)) is includible in

the gross income of the participant or beneficiary for the taxable year in which the loan is made.
See generally §1.72(p)-l.
(4) Examples. The provisions of this paragraph (b) are illustrated by the following
examples:
Example 1. (i) Facts. Eligible Plan G of a governmental entity permits distribution of
benefits in a single sum or in installments of up to 20 years, with such benefits to c o m m e n c e at any
date that is after severance from employment (up to the later of severance from employment or the
plan's normal retirement age of 65). Effective for participants w h o have a severance from
employment after December 31, 2001, Plan X allows an election—as to both the date on which
payments are to begin and the form in which payments are to be made—to be m a d e by the
participant at any time that is before the commencement date selected. However, Plan X chooses
to require elections to befiledat least 30 days before the commencement date selected in order for
Plan X to have enough time to be able to effectuate the election.
(ii) Conclusion. No amounts are included in gross income before actual payments begin.
If installment payments begin (and the installment payments are payable over at least 10 years so
as not to be eligible rollover distributions), the amount included in gross income for any year is
equal to the amount of the installment payment paid during the year.
Example 2. (i) Facts. Same facts as in Example 1, except that the same rules are extended

50

to participants w h o had a severance from employment before January 1, 2002.
(ii) Conclusion. For all participants (that is, both those who have a severance from
employment after December 31, 2001, and those w h o have a severance from employment before
January 1, 2002, including those whose benefit payments have commenced before January 1,
2002), no amounts are included in gross income before actual payments begin. If installment
payments begin (and the installment payments are payable over at least 10 years so as not to be
eligible rollover distributions), the amount included in gross income for any year is equal to the
amount of the installment payment paid during the year.
(c) Amounts included in gross income under an eligible plan of a tax-exempt entity-(l)
Amounts included in gross income in year paid or made available under an eligible plan of a tax-

exempt entity. Amounts deferred under an eligible plan of a tax-exempt entity are includible in th
gross income of a participant or beneficiary for the taxable year in which paid or otherwise made

available to the participant or beneficiary under the plan. Thus, amounts deferred under an eligib

plan of a tax-exempt entity are includible in the gross income of the participant or beneficiary i

the year the amounts are first made available under the terms of the plan, even if the plan has no
distributed the amounts deferred. Amounts deferred under an eligible plan of a tax-exempt entity

are not considered made available to the participant or beneficiary solely because the participant
beneficiary is permitted to choose among various investments under the plan.
(2) When amounts deferred are considered to be made available under an eligible plan of a

tax-exempt entity—(i) General rule. Except as provided in paragraphs (c)(2)(h) through (iv) of thi
section, amounts deferred under an eligible plan of a tax-exempt entity are considered made

available (and, thus, are includible in the gross income of the participant or beneficiary under t
paragraph (c)) at the earliest date, on or after severance from employment, on which the plan
allows distributions to commence, but in no event later than the date on which distributions must
commence pursuant to section 401(a)(9). For example, in the case of a plan that permits

51

distribution to c o m m e n c e on the date that is 60 days after the close of the plan year in which the
participant has a severance from employment with the eligible employer, amounts deferred are
considered to be made available on that date. However, distributions deferred in accordance with
paragraphs (c)(2)(h) through (iv) of this section are not considered made available prior to the
applicable date under paragraphs (c)(2)(h) through (iv) of this section. In addition, no portion of
participant or beneficiary's account is treated as made available (and thus currently includible in
income) under an eligible plan of a tax-exempt entity merely because the participant or beneficiary
under the plan may elect to receive a distribution in any of the following circumstances:
(A) A distribution in the event of an unforeseeable emergency to the extent the distribution
is permitted under §1.457-6(c).
(B) A distribution from an account for which the total amount deferred is not in excess of
the dollar limit under section 41 l(a)(l 1)(A) to the extent the distribution is permitted under
§1.457-6(e).
(ii) Initial election to defer commencement of distributions—(A) In general. An eligible
plan of a tax-exempt entity may provide a period for making an initial election during which the
participant or beneficiary may elect, in accordance with the terms of the plan, to defer the payment
of some or all of the amounts deferred to a fixed or determinable future time. The period for
making this initial election must expire prior to the first time that any such amounts would be
considered made available under the plan under paragraph (c)(2)(i) of this section.
(B) Failure to make initial election to defer commencement of distributions. Generally, if
no initial election is made by a participant or beneficiary under this paragraph (c)(2)(h), then the
amounts deferred under an eligible plan of a tax-exempt entity are considered made available and

52

taxable to the participant or beneficiary in accordance with paragraph (c)(2)(i) of this section at the
earliest time, on or after severance from employment (but in no event later than the date on which
distributions must commence pursuant to section 401(a)(9)), that distribution is permitted to
commence under the terms of the plan. However, the plan may provide for a default payment
schedule that applies if no election is made. If the plan provides for a default payment schedule,

the amounts deferred are includible in the gross income of the participant or beneficiary in the ye
the amounts deferred are first made available under the terms of the default payment schedule.
(hi) Additional election to defer commencement of distribution. An eligible plan of a taxexempt entity is permitted to provide that a participant or beneficiary who has made an initial
election under paragraph (c)(2)(ii)(A) of this section may make one additional election to defer
(but not accelerate) commencement of distributions under the plan before distributions have
commenced in accordance with the initial deferral election under paragraph (c)(2)(ii)(A) of this
section. Amounts payable to a participant or beneficiary under an eligible plan of a tax-exempt
entity are not treated as made available merely because the plan allows the participant to make an
additional election under this paragraph (c)(2)(iii). A participant or beneficiary is not precluded
from making an additional election to defer commencement of distributions merely because the
participant or beneficiary has previously received a distribution under §1.457-6(c) because of an
unforeseeable emergency, has received a distribution of smaller amounts under §1.457-6(e), has
made (and revoked) other deferral or method of payment elections within the initial election
period, or is subject to a default payment schedule under which the commencement of benefits is
deferred (for example, until a participant is age 65).
(iv) Election as to method of payment. An eligible plan of a tax-exempt entity may

53

provide that an election as to the method of payment under the plan m a y be m a d e at any time prior

to the time the amounts are distributed in accordance with the participant or beneficiary's initi
additional election to defer commencement of distributions under paragraph (c)(2)(h) or (hi) of

this section. Where no method of payment is elected, the entire amount deferred will be includible
in the gross income of the participant or beneficiary when the amounts first become made

available in accordance with a participant's initial or additional elections to defer under parag

(c)(2)(h) and (hi) of this section, unless the eligible plan provides for a default method of pay
(in which case amounts are considered made available and taxable when paid under the terms of
the default payment schedule). A method of payment means a distribution or a series of periodic
distributions commencing on a date determined in accordance with paragraph (c)(2)(h) or (hi) of
this section.
(3) Examples. The provisions of this paragraph (c) are illustrated by the following
examples:
Example 1. (i) Facts. Eligible Plan X of a tax-exempt entity provides that a participant's
total account balance, representing all amounts deferred under the plan, is payable to a participant
in a single sum 60 days after severance from employment throughout these examples, unless,
during a 30-day period immediately following the severance, the participant elects to receive the
single sum payment at a later date (that is not later than the plan's normal retirement age of 65) or
elects to receive distribution in 10 annual installments to begin 60 days after severance from
employment (or at a later date, if so elected, that is not later than the plan's normal retirement age
of 65). O n November 13, 2004, participant K, a calendar year taxpayer, has a severance from
employment with the eligible employer. K does not, within the 30-day window period, elect to
postpone distributions to a later date or to receive payment in 10 fixed annual installments.
(ii) Conclusion. The single sum payment is payable to K 60 days after the date K has a
severance from employment (January 12, 2005), and is includible in the gross income of K in 2005
under section 457(a).
Example 2. (i) Facts. The terms of eligible Plan X are the same as described in Example
I. Participant L participates in eligible Plan X. O n November 11, 2003, L has a severance from
the employment of the eligible employer. O n November 24, 2003, L makes an initial deferral

54

election not to receive the single-sum payment payable 60 days after the severance, and instead
elects to receive the amounts in 10 annual installments to begin 60 days after severance from
employment.
(ii) Conclusion. No portion of L's account is considered made available in 2003 or 2004
before a payment is m a d e and no amount is includible in the gross income of L until distributions
commence. The annual installment payable in 2004 will be includible in L's gross income in
2004.
Example 3. (i) Facts. The facts are the same as in Example 1, except that eligible Plan X
also provides that those participants w h o are receiving distributions in 10 annual installments may,
at any time and without restriction, elect to receive a cash out of all remaining installments.
Participant M elects to receive a distribution in 10 annual installments commencing in 2004.
(ii) Conclusion. M's total account balance, representing the total of the amounts deferred
under the plan, is considered m a d e available and is includible in M ' s gross income in 2004.
Example 4. (i) Facts. The facts are the same as in Example 3, except that, instead of
providing for an unrestricted cashout of remaining payments, the plan provides that participants or
beneficiaries w h o are receiving distributions in 10 annual installments m a y accelerate the payment
of the amount remaining payable to the participant upon the occurrence of an unforeseeable
emergency as described in §1.457-6(c)(l) in an amount not exceeding that described in §1.4576(c)(2).
(ii) Conclusion. No amount is considered made available to participant M on account of
M's right to accelerate payments upon the occurrence of an unforeseeable emergency.
Example 5. (i) Facts. Eligible Plan Y of a tax-exempt entity provides that distributions
will commence 60 days after a participant's severance from employment unless the participant
elects, within a 30-day w i n d o w period following severance from employment, to defer
distributions to a later date (but no later than the year following the calendar year the participant
attains age 70 Yi). The plan provides that a participant w h o has elected to defer distributions to a
later date m a y m a k e an election as to form of distribution at any time prior to the 30 day before
distributions are to commence.
(ii) Conclusion. No amount is considered made available prior to the date distributions are
to commence by reason of a participant's right to defer or m a k e an election as to the form of
distribution.
Example 6. (i) Facts. The facts are the same as in Example 1, except that the plan also
permits participants w h o have m a d e an initial election to defer distribution to m a k e one additional
deferral election at any time prior to the date distributions are scheduled to commence. Participant
N has a severance from employment at age 50. The next day, during the 30-day period provided in
the plan, N elects to receive distribution in the form of 10 annual installment payments beginning

55

at age 55. T w o weeks later, within the 30-day w i n d o w period, N makes a n e w election permitted
under the plan to receive 10 annual installment payments beginning at age 60 (instead of age 55).
W h e n N is age 59, N elects under the additional deferral election provisions, to defer distributions
until age 65.
(ii) Conclusion. In this example, N's election to defer distributions until age 65 is a valid
election. The two elections N makes during the 30-day w i n d o w period are not additional deferral
elections described in paragraph (c)(2)(iii) of this section because they are m a d e before the first
permissible payout date under the plan. Therefore, the plan is not precluded from allowing N to
m a k e the additional deferral election. However, N can m a k e no further election to defer
distributions beyond age 65 (or accelerate distribution before age 65) because this additional
deferral election can only be m a d e once.
§1.457-8 Funding rules for eligible plans.
(a) Eligible governmental plans—(1) In general. In order to be an eligible governmental
plan, all amounts deferred under the plan, all property and rights purchased with such amounts,
and all income attributable to such amounts, property, or rights, must be held in trust for the

exclusive benefit of participants and their beneficiaries. A trust described in this paragraph (a) t
also meets the requirements of §§1.457-3 through 1.457-10 is treated as an organization exempt
from tax under section 501(a), and a participant's or beneficiary's interest in amounts in the trust
includible in the gross income of the participants and beneficiaries only to the extent, and at the
time, provided for in section 457(a) and §§1.457-4 through 1.457-10.
(2) Trust requirement, (i) A trust described in this paragraph (a) must be established
pursuant to a written agreement that constitutes a valid trust under State law. The terms of the

trust must make it impossible, prior to the satisfaction of all liabilities with respect to particip

and their beneficiaries, for any part of the assets and income of the trust to be used for, or divert
to, purposes other than for the exclusive benefit of participants and their beneficiaries.
(ii) Amounts deferred under an eligible governmental plan must be transferred to a trust

within a period that is not longer than is reasonable for the proper administration of the participa

56

accounts (if any). For purposes of this requirement, the plan m a y provide for amounts deferred for

a participant under the plan to be transferred to the trust within a specified period after the dat
amounts would otherwise have been paid to the participant. For example, the plan could provide

for amounts deferred under the plan at the election of the participant to be contributed to the trus
within 15 business days following the month in which these amounts would otherwise have been
paid to the participant.
(3) Custodial accounts and annuity contracts treated as trusts—(i) In general. For purposes
of the trust requirement of this paragraph (a), custodial accounts and annuity contracts described

in section 401(f) that satisfy the requirements of this paragraph (a)(3) are treated as trusts under
rules similar to the rules of section 401(f). Therefore, the provisions of § 1.401 (f)-1 (b) will
generally apply to determine whether a custodial account or an annuity contract is treated as a
trust. The use of a custodial account or annuity contract as part of an eligible governmental plan

does not preclude the use of a trust or another custodial account or annuity contract as part of the

same plan, provided that all such vehicles satisfy the requirements of section 457(g)(1) and (3) and

paragraphs (a)(1) and (2) of this section and that all assets and income of the plan are held in suc
vehicles.
(ii) Custodial accounts-(A) In general. A custodial account is treated as a trust, for
purposes of section 457(g)(1) and paragraphs (a)(1) and (2) of this section, if the custodian is a
bank, as described in section 408(n), or a person who meets the nonbank trustee requirements of

paragraph (a)(3)(ii)(B) of this section, and the account meets the requirements of paragraphs (a)(1
and (2) of this section, other than the requirement that it be a trust.
(B) Nonbank trustee status. The custodian of a custodial account may be a person other

57

than a bank only if the person demonstrates to the satisfaction of the Commissioner that the
manner in which the person will administer the custodial account will be consistent with the
requirements of section 457(g)(1) and (3). To do so, the person must demonstrate that the
requirements of §1.408-2(e)(2) through (6) (relating to nonbank trustees) are met. The written
application must be sent to the address prescribed by the Commissioner in the same manner as
prescribed under § 1.408-2(e). To the extent that a person has already demonstrated to the
satisfaction of the Commissioner that the person satisfies the requirements of §1.408-2(e) in
connection with a qualified trust (or custodial account or annuity contract) under section 401(a),
that person is deemed to satisfy the requirements of this paragraph (a)(3)(ii)(B).
(hi) Annuity contracts. An annuity contract is treated as a trust for purposes of section
457(g)(1) and paragraph (a)(1) of this section if the contract is an annuity contract, as defined in
section 401(g), that has been issued by an insurance company qualified to do business in the State,
and the contract meets the requirements of paragraphs (a)(1) and (2) of this section, other than the
requirement that it be a trust. An annuity contract does not include a life, health or accident,
property, casualty, or liability insurance contract.
(4) Combining assets. [Reserved]
(b) Eligible plans maintained by tax-exempt entity—(1) General rule. In order to be an
eligible plan of a tax-exempt entity, the plan must be unfunded and plan assets must not be set
aside for participants or their beneficiaries. Under section 457(b)(6) and this paragraph (b), an
eligible plan of a tax-exempt entity must provide that all amounts deferred under the plan, all
property and rights to property (including rights as a beneficiary of a contract providing life
insurance protection) purchased with such amounts, and all income attributable to such amounts,

58

property, or rights, must remain (until paid or m a d e available to the participant or beneficiary)

solely the property and rights of the eligible employer (without being restricted to the provision
benefits under the plan), subject only to the claims of the eligible employer's general creditors.
(2) Additional requirements. For purposes of a paragraph (b)(1) of this section, the plan
must be unfunded regardless of whether or not the amounts were deferred pursuant to a salary
reduction agreement between the eligible employer and the participant. Any funding arrangement
under an eligible plan of a tax-exempt entity that sets aside assets for the exclusive benefit of
participants violates this requirement, and amounts deferred are generally immediately includible

in the gross income of plan participants and beneficiaries. Nothing in this paragraph (b) prohibits
an eligible plan from permitting participants and their beneficiaries to make an election among

different investment options available under the plan, such as an election affecting the investment
of the amounts described in paragraph (b)(1) of this section.
§1.457-9 Effect on eligible plans when not administered in accordance with eligibility
requirements.
(a) Eligible governmental plans. A plan of a State ceases to be an eligible governmental

plan on the first day of the first plan year beginning more than 180 days after the date on which t
Commissioner notifies the State in writing that the plan is being administered in a manner that is
inconsistent with one or more of the requirements of §§1.457-3 through 1.457-8, or 1.457-10.

However, the plan may correct the plan inconsistencies specified in the written notification before

the first day of that plan year and continue to maintain plan eligibility. If a plan ceases to be a
eligible governmental plan, amounts subsequently deferred by participants will be includible in
income when deferred, or, if later, when the amounts deferred cease to be subject to a substantial

59

risk of forfeiture, as provided at §1.457-11. A m o u n t s deferred before the date on which the plan
ceases to be an eligible governmental plan, and any earnings thereon, will be treated as if the plan
continues to be an eligible governmental plan and will not be includible in participant's or
beneficiary's gross income until paid to the participant or beneficiary.
(b) Eligible plans of tax-exempt entities. A plan of a tax-exempt entity ceases to be an
eligible plan on the first day that the plan fails to satisfy one or more of the requirements of
§§1.457-3 through 1.457-8, or §1.457-10. See §1.457-11 for rules regarding the treatment of an
ineligible plan.
§1.457-10 Miscellaneous provisions.
(a) Plan terminations and frozen plans—(1) In general. An eligible employer may amend

its plan to eliminate future deferrals for existing participants or to limit participation to existi
participants and employees. An eligible plan may also contain provisions that permit plan
termination and permit amounts deferred to be distributed on termination. In order for a plan to be
considered terminated, amounts deferred under an eligible plan must be distributed to all plan
participants and beneficiaries as soon as administratively practicable after termination of the

eligible plan. The mere provision for, and making of, distributions to participants or beneficiaries
upon a plan termination will not cause an eligible plan to cease to satisfy the requirements of
section 457(b) or the regulations.
(2) Employers that cease to be eligible employers—(i) Plan not terminated. An eligible
employer that ceases to be an eligible employer may no longer maintain an eligible plan. If the
employer was a tax-exempt entity and the plan is not terminated as permitted under a paragraph
(a)(2)(h) of this section, the tax consequences to participants and beneficiaries in the previously

60

eligible (unfunded) plan of an ineligible employer are determined in accordance with either section
451 if the employer becomes an entity other than a State or §1.457-11 if the employer becomes a
State. If the employer was a State and the plan is neither terminated as permitted under paragraph
(a)(2)(h) of this section nor transferred to another eligible plan of that State as permitted under
paragraph (b) of this section, the tax consequences to participants in the previously eligible
governmental plan of an ineligible employer, the assets of which are held in trust pursuant to
§1.457-8(a), are determined in accordance with section 402(b) (section 403(c) in the case of an
annuity contract) and the trust is no longer to be treated as a trust that is exempt from tax under
section 501(a).
(ii) Plan termination. As an alternative to determining the tax consequences to the plan and
participants under paragraph (a)(2)(i) of this section, the employer may terminate the plan and
distribute the amounts deferred (and all plan assets) to all plan participants as soon as
administratively practicable in accordance with paragraph (a)(1) of this section. Such distribution
may include eligible rollover distributions in the case of a plan that was an eligible governmental
plan. In addition, if the employer is a State, another alternative to determining the tax
consequences under paragraph (a)(2)(i) of this section is to transfer the assets of the eligible
governmental plan to an eligible governmental plan of another eligible employer within the same
State under the plan-to-plan transfer rules of paragraph (b) of this section.
(3) Examples. The provisions of this paragraph (a) are illustrated by the following
examples:
Example 1. (i) Facts. Employer Y, a corporation that owns a State hospital, sponsors an
eligible governmental plan funded through a trust. Employer Y is acquired by a for-profit hospital
and Employer Y ceases to be an eligible employer under section 457(e)(1) or §1.457-2(e).
Employer Y terminates the plan and, during the next 6 months, distributes to participants and
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beneficiaries all amounts deferred that were under the plan.
(ii) Conclusion. The termination and distribution does not cause the plan to fail to be an
eligible governmental plan. Amounts that are distributed as eligible rollover distributions m a y be
rolled over to an eligible retirement plan described in section 402(c)(8)(B).
Example 2. (i) Facts. The facts are the same as in Example 1, except that Employer Y
decides to continue to maintain the plan.
(ii) Conclusion. If Employer Y continues to maintains the plan, the tax consequences to
participants and beneficiaries will be determined in accordance with either section 402(b) if the
compensation deferred is funded through a trust, section 403(c) if the compensation deferred is
funded through annuity contracts, or §1.457-11 if the compensation deferred is not funded through
a trust or annuity contract. In addition, if Employer Y continues to maintain the plan, the trust will
no longer be treated as exempt from tax under section 501(a).
Example 3. (i) Facts. Employer Z, a corporation that owns a tax-exempt hospital,
sponsors an unfunded eligible plan. Employer Z is acquired by a for-profit hospital and is no
longer an eligible employer under section 457(e)(1) or §1.457-2(e). Employer Z terminates the
plan and distributes all amounts deferred under the eligible plan to participants and beneficiaries
within a one-year period.
(ii) Conclusion. Distributions under the plan are treated as made under an eligible plan of
a tax-exempt entity and the distributions of the amounts deferred are includible in the gross income
of the participant or beneficiary in the year distributed.
Example 4. (i) Facts. The facts are the same as in Example 3, except that Employer Z
decides to maintain instead of terminate the plan.
(ii) Conclusion. If Employer Z maintains the plan, the tax consequences to participants
and beneficiaries in the plan will thereafter be determined in accordance with section 451.
(b) Plan-to-plan transfers-(l) General rule. An eligible governmental plan may provide
for the transfer of amounts deferred by a participant or beneficiary to another eligible
governmental plan if the conditions in paragraph (b)(2), (3), or (4) of this section are met. An
eligible plan of a tax-exempt entity may provide for transfers of amounts deferred by a participant

to another eligible plan of a tax-exempt entity if the conditions in paragraph (b)(5) of this secti
are met. In addition, an eligible governmental plan may accept transfers from another eligible

62

governmental plan as described in thefirstsentence of this paragraph (b)(1), and an eligible plan
of a tax-exempt entity may accept transfers from another eligible plan of a tax-exempt entity as
described in the preceding sentence. However, a State may not transfer the assets of its eligible
governmental plan to a tax-exempt entity's eligible plan and the plan of a tax-exempt entity may

not accept such a transfer. Similarly, a tax-exempt entity may not transfer the assets of its eligib
plan to an eligible governmental plan and an eligible governmental plan may not accept such a
transfer. In addition, if the conditions in paragraph (b)(4) of this section (relating to permissive
past service credit and repayments under section 415) are met, an eligible governmental plan of a

State may provide for the transfer of amounts deferred by a participant or beneficiary to a qualified
plan (under section 401(a)) maintained by a State. However, a qualified plan may not transfer

assets to an eligible governmental plan or to an eligible plan of a tax-exempt entity, and an eligib
governmental plan or the plan of a tax-exempt entity may not accept such a transfer.
(2) Requirements for post-severance plan-to-plan transfers among eligible governmental
plans. A transfer under paragraph (b)(1) of this section from an eligible governmental plan to
another eligible governmental plan is permitted if the following conditions are met —
(i) The transferor plan provides for transfers;
(ii) The receiving plan provides for the receipt of transfers;
(hi) The participant or beneficiary whose amounts deferred are being transferred will have
an amount deferred immediately after the transfer at least equal to the amount deferred with
respect to that participant or beneficiary immediately before the transfer; and
(iv) In the case of a transfer for a participant, the participant has had a severance from
employment with the transferring employer and is performing services for the entity maintaining

63

the receiving plan.
(3) Requirements for plan-to-plan transfers of all plan assets of eligible governmental plan.
A transfer under paragraph (b)(1) of this section from an eligible governmental plan to another
eligible governmental plan is permitted if the following conditions are met —
(i) The transfer is from an eligible governmental plan to another eligible governmental plan
within the same State;
(ii) All of the assets held by the transferor plan are transferred;
(hi) The transferor plan provides for transfers;
(iv) The receiving plan provides for the receipt of transfers;
(v) The participant or beneficiary whose amounts deferred are being transferred will have
an amount deferred immediately after the transfer at least equal to the amount deferred with
respect to that participant or beneficiary immediately before the transfer; and
(vi) The participants or beneficiaries whose deferred amounts are being transferred are not

eligible for additional annual deferrals in the receiving plan unless they are performing services f
the entity maintaining the receiving plan.
(4) Requirements for plan-to-plan transfers among eligible governmental plans of the same
employer. A transfer under paragraph (b)(1) of this section from an eligible governmental plan to
another eligible governmental plan is permitted if the following conditions are met —
(i) The transfer is from an eligible governmental plan to another eligible governmental plan
of the same employer (and, for this purpose, the employer is not treated as the same employer if
the participant's compensation is paid by a different entity);
(ii) The transferor plan provides for transfers;

64

(hi) The receiving plan provides for the receipt of transfers;
(iv) The participant or beneficiary whose amounts deferred are being transferred will have
an amount deferred immediately after the transfer at least equal to the amount deferred with
respect to that participant or beneficiary immediately before the transfer; and
(v) The participant or beneficiary whose deferred amounts are being transferred is not

eligible for additional annual deferrals in the receiving plan unless the participant or beneficiary
performing services for the entity maintaining the receiving plan.
(5) Requirements for post-severance plan-to-plan transfers among eligible plans of taxexempt entities. A transfer under paragraph (b)(1) of this section from an eligible plan of a taxexempt employer to another eligible plan of a tax-exempt employer is permitted if the following
conditions are met —
(i) The transferor plan provides for transfers;
(ii) The receiving plan provides for the receipt of transfers;
(hi) The participant or beneficiary whose amounts deferred are being transferred will have
an amount deferred immediately after the transfer at least equal to the amount deferred with
respect to that participant or beneficiary immediately before the transfer; and
(iv) In the case of a transfer for a participant, the participant has had a severance from
employment with the transferring employer and is performing services for the entity maintaining
the receiving plan.
(6) Treatment of amount transferred following a plan-to-plan transfer between eligible
plans. Following a transfer of any amount between eligible plans under paragraphs (b)(1) through
(b)(5) of this section ~

65

(i) the transferred amount is subject to the restrictions of §1.457-6 (relating to w h e n

distributions are permitted to be made to a participant under an eligible plan) in the receiving pl
in the same manner as if the transferred amount had been originally been deferred under the
receiving plan if the participant is performing services for the entity maintaining the receiving
plan, and
(ii) in the case of a transfer between eligible plans of tax-exempt entities, except as
otherwise determined by the Commissioner, the transferred amount is subject to §1.457-7(c)(2)
(relating to when amounts are considered to be made available under an eligible plan of a taxexempt entity) in the same manner as if the elections made by the participant or beneficiary under
the transferor plan had been made under the receiving plan.
(7) Examples. The provisions of paragraphs (b)(1) through (6) of this section are
illustrated by the following examples:
Example 1. (i) Facts. Participant A, the president of City X's hospital, has accepted a
position with another hospital which is a tax-exempt entity. A participates in the eligible
governmental plan of City X. A would like to transfer the amounts deferred under City X's
eligible governmental plan to the eligible plan of the tax-exempt hospital.
(ii) Conclusion. City X's plan may not transfer A's amounts deferred to the tax-exempt
employer's eligible plan. In addition, because the amounts deferred would no longer be held in
trust for the exclusive benefit of participants and their beneficiaries, the transfer would violate the
exclusive benefit rule of section 457(g) and §1.457-8(a).
Example 2. (i) Facts. County M, located in State S, operates several health clinics and
maintains an eligible governmental plan for employees of those clinics. O n e of the clinics
operated by County M is being acquired by a hospital operated by State S, and employees of that
clinic will become employees of State S. County M permits those employees to transfer their
balances under County M ' s eligible governmental plan to the eligible governmental plan of State
S.
(ii) Conclusion. If the eligible governmental plans of County M and State S provide for
the transfer and acceptance of the transfer (and the other requirements of paragraph (b)(1) of this
section are satisfied), then the requirements of paragraph (b)(2) of this section are satisfied and,

66

thus, the transfer will not cause either plan to violate the requirements of section 457 or these
regulations.
Example 3. (i) Facts. City Employer Z, a hospital, sponsors an eligible governmental plan.
City Employer Z is located in State B. All of the assets of City Employer Z are being acquired by
a tax-exempt hospital. City Employer Z, in accordance with the plan-to-plan transfer rules of
paragraph (b) of this section, would like to transfer the total amount of assets deferred under City
Employer Z's eligible governmental plan to the acquiring tax-exempt entity's eligible plan.
(ii) Conclusion. City Employer Z may not permit participants to transfer the amounts to
the eligible plan of the tax-exempt entity. In addition, because the amounts deferred would no
longer be held in trust for the exclusive benefit of participants and their beneficiaries, the transfer
would violate the exclusive benefit rule of section 457(g) and §1.457-8(a).
Example 4. (i) Facts. The facts are the same as in Example 3, except that City Employer
Z, instead of transferring all of its assets to the eligible plan of the tax-exempt entity, decides to
transfer all of the amounts deferred under City Z's eligible governmental plan to the eligible
governmental plan of County B in which City Z is located. County B's eligible plan does not
cover employees of City Z, but is willing to allow the assets of City Z's plan to be transferred to
County B's plan, a related state government entity, also located in State B.
(ii) Conclusion. If City Employer Z's (transferor) eligible governmental plan provides for
such transfer and the eligible governmental plan of County B permits the acceptance of such a
transfer (and the other requirements of paragraph (b)(1) of this section are satisfied), then the
requirements of paragraph (b)(3) of this section are satisfied and, thus, City Employer Z m a y
transfer the total amounts deferred under its eligible governmental plan, prior to termination of that
plan, to the eligible governmental plan maintained by County B. However, the participants of City
Employer Z whose deferred amounts are being transferred are not eligible to participate in the
eligible governmental plan of County B, the receiving plan, unless they are performing services for
County B.
Example 5. (i) Facts. State C has an eligible governmental plan. Employees of City U in
State C are a m o n g the eligible employees for State C's plan and City U decides to adopt another
eligible governmental plan only for its employees. State C decides to allow employees to elect to
transfer all of the amounts deferred for an employee under State C's eligible governmental plan to
City U's eligible governmental plan.
(ii) Conclusion. If State C's (transferor) eligible governmental plan provides for such
transfer and the eligible governmental plan of City U permits the acceptance of such a transfer
(and the other requirements of paragraph (b)(1) of this section are satisfied), then the requirements
of paragraph (b)(4) of this section are satisfied and, thus, State C m a y transfer the total amounts
deferred under its eligible governmental plan to the eligible governmental plan maintained by City
U.

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(8) Purchase of permissive past service credit by plan-to-plan transfers from an eligible
governmental plan to a qualified plan—(i) General rule. An eligible governmental 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)(h) of this section a

met. A transfer under this paragraph (b)(8) is not treated as a distribution for purposes of §1.4576. Therefore, such a transfer may be made before severance from employment.
(ii) Conditions for plan-to-plan transfers 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 past service credit (as defined in section 415(n)(3)(A))
under the receiving defined benefit governmental plan; or
(B) A repayment to which section 415 does not apply by reason of section 415(k)(3).
(hi) Example. The provisions of this paragraph (b)(8) are illustrated by the following
example:
Example, (i) Facts. Plan X is an eligible governmental plan maintained by County Y for
its employees. Plan X provides for distributions only in the event of death, an unforeseeable
emergency, or severance from employment with County Y (including retirement from County Y ) .
Plan S is a qualified defined benefit plan maintained by State T for its employees. 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 past service credit under Plan S and does not permit the amount
transferred to exceed the amount necessary to fund the benefit resulting from the past service
credit. Although not required to do so, Plan X allows Employee A to transfer assets to Plan S to
provide a past service benefit under Plan S.
(ii) Conclusion. The transfer is permitted under this paragraph (b)(8).
(c) Qualified domestic relations orders under eligible plans-(l) General rule. An eligible

68

plan does not become an ineligible plan described in section 457(f) solely because its administrator
or sponsor complies with a qualified domestic relations order as defined in section 414(p),

including an order requiring the distribution of the benefits of a participant to an alternate payee
advance of the general rules for eligible plan distributions under §1.457-6. If a distribution or
payment is made from an eligible plan to an alternate payee pursuant to a qualified domestic
relations order, rules similar to the rules of section 402(e)(1)(A) shall apply to the distribution
payment.
(2) Examples. The provisions of this paragraph (c) are illustrated by the following
examples:
Example 1. (i) Facts. Participant C and C's spouse D are divorcing. C is employed by
State S and is a participant in an eligible plan maintained by State S. C has an account valued at
$100,000 under the plan. Pursuant to the divorce, a court issues a qualified domestic relations
order on September 1, 2003 that allocates 50 percent of C's $100,000 plan account to D and
specifically provides for an immediate distribution to D of D's share within 6 months of the order.
Payment is m a d e to D in January of 2004.
(ii) Conclusion. State S's eligible plan does not become an ineligible plan described in
section 457(f) and §1.457-11 solely because its administrator or sponsor complies with the
qualified domestic relations order requiring the immediate distribution to D in advance of the
general rules for eligible plan distributions under §1.457-6. In accordance with section
402(e)(1)(A), D (not C ) must include the distribution in gross income. The distribution is
includible in D's gross income in 2004. If the qualified domestic relations order were to provide
for distribution to D at a future date, amounts deferred attributable to D's share will be includible
in D's gross income w h e n paid to D.
Example 2. (i) Facts. The facts are the same as in Example 1, except that S is a taxexempt entity, instead of a State.
(ii) Conclusion. State S's eligible plan does not become an ineligible plan described in
section 457(f) and §1.457-11 solely because its administrator or sponsor complies with the
qualified domestic relations order requiring the immediate distribution to D in advance of the
general rules for eligible plan distributions under § 1.457-6. In accordance with section
402(e)(1)(A), D (not C ) must include the distribution in gross income. The distribution is
includible in D's gross income in 2004, assuming that the plan did not m a k e the distribution
available to D in 2003. If the qualified domestic relations order were to provide for distribution to
D at a future date, amounts deferred attributable to D's share would be includible in D's gross

69

income w h e n paid or m a d e available to D.
(d) Death benefits and life insurance proceeds. A death benefit plan under section
457(e)(l 1) is not an eligible plan. In addition, no amount paid or made available under an eligible
plan as death benefits or life insurance proceeds is excludable from gross income under section
101.
(e) Rollovers to eligible governmental plans-fl) General rule. An eligible governmental
plan may accept contributions that are eligible rollover distributions (as defined in section
402(c)(4)) made from another eligible retirement plan (as defined in section 402(c)(8)(B)) if the
conditions in paragraph (e)(2) of this section are met. Amounts contributed to an eligible
governmental plan as eligible rollover distributions are not taken into account for purposes of the
annual limit on annual deferrals by a participant in §1.457-4(c) or §1.457-5, but are otherwise
treated in the same manner as amounts deferred under section 457 for purposes of §§1.457-3
through 1.457-9 and this section.
(2) Conditions for rollovers to an eligible governmental plan. An eligible governmental
plan that permits eligible rollover distributions made from another eligible retirement plan to be
paid into the eligible governmental plan is required under this paragraph (e)(2) to provide that it
will separately account for any eligible rollover distributions it receives. A plan does not fail to
satisfy this requirement if it separately accounts for particular types of eligible rollover
distributions (for example, if it maintains a separate account for eligible rollover distributions
attributable to annual deferrals that were made under other eligible governmental plans and a
separate account for amounts attributable to other eligible rollover distributions), but this
requirement is not satisfied if any such separate account includes any amount that is not

70

attributable to an eligible rollover distribution.
(3) Example. The provisions of this paragraph (e) are illustrated by the following
example:
Example, (i) Facts. Plan T is an eligible governmental plan that provides that employees
w h o are eligible to participate in Plan T m a y m a k e rollover contributions to Plan T from amounts
distributed to an employee from an eligible retirement plan. A n eligible retirement plan is defined
in Plan T as another eligible governmental plan, a qualified section 401(a) or 403(a) plan, or a
section 403(b) contract, or an individual retirement arrangement (IRA) that holds such amounts.
Plan T requires rollover contributions to be paid by the eligible retirement plan directly to Plan T
(a direct rollover) or to be paid by the participant within 60 days after the date on which the
participant received the amount from the other eligible retirement plan. Plan T does not take
rollover contributions into account for purposes of the plan's limits on amounts deferred that
conform to §1.457-4(c). Rollover contributions paid to Plan T are invested in the trust in the same
manner as amounts deferred under Plan T and rollover contributions (and earnings thereon) are
available for distribution to the participant at the same time and in the same manner as amounts
deferred under Plan T. In addition, Plan T provides that, for each participant w h o makes a rollover
contribution to Plan T, the Plan T record-keeper is to establish a separate account for the
participant's rollover contributions. The record-keeper calculates earnings and losses for
investments held in the rollover account separately from earnings and losses on other amounts held
under the plan and calculates disbursements from and payments m a d e to the rollover account
separately from disbursements from and payments m a d e to other amounts held under the plan.
(ii) Conclusion. Plan T does not lose its status as an eligible governmental plan as a result
of the receipt of rollover contributions. The conclusion would not be different if the Plan T
record-keeper were to establish two separate accounts, one of which is for the participant's
rollover contributions attributable to annual deferrals that were m a d e under an eligible
governmental plan and the other of which is for other rollover contributions.
(f) Deemed IRAs under eligible governmental plans. See regulations under section 408(q)
for guidance regarding the treatment of separate accounts or annuities as individual retirement
plans (IRAs).
§1.457-11 Tax treatment of participants if plan is not an eligible plan.
(a) In general. Under section 457(f), if an eligible employer provides for a deferral of
compensation under any agreement or arrangement that is an ineligible plan—
(1) Compensation deferred under the agreement or arrangement is includible in the gross

71

income of the participant or beneficiary for thefirsttaxable year in which there is no substantial
risk of forfeiture (within the meaning of section 457(f)(3)(B)) of the rights to such compensation;
(2) If the compensation deferred is subject to a substantial risk of forfeiture, the amount
includible in gross income for the first taxable year in which there is no substantial risk of

forfeiture includes earnings thereon to the date on which there is no substantial risk of forfeiture
(3) Earnings credited on the compensation deferred under the agreement or arrangement
that are not includible in gross income under paragraph (a)(2) of this section are includible in the
gross income of the participant or beneficiary only when paid or made available to the participant

or beneficiary, provided that the interest of the participant or beneficiary in any assets (includin
amounts deferred under the plan) of the entity sponsoring the agreement or arrangement is not
senior to the entity's general creditors; and
(4) Amounts paid or made available to a participant or beneficiary under the agreement or
arrangement are includible in the gross income of the participant or beneficiary under section 72,
relating to annuities.
(b) Exceptions. Paragraph (a) of this section does not apply with respect to—
(1) A plan described in section 401(a) which includes a trust exempt from tax under section
501(a);
(2) An annuity plan or contract described in section 403;
(3) That portion of any plan which consists of a transfer of property described in section
83;
(4) That portion of any plan which consists of a trust to which section 402(b) applies; or
(5) A qualified governmental excess benefit arrangement described in section 415(m).

72

(c) A m o u n t included in income. The amount included in gross income on the applicable
date under paragraphs (a)(1) and (a)(2) of this section is equal to the present value of the

compensation (including earnings to the extent provided in paragraph (a)(2) of this section) on tha
date. For purposes of applying section 72 on the applicable date under paragraphs (a)(3) and (4) of

this section, the participant is treated as having paid investment in the contract (or basis) to the
extent that the deferred compensation has been taken into account by the participant in accordance
with paragraphs (a)(1) and (a)(2) of this section.
(d) Coordination of section 457(f) with section 83— (1) General rules. Under paragraph

(b)(3) of this section, section 457(f) and paragraph (a) of this section do not apply to that porti
any plan which consists of a transfer of property described in section 83. For this purpose, a
transfer of property described in section 83 means a transfer of property to which section 83

applies. Section 457(f) and paragraph (a) of this section do not apply if the date on which there is
no substantial risk of forfeiture with respect to compensation deferred under an agreement or
arrangement that is not an eligible plan is on or after the date on which there is a transfer of
property to which section 83 applies. However, section 457(f) and paragraph (a) of this section
apply if the date on which there is no substantial risk of forfeiture with respect to compensation
deferred under an agreement or arrangement that is not an eligible plan precedes the date on which
there is a transfer of property to which section 83 applies. If deferred compensation payable in
property is includible in gross income under section 457(f), then, as provided in section 72, the
amount includible in gross income when that property is later transferred or made available to the
service provider is the excess of the value of the property at that time over the amount previously
included in gross income under section 457(f).

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(2) Examples. The provisions of this paragraph (d) are illustrated in the following
examples:
Example 1. (i) Facts. As part of an arrangement for the deferral of compensation, an
eligible employer agrees on December 1, 2002 to pay an individual rendering services for the
eligible employer a specified dollar amount on January 15, 2005. The arrangement provides for
the payment to be m a d e in the form of property having a fair market value equal to the specified
dollar amount. The individual's rights to the payment are not subject to a substantial risk of
forfeiture (within the meaning of section 457(f)(3)(B)).
(ii) Conclusion. In this Example 1, because there is no substantial risk of forfeiture with
respect to the agreement to transfer property in 2005, the present value (as of December 1, 2002)
of the payment is includible in the individual's gross income for 2002. Under paragraph (a)(4) of
this section, w h e n the payment is m a d e on January 15, 2005, the amount includible in the
individual's gross income is equal to the excess of the fair market value of the property w h e n paid,
over the amount that was includible in gross income for 2002 (which is the basis allocable to that
payment).
Example 2. (i) Facts. As part of an arrangement for the deferral of compensation,
individuals A and B rendering services for a tax-exempt entity each receive in 2010 property that
is subject to a substantial risk of forfeiture (within the meaning of section 457(f)(3)(B) and within
the meaning of section 83(c)(1)). Individual A makes an election to include the fair market value
of the property in gross income under section 83(b) and individual B does not m a k e this election.
The substantial risk of forfeiture for the property transferred to individual A lapses in 2012 and the
substantial risk of forfeiture for the property transferred to individual B also lapses in 2012. Thus,
the property transferred to individual A is included in A's gross income for 2010 w h e n A makes an
section 83(b) election and the property transferred to individual B is included in B's gross income
for 2012 w h e n the substantial risk of forfeiture for the property lapses.
(ii) Conclusion. In this Example 2, in each case, the compensation deferred is not subject
to section 457(f) or this section because section 83 applies to the transfer of property on or before
the date on which there is no substantial risk of forfeiture with respect to compensation deferred
under the arrangement.
Example 3. (i) Facts. In 2004, Z, a tax-exempt entity, grants an option to acquire property
to employee C. The option lacks a readily ascertainable fair market value, within the meaning of
section 83(e)(3), has a value on the date of grant equal to $100,000, and is not subject to a
substantial risk of forfeiture (within the meaning of section 457(f)(3)(B) and within the meaning of
section 83(c)(1)). Z exercises the option in 2012 by paying an exercise price of $75,000 and
receives property that has a fair market value (for purposes of section 83) equal to $300,000.
(ii) Conclusion. In this Example 3, under section 83(e)(3), section 83 does not apply to the
grant of the option. Accordingly, C has income of $100,000 in 2004 under section 457(f). In

74

2012, C has income of $125,000, which is the value of the property transferred in 2012, minus the
allocable portion of the basis that results from the $100,000 of income in 2004 and the $75,000
exercise price.
Example 4. (i) Facts. In 2010, X, a tax-exempt entity, agrees to pay deferred
compensation to employee D. The amount payable is $100,000 to be paid 10 years later in 2020.
The commitment to m a k e the $100,000 payment is not subject to a substantial risk of forfeiture. In
2010, the present value of the $100,000 is $50,000. In 2018, X transfers to D property having a
fair market value (for purposes of section 83) equal to $70,000. The transfer is in partial
settlement of the commitment m a d e in 2010 and, at the time of the transfer in 2018, the present
value of the commitment is $80,000. In 2020, X pays D the $12,500 that remains due.
(ii) Conclusion. In this Example 4, D has income of $50,000 in 2010. In 2018, D has
income of $30,000, which is the amount transferred in 2018, minus the allocable portion of the
basis that results from the $50,000 of income in 2010. (Under section 72(e)(2)(B), income is
allocatedfirst.The income is equal to $30,000 ($80,000 minus the $50,000 basis), with the result
that the allocable portion of the basis is equal to $40,000 ($70,000 minus the $30,000 of income).)
In 2020, D has income of $2,500 ($12,500 minus $10,000, which is the excess of the original
$50,000 basis over the $40,000 basis allocated to the transfer made in 2018).
§ 1.457-12 Effective dates.
(a) General effective date. Except as otherwise provided in this section, §§1.457-1 through
1.457-11 apply for taxable years beginning after December 31, 2001.
(b) Transition period for eligible plans to comply with EGTRRA. For taxable years
beginning after December 31, 2001, and before January 1, 2004, a plan does not fail to be an
eligible plan as a result of requirements imposed by the Economic Growth and Tax Relief
Reconciliation Act of 2001 (115 Stat. 385) (EGTRRA) (Public Law 107-16) June 7, 2001, if it is
operated in accordance with a reasonable, good faith interpretation of EGTRRA.
(c) Special rule for distributions from rollover accounts. The last sentence of § 1.457-6(a)

(relating to distributions of amounts held in a separate account for eligible rollover distribut
applies for taxable years beginning after December 31, 2003.
(d) Special rule for options. Section 1.457-11(d) does not apply with respect to an option

75

without a readily ascertainable fair market value (within the meaning of section 83(e)(3)) that was
granted on or before May 8, 2002.
(e) Special rule for qualified domestic relations orders. Section 1.457-10(c) (relating to

qualified domestic relations orders) applies for transfers, distributions, and payments made afte
December 31, 2001.

Part 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (b) is amended by adding an entry in numerical order to
the table to read as follows:
§602.101 OMB Control numbers.

(b) *

* *

C F R part or section where
identified and described

Current O M B
control No.

1.457-8

1545-1580

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement

Approved: July 2, 2003.
Pamela F. Olson,
Assistant Secretary of Treasury (Tax Policy)

77

JS-552: Treasury and IRS issue Guidance for U.S. Individuals Working in Iraq

Page 1 of I

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the Microsoft Word content on this page, download_ the free Microsoft Word
Viewer.
July 11,2003
JS-552
Treasury and IRS issue Guidance for U.S. Individuals
Working in Iraq
Today, the Treasury Department and the IRS issued a notice clarifying the taxation
of U.S. individuals working in Iraq.
Section 911 of the Internal Revenue Code provides special rules that apply to
individuals w h o are U.S. citizens or residents but w h o live and work outside the
United States. Under section 911, a portion of the foreign earned income of such
individuals is excluded from U.S. tax. This special tax treatment generally does not
apply in the case of income earned in countries that are subject to specific U.S.
travel restrictions. Individuals w h o are authorized by the United States government
to engage in activities in these countries, however, are eligible for the special tax
treatment on the foreign earned income from the authorized activities.
Revenue Ruling 92-63 identifies Iraq as one of the countries subject to the travel
restrictions described in section 911. Notwithstanding the general travel restrictions
regarding Iraq, there are individuals working in Iraq pursuant to U.S. government
authorization. Notice 2003-52 makes clear that if an individual's activities in Iraq are
authorized by Treasury's Office of Foreign Assets Control, then the denial of the
exclusion on income earned in a country subject to U.S. travel restrictions does not
apply and the individual is eligible for the special tax treatment provided that he or
she meets the other requirements of section 911.
Related Documents:
• The text of Notice 2003-52

http://www.treas.gov/press/releases/js552.htm

4/26/2005

Notice 2003-52
Guidance on the Application of Section 911 to U.S. Individuals Working in Iraq
This notice clarifies the application of section 911 of the Internal Revenue Code
(the "Code") to U.S. citizens and residents earning income in Iraq attributable to
services performed by such individuals.
Section 911(a) of the Code allows a "qualified individual" to elect to exclude from
gross income his or her "foreign earned income" (as defined in section 911(b)) and
"housing cost amount" (as defined in section 911(c)). Section 911(d)(1) generally
defines a "qualified individual" as a citizen or resident of the United States whose tax
h o m e is in a foreign country and w h o meets certain requirements of residence or
presence in a foreign country.
Section 911 (d)(8)(A) of the Code provides generally that if travel with respect to
any foreign country (or any transaction in connection with such travel) is proscribed by
certain regulations during any period, then: (1) foreign earned income does not include
income from sources within that country attributable to services performed during that
period; (2) housing expenses do not include any expenses allocable to such period for
housing in that country, or for housing of the taxpayer's spouse or dependents in
another country while the taxpayer is present in that country; and (3) an individual is not
treated as a bona fide resident of, or as present in, a foreign country for any day during
which the individual w a s present in that country.
Section 911(d)(8)(B) of the Code provides that the regulations described in
section 911(d)(8) are those promulgated pursuant to the Trading With the E n e m y Act,
50 U.S.C. App. 1 etseq., or the International Emergency Economic Powers Act
("IEEPA"), 50 U.S.C. 1701 etseq., that include provisions generally prohibiting U.S.
citizens and residents from engaging in transactions related to travel to, from, or within a
foreign country. Section 911(d)(8)(C), however, provides that the limitations of section
911(d)(8)(A) do not apply to any individual during any period in which such individual's
activities are not in violation of the regulations described in section 911(d)(8)(B).
In 1991, Treasury's Office of Foreign Assets Control ("OFAC") issued the Iraqi
Sanctions Regulations, 31 C.F.R. part 575. The Iraqi Sanctions Regulations were
issued pursuant to IEEPA, a m o n g other authorities. Specifically, 31 C.F.R. sec.
575.207 provides that "[e]xcept as otherwise authorized, no U.S. person m a y engage in
any transaction relating to travel by any U.S. citizen or permanent resident alien to Iraq,
or to activities by any U.S. citizen or permanent resident alien within Iraq," with narrow
exceptions. Following promulgation of the Iraqi Sanctions Regulations, the Service
issued Rev. Rul. 92-63, 1992-2 C.B. 195, which lists Iraq as one of the countries subject
to the limitations under section 911 (d)(8) of the Code.

In recent months, O F A C has issued several specific and general licenses that
authorize individuals to engage in transactions related to travel to Iraq or to activities
within Iraq. Pursuant to the terms of the Iraqi Sanctions Regulations, individuals w h o s e
activities in Iraq are permitted by a specific or general license issued by O F A C are not
in violation of the Iraqi Sanctions Regulations with respect to the activities permitted by
the license. 31 C.F.R. sec. 575.501 (c). Accordingly, under section 911 (d)(8)(C) of the
Code, the limitations of section 911(d)(8)(A) do not apply to such individuals with
respect to such licensed activities. Such individuals are eligible for the exclusion under
section 911 of the C o d e provided that they meet the other requirements of that section.
For further information on this Notice, contact Kate Hwa at (202) 622-3840 (not a
toll free call).

JS-553: Tropical Forest Conservation Act Program with the Republic of P a n a m a

PRESS ROOM

Page 1 of 1

^ C ^

FROM THE OFFICE OF PUBLIC AFFAIRS
July 10, 2003
JS-553
United States, Nature Conservancy, Sign Tropical Forest Conservation Act
Program with the Republic of P a n a m a
Deal will reduce Panama's debt payments to the U.S. by$10 million dollars over the
next fourteen years.
On July 10, 2003 American Ambassador to Panama, Linda Watt on behalf of the
United States, Finance Minister Norberto Delgado on behalf of the Republic of
Panama, and Robert D e Jhong, Director of the Central American Division of The
Nature Conservancy signed agreements m a d e possible by the Tropical Forest
Conservation Act (TFCA) that reduce Panama's debt payments to the U.S. by $10
million dollars over the next fourteen years. In return, the Government of P a n a m a
has committed to funding local conservation projects that will amount to ten million
dollars over the next fourteen years for the protection and conservation of the
Chagres River Basin.
The Chagres National Park is a 318,000 acre national protected area covering the
Chagres River basin that provides over 5 0 % of the water necessary for the
operation of the P a n a m a Canal as well as drinking water for the two largest cities in
the country P a n a m a City and Colon. In addition, as the U.S. is one of the largest
users of the canal, and the canal itself moves more than 5 % of world trade,
preserving the watershed is of material economic importance to the U S G .
The Chagres National Park is also home to endangered species such as jaguars,
mantled howler monkeys and anteaters. It is also a bird sanctuary for more than
560 species, including the harpy eagle - the largest eagle in the world and
Panama's national bird. For these reasons the permanent conservation of this area
is of critical importance to the economy, health and natural resources of Panama.
The funds resulting from this agreement will be channeled to two sources: funding
conservation activities in the Chagres National Park over the next fourteen years,
and creating a permanent endowment to provide sustainable funding to the park.
This agreement complements ongoing environmental programs being provided to
P a n a m a by the U.S. Agency for International Development (USAID) and will be
managed by a group including the government of Panama, local non-governmental
organizations including Fundacion Natura, the USAID mission to Panama, the
American Embassy and The Nature Conservancy.
Today's agreements mark the third debt-for-nature swap by the U.S. under the
T F C A , and w a s m a d e possible through a grant of $5.6 million from the United
States government in combination with a financial contribution of almost $1.2 million
from The Nature Conservancy. For every dollar in U S budget funds, the U.S.
government w a s able to leverage almost two dollars in funds for tropical forest
conservation in Panama.
Panama is the sixth country to benefit from programs under the TFCA. Bangladesh,
Belize, El Salvador, Peru, and the Philippines are the others. The T F C A was
enacted in 1998 to provide eligible developing countries the opportunity to reduce
their concessional debts owed to the United States while at the s a m e time
generating funds for activities to conserve tropical forests.
-30-

http://www.treas.gov/press/releases/js553.htm

4/26/2005

JS-554: Treasury and I R S Issue Final Regulations for Retroactive Annuity P a y m e n t s fro...

P a g e 1 of 1

PRL5S ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
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Viewer.
July 15, 2003
JS-554
Treasury and IRS Issue Final Regulations for Retroactive
Annuity Payments from Pension Plans

Today, the Treasury Department and the IRS issued final regulations for
defined benefit plans making retroactive annuity payments.
A defined benefit plan typically provides employees with a choice between
a "qualified joint-and-survivor annuity" and other payment forms, such as a
single life annuity or a lump sum. The qualified joint-and-survivor annuity
provides benefits to the employee's spouse after the employee's death.
The law requires the plan to provide the employee with certain information
about the qualified joint-and-survivor annuity and the other available
payment forms before the employee and the employee's spouse choose
h o w payments will be made. However, a company m a y not always be able
to give the employee the information needed before the employee first
becomes eligible for benefits.
The regulations allow the company to m a k e retroactive annuity payments
in those circumstances. The final regulations, which are very similar to the
proposed regulations, describe h o w a plan can allow an employee to elect
a retroactive annuity start date.
The final regulations will apply to plan years beginning on or after January
1,2004.

Related Documents:
• The text of the final regulations

[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9076]
RIN 1545-AX34
Special Rules Under Section 417(a)(7) for Written Explanations Provided by Qualified
Retirement Plans After Annuity Starting Dates
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations relating to the special rule added
by the Small Business Job Protection Act of 1996 which permits the required written

explanations of certain benefits to be provided by qualified retirement plans to plan

participants after the annuity starting date. These final regulations affect sponsors
administrators of qualified retirement plans, and participants in those plans.
DATES: Effective Date: These regulations are effective July 16, 2003.
Applicability Date: These regulations apply to plan years beginning on or after
January 1,2004.
FOR FURTHER INFORMATION CONTACT: Robert Walsh (202) 622-6090 (not a tollfree number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act

2
The collection of information contained in these final regulations has been
reviewed and approved by the Office of Management and Budget in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 15451724.
The collection of information in this final regulation is in §1.417(e)-1(b)(3)(iv)(B)
and §1.417(e)-1(b)(3)(v)(A). This collection of information is required by the IRS to

ensure that the participant and the participant's spouse consent to a form of distributi
from a qualified retirement plan that may result in reduced periodic payments.
An agency may not conduct or sponsor, and a person is not required to respond

to, a collection of information unless it displays a valid control number assigned by th
Office of Management and Budget.
Comments concerning the accuracy of this burden estimate and suggestions for
reducing this burden should be sent to the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington, DC 20224, and to the
Office of Management and Budget, Attn: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to a collection of information must be retained as long
as their contents might become material in the administration of any internal revenue

law. Generally, tax returns and tax return information are confidential, as required by 2
U.S.C. 6103.
Background

3
This document contains amendments to 26 C F R part 1 under section 417(a)(7).
O n January 17, 2001, a notice of proposed rulemaking (REG-109481-99) w a s published
in the Federal Register (66 F R 3916) under section 417(a)(7) of the Internal Revenue
Code. N o public hearing w a s requested or held. Written comments responding to the
notice of proposed rulemaking were received. After consideration of all the comments,
the proposed regulations are adopted as amended by this Treasury decision.
Section 401(a)(11) of the Internal Revenue Code provides that, subject to certain
exceptions, all distributions from a qualified plan must be m a d e in the form of a qualified
joint and survivor annuity (QJSA). O n e such exception is provided in section 417, which
allows a participant to elect to waive the Q J S A in favor of another form of distribution.
Section 417(a)(2) provides that, for the waiver to be valid, the participant=s spouse
must consent to the waiver. Section 417(a)(3)(A) requires a qualified plan to provide to
each participant, within a reasonable period of time before the annuity starting date, a
written explanation (QJSA explanation) that describes the Q J S A , the right to waive the
QJSA, and the rights of the participant=s spouse.
Section 417(a)(7), which w a s added to the Code by section 1451(a) of the Small
Business Job Protection Act of 1996, Public Law 104-188 (110 Stat. 1755) (SBJPA),
creates an exception to the rules of section 417(a)(3)(A), effective for plan years
beginning after December 31, 1996. Section 417(a)(7)(A) provides that,
notwithstanding any other provision of section 417(a), a plan m a y furnish the Q J S A
explanation after the annuity stating date, as long as the applicable election period is
extended for at least 30 days after the date on which the explanation is furnished.

4
Thus, section 417(a)(7)(A) allows the annuity starting date to be a date that is earlier
than the date the QJSA explanation is provided, thereby allowing the retroactive
payment of benefits that are attributable to the period before the QJSA explanation is
provided. Section 417(a)(7)(A)(ii) provides that the Secretary may limit the application
of the provision permitting the selection of a retroactive annuity starting date by
regulations, except that the regulations may not limit the period of time by which the
annuity starting date precedes the furnishing of the written explanation other than by
providing that the retroactive annuity starting date may not be earlier than termination of
employment.
Section 205(c)(8) of the Employee Retirement Income Security Act of 1974,
Public Law 93-406 (88 Stat. 829) (ERISA), provides a parallel rule to section 417(a)(7)
of the Code that applies under Title I of ERISA, and authorizes the Secretary of the
Treasury to issue regulations limiting the application of the general rule. Thus, Treasury
regulations issued under section 417(a)(7) of the Code apply as well for purposes of
section 205(c)(8) of ERISA.
Explanation of Provisions
In accordance with section 417(a)(7)(A), these regulations provide that the QJSA
explanation may be furnished on or after the annuity starting date under certain
circumstances. The regulations refer to the annuity starting date in such cases as the
Aretroactive annuity starting date®, define how payments are made in the case of a
retroactive annuity starting date, and set conditions for the use of a retroactive annuity
starting date.

5
Like the proposed regulations, the final regulations provide that a retroactive
annuity starting date may be used only if the plan provides for it and the participant
affirmatively elects to use the retroactive annuity starting date. If a participant
affirmatively elects a retroactive annuity starting date, the participant must be put in
approximately the same situation he or she would have been in had benefit payments
actually commenced on the retroactive annuity starting date. Accordingly, in the case
where a participant affirmatively elects a retroactive annuity starting date, the plan
benefits must be determined as of that retroactive annuity starting date (including the
application of section 415 and, if applicable, section 417(e)(3) as of that retroactive
annuity starting date). If the plan benefits are determined in that manner, future periodic
payments for a participant who elects a retroactive annuity starting date will be the
same as the periodic payments that would have been paid to the participant had
payments actually commenced on the retroactive annuity starting date. In addition, the
participant must receive a make-up amount to reflect any missed payments (with an
appropriate adjustment for interest from the date the payments would have been made
to the date of actual payment).
Several commentators suggested that an adjustment for interest should not be
required where the period between the retroactive annuity starting date and the date
payments begin was less than three or four months. It was argued that the requirement
of an interest adjustment in such a case may create burdens for the plan that are more
significant that the additional money that may be paid to the participant. The Treasury
Department and the IRS continue to believe that an appropriate adjustment for interest
is needed for make-up payments. Thus, the final regulations retain the rule that an

6
appropriate adjustment is required for make-up payments. The extent to which an
adjustment is appropriate for a particular make-up payment depends on the facts and
circumstances related to that payment.
The final regulations retain the rules from the proposed regulations that provide
that the notice, consent, and election rules of section 417(a)(1), (2), and (3) apply to the
retroactive payment of benefits but with several modifications. These modifications
generally reflect the fact that the existing timing rules relating to notice and consent are
generally determined with reference to an annuity starting date that is after the
furnishing of the QJSA explanation by a period of up to 90 days.1 If legislation currently
pending in Congress changing the 90-day QJSA election period to 180 days is enacted,
it is anticipated that the regulations will be modified to reflect that change.
The final regulations also retain the special spousal consent rule provided for
under the proposed regulations. Under this special rule, the participant's spouse as of
the time distributions actually commence must consent to the retroactive annuity
starting date election, if the survivor payments under the retroactive annuity are less
than under a QJSA with an annuity starting date after the date the QJSA explanation
was provided. This special rule applies even if the form of benefit that the participant
elects as of the retroactive annuity starting date is a QJSA. Thus, for example, where a
QJSA that begins after the QJSA explanation is furnished would provide $1,000 monthly

1 For example, section 417(a)(1) provides that a participant may elect to waive the QJSA within the
Aapplicable election period® which is defined by section 417(a)(6) as the 90-day period ending on the
annuity starting date. Similarly, • 1.417(e)-1 (b)(3)(i) provides that the written consent of the plan
participant and the participant=s spouse must be m a d e no more than 90 days before the annuity starting
date. Also, ' 1.417(e)-1 (b)(3)(H) provides that the Q J S A explanation must generally be provided no less
than 30 days and no more than 90 days before the annuity starting date.

7
to the participant with a survivor annuity of $500 monthly to the spouse, and a QJSA
with a retroactive annuity starting date would provide $900 monthly to the participant
with a survivor annuity of $450 monthly to the spouse, together with a $20,000 make-up
payment to the participant, the participant would be required to obtain the consent of the
current spouse in order to elect the retroactive annuity starting date. Spousal consent
would be required in this example because the spouse has a statutory entitlement to a
survivor benefit of at least $500 per month under a QJSA with a current annuity starting
date.
Various comments were received regarding this spousal consent requirement.
For example, it was suggested that spousal consent should not be required in the cases
of short delay if the QJSA form is elected, or where the survivor benefit under the
retroactive annuity starting date is at least 95% of the survivor annuity payable under a
current QJSA, because requiring consent in such a case would create additional work
and confusion and result in little benefit to the spouse. The regulations are not changed
in this regard, as the Treasury Department and the IRS believe that spousal protection
cannot be diminished below the statutorily prescribed QJSA without spousal consent.
However, these regulations provide that such consent is only necessary where the
survivor annuity is less than 50% of the amount of the annuity payable during the life of
the participant under a currently commencing QJSA. Thus, in the example provided
above, if the participant elected a QJSA with a retroactive annuity starting date and a 66
2/3% survivor annuity, the QJSA would provide $840 monthly to the participant with a
survivor annuity of $560 to the participant's spouse and a make-up payment of $18,666.
Spousal consent is not required in such a case because the $560 survivor annuity

8
exceeds the minimum permissible under a currently commencing QJSA.
The proposed regulations impose an additional condition on the availability of a
retroactive annuity starting date, regarding the permissible amount of the distribution
under sections 417(e)(3) (if applicable) and 415. To satisfy this condition, the
distribution must be adjusted, if necessary, to satisfy the requirements of sections
417(e)(3) (if applicable) and 415 where the date the distribution commences is
substituted for the annuity starting date.
Several comments raised concerns regarding the requirement that sections 415

and 417(e)(3) be satisfied as of the date of distribution as well as the retroactive annuity
starting date. Some commentators suggested that testing whether the distributions
satisfy section 415 as of the date of distribution could be particularly restrictive for
multiemployer plans. The commentators noted, for example, that for a participant who
left covered service under a multiemployer plan at age 60 and retires at age 68 under a
plan with an age-62 normal retirement age, the amount payable in the year of benefit
commencement, as calculated for purposes of section 415, could well be higher than
100% of that participant's average compensation for his high three years and thus
would violate section 415.2
The IRS and Treasury Department believe this second test is generally needed
to stop participants from using the retroactive annuity starting date as a means of
receiving benefits in excess of the section 415 limits. However, the IRS and Treasury
Department have weighed the importance of compliance with this requirement against
2 After the comments relating to multiemployer plans were received, section 415(b)(11) was amended by
the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law No. 107-16, to provide that

9
the associated burdens and have concluded that testing for section 415 compliance as
of the date distributions commence may not be needed in every case. Thus, the final
regulations do not apply the requirement that satisfaction of the benefit limitations of
section 415 be demonstrated as of the date distributions commence in the case of a
distribution that commences no more than twelve months after the retroactive annuity
starting date, unless the form of benefit (as of the retroactive annuity starting date) is a
form of benefit subject to the valuation rules of section 417(e)(3). For example, in the
case of a life annuity distribution, compliance with section 415 need not be
demonstrated as of the date of distribution where that date is no more than twelve
months after the retroactive annuity starting date. However, if the distribution were a
single sum distribution, compliance with section 415 would need to be tested as of the
actual commencement date.
Some commentators also objected to the rule in the proposed regulation that
required the plan to comply with the valuation rules of section 417(e)(3) as of the date of
distribution. The IRS and Treasury Department continue to believe that a participant
should not be receiving a smaller lump sum through the election of a retroactive annuity
starting date than would be available for a current annuity starting date. Accordingly,
these regulations adopt the rules of the proposed regulations regarding the
requirements of section 417(e)(3) with a clarification relating to the application of section
417(e)(3). Under this clarification, in the case of a form of benefit that would have been
subject to section 417(e)(3) if distributions had commenced as of the retroactive annuity
starting date, the distribution pursuant to a retroactive annuity starting date election
the 1 0 0 % test of section 415(b)(1)(B) no longer applies to multiemployer plans.

10
must be no less than the distribution produced by applying the applicable interest rate
and the applicable mortality table determined as of the date the distribution commences
to the annuity form that corresponds to the annuity form that was used to determine the
benefit amount as of the retroactive annuity starting date. Thus, for example, if a
distribution paid pursuant to an election of a retroactive annuity starting date is a singlesum distribution that is based on the present value of the straight life annuity payable at
normal retirement age, then the amount of the distribution must be no less than the
present value of the annuity payable at normal retirement age, determined as of the
distribution date using the applicable mortality table and applicable interest rate that
apply as of the distribution date. Likewise, if a distribution paid pursuant to an election
of a retroactive annuity starting date is a single-sum distribution that is based on the
present value of the early retirement annuity payable as of the retroactive annuity
starting date, then the amount of the distribution must be no less than the present value
of the early retirement annuity payable as of the distribution date, determined as of the
distribution date using the applicable mortality table and applicable interest rate that
apply as of the distribution date.
The final regulations retain the rule of the proposed regulations that the
determination of whether the valuation rules of section 417(e)(3) apply is based upon
the benefit form as of the retroactive annuity starting date. Accordingly, a distribution
option that is a non-decreasing benefit under §1.417(e)-1 (d)(6) does not become
subject to the valuation rules of section 417(e)(3) merely because of the make-up
payments for the period between the retroactive annuity starting date and the date
distributions actually commence.

11
Similarly, the final regulations provide that annuity payments that otherwise
satisfy the requirements for a Q J S A under section 417(b) will not fail to be treated as a
Q J S A for purposes of section 415(b)(2)(B) because a retroactive annuity starting date is
elected and a make-up payment is made. Further, to address concerns raised by
commentators, these regulations provide that plan distributions m a y be considered to
be a series of substantially equal periodic payments for purposes of section
72(t)(2)(A)(iv) even though the plan distributes a make-up payment to a participant w h o
has elected a retroactive annuity starting date.
O n e commentator suggested that make-up payments m a d e pursuant to a
retroactive annuity starting date should be considered to be part of a series of
substantially equal periodic payments for purposes of the eligible rollover distribution
definition of section 402(c)(4)(A). However, these regulations do not address this issue.
Section 1.402(c)-2, Q & A - 6 provides that an adjustment in a payment that is part of a
series of substantially equal periodic payments will be treated as part of the series of
substantially equal periodic payments for purposes of section 402(c)(4)(A) where the
adjustment w a s due solely to reasonable administrative error or delay. To ensure that
any rule applicable to make-up payments under this regulation is consistent with the
rules generally applicable to independent payments under Q&A-6, the IRS and Treasury
Department anticipate reviewing these rules and issuing guidance.
T w o commentators suggested that defined contribution plans should be allowed
to adopt provisions for retroactive annuity starting dates. O n e of these commentators
suggests that the proposed regulations would prohibit a defined contribution plan from
making payments to cover amounts that were unpaid due to an administrative oversight.

12
This commentator adds that such a prohibition may cause the plan to fail to provide
required distributions under section 401(a)(9). The IRS and Treasury Department
continue to believe that the rules applicable to retroactive annuity starting dates are
relevant only to defined benefit plans because the benefit provided by a defined
contribution plan is equal to the account balance and the concerns addressed in these
regulations are generally not relevant in such a case. Moreover, the problem raised by
the commentator appears to relate to an administrative delay in making a payment
(which is an issue covered under §1.401(a)-20, A-10(b)(3)), rather than the topic of
these regulations. In any event, a plan must provide all distributions required by section
401(a)(9) and these regulations do not affect that requirement.
One commentator noted that some plans currently allow retroactive annuity
starting dates in reliance upon a good faith interpretation of the statute and existing
regulations. This commentator suggested that some of the sponsors of these plans
may not wish to provide retroactive annuity starting dates in light of these regulations
and requested that the IRS and Treasury Department confirm that plan sponsors who

currently allow retroactive annuity starting dates will not violate the anti-cutback rules
section 411(d)(6) if they choose to amend these plans to restrict the availability of
retroactive annuity starting dates in the future. The issues raised in this comment are
not addressed in this Treasury decision. It is anticipated that such plan amendments
will be governed by regulations to be issued under section 411(d)(6) pursuant to section
645 of the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 10716 (115 Stat. 117).
Special Analyses

13
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not

required. It is hereby certified that these regulations will not have a significant economic
impact on a substantial number of small entities. This certification is based on the fact
that the regulations require the collection of plan participants= written elections
requesting qualified retirement plan distributions, and written spousal consent to these
distributions, under limited circumstances. It is anticipated that most small businesses
affected by these regulations will be sponsors of qualified retirement plans. Since these
written participant elections and written spousal consents are required to be collected
only for certain distributions, and since, in the case of a small plan, there will be
relatively few distributions per year (and even fewer that are subject to these
requirements), small plans that provide distributions for which this collection of
information is required will only have to collect a small number of participant elections
and spousal consents as a result of these regulations. Accordingly, a Regulatory
Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking preceding these regulations was submitted to
the Small Business Administration for comment on its impact on small business.
Drafting Information
The principal authors of these regulations are Robert M. Walsh and Linda S. F.
Marshall, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and Treasury
participated in their development.

14
List of Subjects
26 C F R Part 1
Income taxes, Reporting and recordkeeping requirements.
26 C F R Part 602
Reporting and recordkeeping requirements.
Adoption of A m e n d m e n t s to the Regulations
Accordingly, 26 C F R parts 1 and 602 are 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 * * *
Section 1.417(e)-1 (b)(3) also issued under 26 U.S.C. 417(a)(7)(A)(ii); * * *
Par. 2. Section 1.417(e)-1 is amended by:
1. Revising paragraphs (b)(3)(i), (b)(3)(H) introductory text, and (b)(3)(ii)(C).
2. Redesignating paragraphs (b)(3)(iii) and (b)(3)(iv) as paragraphs (b)(3)(viii)
and (b)(3)(ix), respectively.
3. Adding n e w paragraphs (b)(3)(iii) through (b)(3)(vii).
The additions and revisions read as follows:
' 1.417(e)-1 Restrictions and valuations of distributions from plans subject to sections
401(a)(11)and417.
* ****
/U.\*

* * /H \ * *

*

15
(3)* * * (i) Written consent of the participant and the participant=s spouse to the
distribution must be m a d e not more than 90 days before the annuity starting date, and,
except as otherwise provided in paragraphs (b)(3)(iii) and (b)(3)(iv) of this section, no
later than the annuity starting date.
(ii) A plan must provide participants with the written explanation of the Q J S A
required by section 417(a)(3) no less than 30 days and no more than 90 days before the
annuity starting date, except as provided in paragraph (b)(3)(iv) of this section regarding
retroactive annuity starting dates. However, if the participant, after having received the
written explanation of the Q J S A , affirmatively elects a form of distribution and the
spouse consents to that form of distribution (if necessary), a plan will not fail to satisfy
the requirements of section 417(a) merely because the written explanation w a s
provided to the participant less than 30 days before the annuity starting date, provided
that the following conditions are met:
*****

(C) T h e annuity starting date is after the date that the explanation of the Q J S A is
provided to the participant.
*****

(iii) The plan m a y permit the annuity starting date to be before the date that any
affirmative distribution election is m a d e by the participant (and before the date that
distribution is permitted to c o m m e n c e under paragraph (b)(3)(ii)(D) of this section),
provided that, except as otherwise provided in paragraph (b)(3)(vii) of this section
regarding administrative delay, distributions c o m m e n c e not more than 90 days after the

16
explanation of the QJSA is provided.
(iv) Retroactive annuity starting dates. (A) Notwithstanding the requirements of
paragraphs (b)(3)(i) and (ii) of this section, pursuant to section 417(a)(7), a defined
benefit plan is permitted to provide benefits based on a retroactive annuity starting date
if the requirements described in paragraph (b)(3)(v) of this section are satisfied. A
defined benefit plan is not required to provide for retroactive annuity starting dates. If a
plan does provide for a retroactive annuity starting date, it may impose conditions on the
availability of a retroactive annuity starting date in addition to those imposed by
paragraph (b)(3)(v) of this section, provided that imposition of those additional
conditions does not violate any of the rules applicable to qualified plans. For example, a
plan that includes a single sum payment as a benefit option may limit the election of a
retroactive annuity starting date to those participants who do not elect the single sum
payment. A defined contribution plan is not permitted to have a retroactive annuity
starting date.
(B) For purposes of this section, a Aretroactive annuity starting date® is an
annuity starting date affirmatively elected by a participant that occurs on or before the
date the written explanation required by section 417(a)(3) is provided to the participant.
In order for a plan to treat a participant as having elected a retroactive annuity starting
date, future periodic payments with respect to a participant who elects a retroactive
annuity starting date must be the same as the future periodic payments, if any, that
would have been paid with respect to the participant had payments actually commenced
on the retroactive annuity starting date. The participant must receive a make-up

17
payment to reflect any missed payment or payments for the period from the retroactive
annuity starting date to the date of the actual make-up payment (with an appropriate
adjustment for interest from the date the missed payment or payments would have been
made to the date of the actual make-up payment). Thus, the benefit determined as of
the retroactive annuity starting date must satisfy the requirements of sections 417(e)(3),
if applicable, and section 415 with the applicable interest rate and applicable mortality
table determined as of that date. Similarly, a participant is not permitted to elect a
retroactive annuity starting date that precedes the date upon which the participant could
have otherwise started receiving benefits (e.g., in the case of an ongoing plan, the
earlier of the participant=s termination of employment or the participant=s normal
retirement age) under the terms of the plan in effect as of the retroactive annuity starting
date. A plan does not fail to treat a participant as having elected a retroactive annuity
starting date as described in this paragraph (b)(3)(iv)(B) merely because the
distributions are adjusted to the extent necessary to satisfy the requirements of
paragraph (b)(3)(v)(B) and (C) of this section relating to sections 415 and 417(e)(3).
(C) If the participant=s spouse as of the retroactive annuity starting date would
not be the participant=s spouse determined as if the date distributions commence was
the participant=s annuity starting date, consent of that former spouse is not needed to
waive the QJSA with respect to the retroactive annuity starting date, unless otherwise
provided under a qualified domestic relations order (as defined in section 414(p)).
(D) A distribution payable pursuant to a retroactive annuity starting date election
is treated as excepted from the present value requirements of paragraph (d) of this

18
section under paragraph (d)(6) of this section if the distribution form would have been
described in paragraph (d)(6) of this section had the distribution actually commenced on
the retroactive annuity starting date. Similarly, annuity payments that otherwise satisfy
the requirements of a QJSA under section 417(b) will not fail to be treated as a QJSA
for purposes of section 415(b)(2)(B) merely because a retroactive annuity starting date
is elected and a make-up payment is made. Also, for purposes of section
72(t)(2)(A)(iv), a distribution that would otherwise be one of a series of substantially
equal periodic payments will be treated as one of a series of substantially equal
periodic payments notwithstanding the distribution of a make-up payment provided for in
paragraph (b)(3)(iv)(B) of this section.
(E) The following example illustrates the application of paragraph (b)(3)(iv)(D) of
this section:
Example. Under the terms of a defined benefit plan, participant A is entitled to a
Q J S A with a monthly payment of $1,500 beginning as of his annuity starting date. D u e
to administrative error, the Q J S A explanation is provided to A after the annuity starting
date. After receiving the Q J S A explanation A elects a retroactive annuity starting date.
Pursuant to this election, A begins to receive a monthly payment of $1,500 and also
receives a make-up payment of $10,000. Under these circumstances the monthly
payments m a y be treated as a Q J S A for purposes of section 415(b)(2)(B). In addition,
the monthly payments of $1,500 and the make-up payment of $10,000 m a y be treated
as part of as series of substantially equal periodic payments for purpose of section
72(t)(2)(A)(iv).
(v) Requirements applicable to retroactive annuity starting dates. A distribution is
permitted to have a retroactive annuity starting date with respect to a participant's
benefit only if the following requirements are met:
(A) The participant=s spouse (including an alternate payee who is treated as the
spouse under a qualified domestic relations order (QDRO), as defined in section

19
414(p)), determined as if the date distributions commence were the participant=s
annuity starting date, consents to the distribution in a manner that would satisfy the
requirements of section 417(a)(2). The spousal consent requirement of this paragraph
(b)(3)(v)(A) is satisfied if such spouse consents to the distribution under paragraph
(b)(2)(i) of this section. The spousal consent requirement of this paragraph (b)(3)(v)(A)
does not apply if the amount of such spouse=s survivor annuity payments under the
retroactive annuity starting date election is no less than the amount that the survivor
payments to such spouse would have been under an optional form of benefit that would
satisfy the requirements to be a QJSA under section 417(b) and that has an annuity
starting date after the date that the explanation was provided.
(B) The distribution (including appropriate interest adjustments) provided based
on the retroactive annuity starting date would satisfy the requirements of section 415 if
the date the distribution commences is substituted for the annuity starting date for all
purposes, including for purposes of determining the applicable interest rate and the
applicable mortality table. However, in the case of a form of benefit that would have
been excepted from the present value requirements of paragraph (d) of this section
under paragraph (d)(6) of this section if the distribution had actually commenced on the
retroactive annuity starting date, the requirement to apply section 415 as of the date
distribution commences set forth in this paragraph (b)(3)(v)(B) does not apply if the date
distribution commences is twelve months or less from the retroactive annuity starting
date.
(C) In the case of a form of benefit that would have been subject to section

20
417(e)(3) and paragraph (d) of this section if distributions had commenced as of the
retroactive annuity starting date, the distribution is no less than the benefit produced by
applying the applicable interest rate and the applicable mortality table determined as of
the date the distribution commences to the annuity form that corresponds to the annuity
form that was used to determine the benefit amount as of the retroactive annuity starting
date. Thus, for example, if a distribution paid pursuant to an election of a retroactive
annuity starting date is a single-sum distribution that is based on the present value of
the straight life annuity payable at normal retirement age, then the amount of the
distribution must be no less than the present value of the annuity payable at normal
retirement age, determined as of the distribution date using the applicable mortality
table and applicable interest rate that apply as of the distribution date. Likewise, if a
distribution paid pursuant to an election of a retroactive annuity starting date is a singlesum distribution that is based on the present value of the early retirement annuity
payable as of the retroactive annuity starting date, then the amount of the distribution
must be no less than the present value of the early retirement annuity payable as of the
distribution date, determined as of the distribution date using the applicable mortality
table and applicable interest rate that apply as of the distribution date.
(vi) Timing of notice and consent reguirements in the case of retroactive annuity
starting dates. In the case of a retroactive annuity starting date, the date of the first
actual payment of benefits based on the retroactive annuity starting date is substituted
for the annuity starting date for purposes of satisfying the timing requirements for giving
consent and providing an explanation of the QJSA provided in paragraphs (b)(3)(i) and
(ii) of this section, except that the substitution does not apply for purposes of paragraph

21
(b)(3)(iii) of this section. Thus, the written explanation required by section 417(a)(3)(A)
must generally be provided no less than 30 days and no more than 90 days before the
date of the first payment of benefits and the election to receive the distribution must be
made after the written explanation is provided and on or before the date of the first
payment. Similarly, the written explanation may also be provided less than 30 days
prior to the first payment of benefits if the requirements of paragraph (b)(3)(ii) of this
section would be satisfied if the date of the first payment is substituted for the annuity
starting date.
(vii) Administrative delay. A plan will not fail to satisfy the 90-day timing
requirements of paragraphs (b)(3)(iii) and (vi) of this section merely because, due solely
to administrative delay, a distribution commences more than 90 days after the written
explanation of the QJSA is provided to the participant.
* ****

Part 602 - O M B C O N T R O L N U M B E R S U N D E R T H E P A P E R W O R K REDUCTION A C T
Par. 3. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 4. In § 602.101, paragraph (b) is amended by adding the following entry in
numerical order to the table to read as follows:
$ 602.101 OMB Control numbers.
*****

(b) * * *
CFR part or section where
identified and described
*****

1.417(e)-1 1545-1724
* ****

/s/ Robert E. Wenzel
Deputy Commissioner for Services and Enforcement
Approved: July 9, 2003
/s/ Pamela Olson
Assistant Secretary of the Treasury

Current O M B
control No.

JS-555: Testimony of Pamela Olson before the Senate Committee on Fmanceon lnternati... Page 1 of 7

PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
July 15,2003
JS-555
Testimony of
Pamela Olson, Assistant Secretary for Tax Policy,
United States Department of the Treasury
before the Senate Committee on Finance
on International Tax Policy and Competitiveness
Mr. Chairman, Senator Baucus, and distinguished Members of the Committee, I
appreciate the opportunity to appear today at this hearing focusing on international
tax policy and competitiveness issues. I applaud the Committee for holding this
hearing to examine U.S. tax policy and its effect or) the international
competitiveness of U.S.-owned foreign operations. The importance of our
international tax rules to the competitiveness of U.S. businesses and workers is well
known to this Committee, as evidenced by the fact that the Committee has
previously approved legislation addressing many issues in the international area.
Unfortunately, this Committee's good work on those issues in previous sessions
has not resulted in enacted legislation. Nevertheless, the need for changes, such
as the changes previously approved by this Committee, continues. Indeed, with the
growing importance of international competitiveness to the economy, the need is
even more immediate.
Many areas of our tax law are in need of reform to ensure that our tax system does
not impede the efficient, effective, and successful operation of U.S. companies and
the American workers they employ in today's global marketplace. In keeping with
the focus of today's hearing, I will address m y remarks this morning to the tax policy
issues specific to U.S.-based companies competing in markets around the world.
Introduction
Both the increase in foreign acquisitions of U.S. multinationals and the corporate
inversion activity of the past few years evidence the potential competitive
disadvantage created by our international tax rules. The concern this Committee
faces today is that our tax code has not kept pace with the changes in our
economy. From the vantage point of the increasingly global marketplace in which
U.S. companies compete, our tax rules appear outmoded, at best, and punitive of
U.S. economic interests, at worst. Most other developed countries of the world are
concerned with setting a competitiveness policy that permits their workers to benefit
from globalization. A s former Deputy Secretary D a m observed last year, we, by
contrast, appear to have based our international tax policy on the principle that w e
should tax our competitive advantages.
Our income tax system as a whole dates back to shortly after the turn of the last
century. Much has changed since then. Of course, significant changes have been
m a d e to the tax code as well. In the international area, w e added the subpart F
rules back in 1962. Those rules have not advanced with advances in the
economy. W e also m a d e fairly significant changes to the international tax rules in
1986. Many of the 1986 changes had dubious economic underpinnings in 1986.
They also have not advanced with advances in the economy.
The global economy looked very different in 1962 than it looks today. The same is
true of the U.S. role in the global economy. Forty years ago the U.S. w a s dominant,
accounting for over half of all multinational investment in the world. With a
dominant role, w e were free to m a k e decisions about our tax system essentially on
the basis of a closed economy. Moreover, our trade partners generally followed our
lead in tax policy.
Things have changed. When the international rules were first developed, they
affected relatively few taxpayers and relatively few transactions. Today, there is
hardly a U.S.-based company that is not faced with applying the U.S. international
tax rules to s o m e aspect of its business.

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JS-555: Testimony of Pamela Olson before the Senate Committee on Fmanceon Internati... Page 2 of 7
Globalization - the growing interdependence of countries resulting from increasing
integration of trade, finance, investment, people, information and ideas in one
global marketplace - has resulted in increased cross-border trade, and the
establishment of production facilities and distribution networks around the globe.
Technology will continue to accelerate the growth of the worldwide marketplace for
goods and services. Advances in communications, information technology, and
transport have dramatically reduced the cost and time taken to m o v e goods, capital,
people, and information around the world. Firms in this global marketplace
differentiate themselves by being smarter: applying more cost efficient technologies
or innovating faster than their competitors. The returns are much higher than they
once were as the benefits can be marketed worldwide.
The significance of globalization to the U.S. economy since the enactment of
subpart F is apparent from the statistics on international trade and investment. In
1960, trade in goods to and from the U.S. represented just over six percent of
Gross Domestic Product (GDP). Today, trade in goods to and from the U.S.
represents over 20 percent of G D P , a three-fold increase, while trade in goods and
services represents more than 25 percent of G D P today. It is worth noting that
numerous studies confirm a strong link between trade and economic growth. Trade
appears to raise income by spurring the accumulation of, and raising the returns to,
physical and human capital.
Cross border investment, both inflows and outflows, also has grown dramatically in
the last 40 years. In 1960, cross border investment represented just over one
percent of G D P . In 2001, it w a s more than 11 % of G D P , representing annual
cross-border flows of more than $1.1 trillion. The aggregate cross border
ownership of capital is valued at $16 trillion. In addition, U.S. multinational
corporations are n o w responsible for more than one-quarter of U.S. output and
about 15 percent of U.S. employment.
Globalization and Competitiveness and U.S. Tax Policy
At the same time companies are competing for sales, they are also competing for
capital: U.S.-managed firms m a y have foreign investors, and foreign-managed firms
m a y have U.S. investors. Portfolio investment accounts for approximately twothirds of U.S. investment abroad and a similar fraction of foreign investment in the
U.S.
The U.S. tax rules have important effects on international competitiveness both
because of the integration of domestic activities of U.S. multinational companies
with their foreign activities and because repatriated foreign earnings of foreign
investments are subject to U.S. domestic tax. Increasingly, the flow of goods and
services is not through purchases between exporters and importers, but through
transfers between affiliates of multinational corporations. The rules governing
transfer pricing, interest allocation, withholding rates, foreign tax credits, and the
taxation of actual or deemed dividends affect these flows.
As a general rule, the ideal tax system should seek to minimize distortions to trade
or investment relative to what would occur in a world without taxes. Every country
makes sovereign decisions about its o w n tax system, so it is impossible for the U.S.
to level all playing fields simultaneously. But w e can ensure that our o w n rules
minimize the barriers to the free flows of capital that globalization necessitates.
Similarly, every country makes sovereign decisions about its labor markets,
environmental regulations, and health and safety regimes. Fortunately, w e have
had enough wisdom over the years to avoid attempting to level these playing fields.
But our attempts to level the playing field in tax policy have often erected costly
barriers to the free flows of capital that maximizing our international
competitiveness necessitates.
The question w e must answer is what w e can do to increase the competitiveness of
U.S. businesses and workers. Professor Michael Graetz observed in his book, The
Decline (and Fall?) of the Income Tax:
The internationalization of the world economy has made it far more difficult for the
United States, or any other country for that matter, to enact a tax system radically
different from those in place elsewhere in the world. In today's worldwide economy,
w e can no longer look solely to our o w n navels to answer questions of tax policy.
Professor Graetz is right. We must write tax rules that take into account what other
countries are doing. If what they are doing is inconsistent with improving their o w n
international competitiveness, then w e should not follow. But if they appear to be
moving in ways that will improve their ability to compete, then w e must reconsider
the extent to which our rules impede the flow of capital of U S businesses,

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JS-555: Testimony of Pamela Olson before the Senate Committee on Fmanceon Internati... Page 3 of 7
necessitate inefficient business structures and operations, and leave US companies
and workers in a less competitive position.
U.S. Taxation of Income Earned Abroad
Given the significance of competitiveness concerns, we should consider the ways in
which our tax system (1) differs from that of our major trading partners to identify
aspects that m a y hinder the competitiveness of U.S. companies and workers, and
(2) creates barriers to efficient capital flows. About half of the O E C D countries
employ a worldwide tax system similar to that of the United States. T h e practical
effect of a worldwide system is a tax on U.S. companies repatriating their earnings
to the extent foreign tax credits are unavailable to offset U.S. taxes. That tax
creates a hurdle to companies bringing profits back to the United States. It m e a n s
U.S. investments abroad often face a higher hurdle than if a foreign competitor
m a d e the s a m e investment. That is a hurdle foreign competitors in territorial tax
systems do not face, for example, and a hurdle foreign competitors investing in the
U.S. do not face. This creates an incentive for U.S. companies to keep their
income abroad, which can increase the cost of investment in the United States.
That is a result that disadvantages U.S. workers.
Even limiting comparisons of our system to that of countries using a worldwide tax
system, U.S. multinationals can be disadvantaged when competing abroad. This is
because the U.S. worldwide tax system, unlike other worldwide systems, can tax
active forms of business income earned abroad before it has been repatriated, and
it often imposes stricter limits on the use of foreign tax credits that prevent double
taxation of income earned abroad.
Limitations on Deferral
Under the U.S. international tax rules, income earned abroad by a foreign
subsidiary generally is subject to U.S. tax at the U.S. parent corporation level only
when such income is distributed by the foreign subsidiary to the U.S. parent in the
form of a dividend. A n exception to this general rule is provided with the rules of
subpart F of the Code, under which a U.S. parent is subject to current U.S. tax on
certain income of its foreign subsidiaries, without regard to whether that income is
actually distributed to the U.S. parent. The focus of the subpart F rules is on
passive, investment-type income that is earned abroad through a foreign
subsidiary. However, the reach of the subpart F rules extends well beyond passive
income to encompass s o m e forms of income from active foreign business
operations. N o other country has rules for the immediate taxation of foreign-source
income that are comparable to the U.S. rules in terms of breadth and complexity.
Several categories of active business income are covered by the subpart F rules.
Under subpart F, a U.S. parent company is subject to current U.S. tax on income
earned by a foreign subsidiary from certain sales transactions. Accordingly, a U.S.
company that uses a centralized foreign distribution company to handle sales of its
products in foreign markets is subject to current U.S. tax on the income earned
abroad by that foreign distribution subsidiary. In contrast, a local competitor with
sales in that market is subject only to the tax imposed by that country. Moreover, a
foreign competitor that similarly uses a centralized distribution company with sales
into the s a m e markets also generally will be subject only to the tax imposed by the
local country. While this subpart F rule m a y operate in part as a "backstop" to the
transfer pricing rules that require arms' length prices for inter-company sales, this
rule has the effect of imposing current U.S. tax on income from active marketing
operations abroad. U.S. companies that centralize their foreign distribution facilities
therefore face a tax penalty not imposed on their foreign competitors.
The subpart F rules also impose current U.S. taxation on income from certain
services transactions performed abroad. In addition, a U.S. company with a foreign
subsidiary engaged in shipping activities or in certain oil-related activities, such as
transportation of oil from the source to the consumer, will be subject to current U.S.
tax on the income earned abroad from such activities. In contrast, a foreign
competitor engaged in the s a m e activities generally will not be subject to current
home-country tax on its income from these activities. While the purpose of these
rules is to differentiate passive or mobile income from active business income, they
operate to subject to current tax s o m e classes of income arising from active
business operations structured and located in a particular country for business
reasons wholly unrelated to tax considerations. In other words, in seeking to
capture as much passive international income as possible, subpart F captures a
large share of active income as well, putting the companies that earn this active
income at a distinct competitive disadvantage.
Limitations
on
Foreign
Tax Credits
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JS-555: Testimony of Pamela Olson before the Senate Committee on F m a n c e o n lnternati... Page 4 of 7
Under the worldwide system of taxation, income earned abroad potentially is
subject to tax in two countries - the taxpayer's country of residence and the country
where the income w a s earned. Relief from this potential double taxation is provided
through the mechanism of a foreign tax credit under which the tax that otherwise
would be imposed by the country of residence m a y be offset by tax imposed by the
source country. The United States allows U.S. taxpayers a foreign tax credit for
taxes paid on income earned outside the United States.
The foreign tax credit may be used to offset U.S. tax on foreign-source income but
m a y not offset U.S. tax on U.S.-source income. The rules for determining and
applying this limitation are detailed, complex, and can have the effect of subjecting
U.S.-based companies to double taxation on their income earned abroad. The
current U.S. foreign tax credit regime also requires .that the rules be applied
separately to separate categories or "baskets" of income. Foreign taxes paid with
respect to income in a particular category m a y be used only to offset the U.S. tax
on income from that s a m e category. Computations of foreign and domestic source
income, allocable expenses, and foreign taxes paid must be m a d e separately for
each of these separate foreign tax credit baskets, further adding to the complexity
of the system.
The application of the foreign tax credit limitation to ensure that foreign taxes paid
offset only the U.S. tax on foreign-source income requires a determination of net
foreign-source income for U.S. tax purposes. For this purpose, foreign-source
income is reduced by U.S. expenses that are allocated to such income. Under the
current rules, interest expense of a U.S. affiliated group is allocated between U.S.
and foreign-source income based on the group's total U.S. and foreign assets. The
stock of foreign subsidiaries is taken into account for this purpose as a foreign asset
(without regard to the debt and interest expense of the foreign subsidiary). These
rules thus treat interest expense of a U.S. parent as relating to its foreign
subsidiaries even where those subsidiaries are equally or more leveraged than the
U.S. parent. This over-allocation of interest expense to foreign income
inappropriately reduces the foreign tax credit limitation because it understates
foreign income. The effect can be to subject U.S. companies to double taxation.
Other countries do not have expense allocation rules nearly as extensive as ours.
Under the current U.S. rules, if a U.S. company has an overall foreign loss in a
particular taxable year, that loss reduces the company's total income and therefore
reduces its U.S. tax liability for the year. Special overall foreign loss rules apply to
re-characterize foreign-source income earned in subsequent years as U.S.-source
income until the entire overall foreign loss from the prior year is recaptured. This
re-characterization has the effect of limiting the U.S. company's ability to claim
foreign tax credits in those subsequent years. N o comparable re-characterization
rules apply in the case of an overall domestic loss. However, a net loss in the
United States would offset income earned from foreign operations, income on which
foreign taxes have been paid. The net U.S. loss thus would reduce the U.S.
company's ability to claim foreign tax credits for those foreign taxes paid. This
gives rise to the potential for double taxation when the U.S. company's business
cycle for its U.S. operations does not match the business cycle for its foreign
operations.
These rules can have the effect of denying U.S.-based companies the full ability to
credit foreign taxes paid on income earned abroad against the U.S. tax liability with
respect to that income and therefore can result in the imposition of the double
taxation that the foreign tax credit rules are intended to eliminate.
Double Taxation of Corporate Income
While concern about the effects of the U.S. tax system on international
competitiveness m a y focus on the tax treatment of foreign-source income,
competitiveness issues arise in very much the s a m e w a y in terms of the general
manner in which corporate income is subject to tax in the United States.
Prior to the enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003
(JGTRRA), the United States w a s one of the few industrialized countries that failed
to provide s o m e form of integration of corporate and individual income taxes.
Income from an equity-financed investment in the corporate sector w a s taxed twice,
first as profit under the corporate income tax and again under the individual income
tax when received by the shareholder as a dividend or as a capital gain on the
appreciation of corporate shares. In contrast, under a fully integrated tax system,
the double tax would be eliminated and a single tax would be imposed on corporate
profit. Most O E C D countries offer s o m e form of integration under which corporate

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tax payments are either partially or fully taken into consideration when assessing
shareholder taxes on this income, eliminating or reducing the double tax on
corporate profits.
The prior non-integration of corporate and individual tax payments on corporate
income applied equally to domestically earned income or foreign-source income of
a U.S. company. The double tax increased the "hurdle" rate, or the minimum rate of
return required on a prospective investment. To yield a given after-tax return to an
individual investor, the pre-tax return must be sufficiently high to offset both the
corporate level and individual level taxes paid on this return.
Whether competing at h o m e against foreign imports or competing abroad through
exports from the United States or through foreign production, the double tax m a d e it
less likely that the U.S. company could compete successfully against a foreign
competitor.
To address the high effective tax rate on corporate equity investments, J G T R R A
partially integrated corporate and individual taxes by providing relief from the double
tax at the individual level through reduced tax rates on corporate dividends and
capital gains. The m a x i m u m tax rate on dividends paid by corporations to
individuals and on individuals' capital gains is reduced to 15 percent in 2003
through 2008. For taxpayers in the 10 percent and 15 percent income tax rate
brackets, the rate on dividends and capital gains is reduced to 5 percent in 2003
through 2007, and to zero in 2008.
Because J G T R R A reduced the effective tax rate on income earned in the corporate
sector, m a n y more investments can achieve a desired after-tax return (after both
corporate and individual taxes are paid) than under the prior non-integrated tax
system. A s a result, projects that could not attract equity capital in a non-integrated
tax system because they might not be sufficiently profitable are able to attract
equity capital in the present partially integrated system. Nevertheless, taxes on
equity investments in the corporate sector are still higher than they would be under
a fully integrated system. In the context of competitiveness, this m a y m e a n that a
project that would otherwise be undertaken by a U.S. company, either at h o m e or
abroad, is instead undertaken by a foreign competitor. A n additional concern is that
the present relief from the double tax is scheduled to expire in 2009. T o help ensure
the competitiveness of U.S. companies, the present relief from the double tax for
dividends and capital gains should be m a d e permanent
Additional Issues Involving Business Taxation
Mr. Chairman, in addition to the need to reevaluate our international tax rules, there
are other tax policy issues that require consideration.
The President's February budget contained a number of tax provisions in addition
to those that were eventually enacted in J G T R R A that are also intended to
strengthen the economy. Those proposals affect a wide range of areas, including
encouraging saving, strengthening education, investing in health care, increasing
housing opportunities, protecting the environment, encouraging telecommuting, and
providing incentives for charitable giving. They also include specific proposals to
rationalize the tax laws, such as the repeal of section 809, and to simplify the tax
laws, such as a permanent expansion of section 179, and to improve tax
administration. T o maintain their favorable effects and provide greater certainty for
economic and financial planning, the Budget proposed to extend several tax
provisions
that expire
2003proposes
and 2004,
m a k e permanent
the taxand
cuts
The
President's
budgetinalso
to and
m a k to
e permanent
the research
enacted
in
the
Economic
Growth
and
Tax
Relief
Reconciliation
Act
of
2001.
experimentation tax credit. Research is central to American businesses' ability to
compete successfully in the global economy. It results in n e w processes and
innovative products that open up n e w markets and create job opportunities.
American businesses can continue to compete only if they stay at the forefront of
technological innovation. The research credit encourages technological
developments that are an essential component of economic growth and a high
standard of living in the future. A permanent research credit would remove the
uncertainty about its availability in the future and thereby enable businesses to
factor the credit into their decisions to invest in research projects.
The current system of tax depreciation also merits reevaluation. The 2000 Treasury
Report to Congress on Depreciation Recovery Periods and Methods identified a
number of issues with the current system of tax depreciation. Each issue
represents a potential avenue to improving the tax system, and m a y warrant further
study. O n e such issue is that the current system lacks a firm conceptual rationale.
For example, it does not reflect inflation-indexed economic depreciation. This
m e a n s that tax depreciation allowances can deviate significantly from those
required to properly measure income and from those that would provide a uniform

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investment incentive for all assets.
A second issue in depreciation policy is that the current system is dated. The asset
class lives that serve as the primary basis for assignment of recovery periods have
remained largely unchanged since 1981, and most class lives date back at least to
1962. Entirely new industries have developed in the interim, and production
processes in existing industries have changed.
A third issue is that the current depreciation system suffers from an ambiguous
system for determining each asset's cost recovery period. This ambiguity
contributes to administrative problems, makes it difficult to integrate n e w assets and
activities into the system rationally, and inhibits rational changes in class lives for
existing categories of investment.
Finally, in addition to these broad issues, the existing system is hampered by a
number of narrower controversies, including the proper determination of the
recovery period for real estate, the possible recognition of losses on the retirement
of building components, and the presence of cliffs and plateaus in cost recovery
periods that distorts the relationship between economic life and tax life.
The corporate alternative minimum tax (AMT) is an alternative tax system to the
regular tax system. W h e n investments and other expenses are large relative to a
company's taxable income, as occurs during economic downturns, alternative
minimum tax m a y be owed. Corporate A M T payments represent a pre-payment of
tax that the taxpayer will get back when and if the taxpayer returns to a sufficient
level of profitability.
A significant problem with the AMT that is especially relevant today is that the AMT
reduces the stabilizing property of the corporate income tax, raising tax liabilities
just When the taxpayer is most troubled economically. In general, tax payments
should help stabilize the economy by falling as the economy's performance
declines, thereby reducing the impediment taxes place on consumption,
investment, and production. The A M T tends to impose an increased tax burden
during an economic downturn, which prolongs periods of economic weakness by
reducing business activity. During an economic downturn, companies that seek to
maintain a constant level of investment and employment are more likely to pay A M T
or pay larger amounts of A M T . This is because A M T adjustments and preferences
will represent a larger portion of their taxable income than during periods of high
profitability.
The AMT also limits the use of net operating losses (NOLs) which tend to increase
during economic downturns. Under the A M T , N O L s m a y not reduce a taxpayer's
alternative minimum taxable income (AMTI) by more than 90 percent. The Job
Creation and Worker Assistance Act of 2002 temporarily waived the A M T I limitation
for N O L carrybacks arising in 2001 and 2002 as well as carryforwards to those
years. In view of the slow pace of the economy recovery, the President's Budget
proposed to waive the AMTI limitation for N O L carrybacks originating in 2003, 2004,
and 2005, as well as for N O L s carried forward into those years. This change would
provide appropriate tax relief for businesses in difficult financial straits.
Another aspect of the AMT is that it limits the use of foreign tax credits. Foreign tax
credits can offset no more than 90 percent of the tentative minimum tax. Excess
A M T foreign tax credits can be carried forward 5 years or back 2 years. Because
the foreign tax credit is intended to ensure that foreign income of U S corporations is
not double taxed, the AMT's
limitation on the use of foreign tax credit should be reconsidered.
*• *r * * *

It has been observed that "it is difficult to predict the future of an economy in which
it takes more brains to figure out the tax on our income than it does to earn it." That
is the situation w e face. Our tax laws are extraordinarily complex. A recent IRS
study of the burden and cost of complexity to individual taxpayers put the burden
well in excess of three billion hours per year and the cost well in excess of $60
billion per year. And that is just the individual side. The rules on the business side
are even worse. While large businesses can grapple with it, m a n y small and
medium-size businesses cannot. The challenge for businesses trying to comply
with the law - or the IRS trying to administer and enforce it is enormous. It is time
for us to undertake a serious effort to simplify our tax rules.
The complexity is nowhere more evident than in our international tax rules. A
reexamination is needed, including of the fundamental assumptions underlying the

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current system. We should look to the experiences of other countries and the
choices they have m a d e in designing their international tax systems. Consideration
should be given to fundamental reform of the U.S. international tax rules and to
significant reforms within the context of our current system.
The many layers of rules in our current system arise in large measure because of
the difficulties inherent in satisfactorily defining and capturing income for tax
purposes, particularly in the case of activities and investments that cross
jurisdictional boundaries. However, the complexity of our tax law itself imposes a
significant burden on U.S. companies. Therefore, w e must not lose sight of the
need to simplify our international tax rules.

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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
July 15, 2003
JS-556
Testimony of the Honorable Peter R. Fisher
Under Secretary for Domestic Finance
U.S. Department of the Treasury
Before the
Subcommittee on Select Revenue Measures
Committee on W a y s and Means
and the
Subcommittee on Employer-Employee Relations
Committee on Education and the Workforce
United States House of Representatives
THE ADMINISTRATION'S PROPOSAL FOR ACCURATELY MEASURING
PENSION LIABILITIES
Chairman McCrery, Chairman Johnson, Ranking Member McNulty, Ranking
Member Andrews, and Committee members, Labor Assistant Secretary Ann
Combs and I are pleased to present to you the Administration's proposals for
strengthening the long-term health of the defined benefit pension system and
making pension benefits more secure for America's working men and women.
To begin, we must be clear on our objective: we all want to improve the retirement
security for the nation's workers and retirees by strengthening the financial health of
the voluntary defined benefit system that they rely upon. Current estimates suggest
that pension plans in aggregate are underfunded by more than $300 billion. To
achieve our objective, pension funding must improve. That will not happen until the
existing pension funding rules are fixed. Over the next few months, the
Administration would like to work with Congress to analyze the existing funding
rules and develop additional proposals to improve and strengthen them.
Making Americans' pensions more secure is a big job that will require
comprehensive reform of the pension system. The Administration proposal that w e
released on July 8 is the necessary first step in the reform process but it is only the
first step. Before I outline that proposal in detail, I would like to summarize briefly
the case for comprehensive reform and list some of the topics that w e believe
reform should address.
Reform Issues
Americans have a broadly shared interest in adequate funding of employerprovided defined benefit pensions. Without adequate funding, the retirement
income of America's workers will be insecure. This by itself is a powerful reason to
pursue improvements in our pension system.
At the same time, we must remember that the defined benefit pension system is a
voluntary system. Firms offer defined benefit pensions to their workers as an
employee benefit, as a form of compensation. Our pension rules should thus be
structured in ways that encourage, rather than discourage, employer participation.
Key aspects of the current system frustrate participating employers while also
failing to produce adequate funding. W e thus have multiple incentives to improve
our pension system, and to thus better ensure both the availability and the viability
of worker pensions. W e owe it to the nation's workers, retirees, and companies to
roll up our sleeves and to create a system that more clearly and effectively funds
pension benefits. Major areas that require our prompt attention include:

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1. Funding Rules
Our complicated system of funding rules has been constructed, in part, to dampen
the volatility of firms' funding contributions. Yet current rules fail to do so. After
years of making few or no contributions at all, m a n y firms are facing precipitous
increases in their annual funding requirements. This outcome is frustrating to
business and it has failed to provide adequate funding for workers and retirees.
Improvements to funding rules should mitigate volatility, foster more consistent
contributions, and increase flexibility for firms to fund up their plans in good times.
Specific issues in the funding rules that need to be examined include:
a. Volatility Caused by the Minimum Funding
Backstop. The current minimum funding backstop,
known as the deficit reduction contribution, causes
minimum contributions of underfunded plans to be
excessively volatile from year to year.
b. Funding Target. The existing funding target is
based on current liability, a measure with no clear or
consistent meaning. W e will seek to develop a better
target.
c. Contribution Deductibility. Together, minimum
funding rules and limits on m a x i m u m deductible
contributions require sponsors to m a n a g e their funds
within a narrow range. Raising the limits on
deductible contributions would allow sponsors to
build larger surpluses to provide a better cushion for
bad times.
d. Asset Measurement. Under existing rules, assets
can be measured as multi-year averages rather than
current values. Pension funding levels can only be
set appropriately if both assets and liabilities
measures are current and accurate. Failure to
accurately measure assets and liabilities contributes
to funding volatility.
e. Credit Balances. If a sponsor makes a contribution
in any given year that exceeds the minimum required
contribution, the excess plus interest can be credited
against future required contributions. These credit
balances - mere accounting entries -- do not fall in
value even if the assets that back them lose value.
Credit balances allow seriously underfunded plans to
avoid making contributions, often for years, and
contribute to funding volatility.
f. Benefit Amortization. The amortization period for
n e w benefits can be up to 30 years long. This m a y be
excessive. W e will also look at other statutorily
defined amortization periods.
2. Actuarial Assumptions
We also intend to examine how the application of actuarial assumptions in the
current funding rules m a y contribute to funding volatility and to inaccurate
measurement of pension liabilities. For example, companies do not want to be
surprised to find they have inadequately funded their plans because the mortality
tables used in the funding rules are outdated or because those rules fail to account
for lump s u m payments. W e will examine:
a. Mortality Tables. In order to ensure that liabilities
are measured accurately mortality estimates need to
be m a d e from the most up to date and accurate
tables available. The Treasury will be examining the

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tables currently in use over the next few months and
determine, after inviting public comment, whether
they should be replaced.
b. Retirement Assumptions. Retirement assumptions
m a d e by plan actuaries need to reflect the actual
retirement behavior of those covered by the plan.
c. Lump Sums. Liability computations for minimum
funding purposes need to include reasonable
estimates of expected future lump sum withdrawals
that are determined by methodologies that are
broadly consistent with other estimates of plan
obligations.
3. Other Issues
Three other issues also deserve review:
a. Extent of Benefit Coverage. It may be advisable to
limit or eliminate guarantees of certain benefits that
typically are not funded, such as shutdown benefits.
b. Multi-employer Plan Problems. Multi-employer
plans operate under a different set of rules than
single-employer plans. Despite these regulatory
differences, the same principles of accuracy and
transparency should apply to multi-employer plans,
and w e will be reviewing the best ways to accomplish
this.
c. PBGC Premiums. PBGC's premium structure
should be re-examined to see whether it can better
reflect the risk posed by various plans to the pension
system as a whole.
Although comprehensive reform needs prompt attention, as I testified before your
Subcommittee in April, Chairman McCrery, the necessary first step is to develop a
more precise measurement of pension liabilities. Fixing the pension funding rules
won't help unless w e give our immediate attention to ensuring that w e are
accurately measuring the pension liabilities on which those rules rely.
As I described in detail at the April hearing, our immediate task is replacing the 30year Treasury rate used in measuring pension liabilities for minimum funding
purposes.
I think that we all agree that any permanent change in pension discounting rules
should not contribute to future pension plan underfunding. In making the
recommendations that I a m about to describe, the Administration is seeking to
measure accurately pension liabilities, in order to provide the necessary foundation
for reform of the funding rules, which then will help ensure that pension promises
m a d e are pension promises kept.
We face two near-term concerns that must be addressed in getting to a permanent
replacement of the current discount rate.
First, firms that sponsor defined benefit plans already are budgeting their pension
contributions for the next several years. Near-term changes to the current rules that
would increase pension contributions above current expectations could disrupt
these firms' existing short-term plans.
Second, many underfunded plans are already facing sharp increases in their
required pension funding contributions. Thus, while w e must ultimately ensure that
liabilities are measured accurately and that firms appropriately fund the pension
promises they have made, an abrupt change from the current system could do
more short-term harm than good by triggering plan freezes or terminations.

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The Importance of the Discount Rate in Pension Funding
To determine minimum required funding contributions, a plan sponsor must
compute the present value of the plan participants' accrued future benefit
payments, which is known as the plan's current liability. The present value of a
benefit payment due during a particular future year is calculated by applying a
discount factor to the dollar amount of that payment. This discount factor converts
the dollar value of the future payment to today's dollars. Current liability is simply
the s u m of all these discounted future payments.
Pension liabilities must be accurately measured to ensure that pension plans are
adequately funded to protect workers' and retirees' benefits and to ensure that
minimum funding rules do not impose unnecessary financial burdens on plan
sponsors. Liability estimates that are too low will lead to plan underfunding,
potentially undermining benefit security. Pension plan liability estimates that are too
high lead to higher than necessary minimum contributions, reducing the likelihood
that sponsors will continue to operate defined benefit plans.
Computing pension liabilities is basically a two step process. In the first step, the
plan actuary estimates the payments that will be m a d e to retirees each year in the
future. The pension plan's actuary makes these estimates based on the plan's
terms, and estimates of h o w long current employees will work before retirement and
receive benefits in retirement. Estimating the future stream of payments involves
considerable judgment on the part of the actuary.
Step two, converting the value of future payments to today's dollars, is, by
comparison, simple and rather mechanical. To convert payments in a future year to
present dollars, the estimated payments are simply adjusted by the appropriate
discount rate. Although s o m e discounting schemes use the s a m e discount rate to
compute the present value of payments for all future years, it is no more difficult to
compute the present value using different discount rates for each future year.
Choosing the right rate is the key to accurate pension discounting. The wrong rate
leads to inaccurate estimates of liabilities that can be either too high or too low.
Therefore, the primary goal of the Administration's proposal to replace the 30-year
Treasury rate can be s u m m e d up in one word: accuracy. Without first accurately
measuring a plan's pension liabilities, the minimum funding rules cannot ensure that
the firm is setting aside sufficient funds to m a k e good on its pension promises to its
workers. Accurate liability measures also provide a firm's investors with valuable
information about the pension contributions that will be m a d e from the firm's
earnings. Accurate liability measures allow workers and retirees to monitor the
health of their pension plans. Finally, accurate liability measures allow the P B G C as
pension insurer to better monitor the health of the overall pension system.
Pension Discounting under Current Law
Since 1987, federal law has required that pension liabilities that determine minimum
pension contributions be computed using the interest rate on the 30-year Treasury
bond. Liabilities computed using this discount rate have become less accurate over
time, as financial conditions have changed. In the late 1980s, inflation w a s at higher
levels than today. A s the inflation rate has declined, the term structure of interest
rates has changed. Congress recognized this and in 2002 passed legislation that
temporarily changed the discount rate to provide funding relief to plan sponsors.
This temporary fix expires at the end of this year.
In my April testimony, I put forward an Administration proposal that would have
extended this fix for two additional years while the Treasury Department developed
a permanent replacement discount rate. However, dissatisfaction with the continued
use of the 30-year rate, even on an interim basis, w a s expressed by m a n y
m e m b e r s of Congress and pension sponsors. Your Committees asked the
Administration to go back and return with a permanent proposal that w e could
support and, after two months of intense work, w e are n o w pleased to present it
today.
The Administration's Proposal for Accurately Measuring Pension Liabilities

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In my April testimony, I explained why the Administration believes that corporate
bond rates, not Treasury rates, should be the basis for the pension discount
methodology. I also identified three key issues that needed to be addressed in
selecting a permanent replacement for the 30-year Treasury rate: the time structure
of a pension plan's future benefit payments; the appropriateness of smoothing the
discount rate; and the appropriate relationship between the discount rate and the
computation of lump s u m payments.
The proposal I will now set forth deals with each of these issues.
1. Pension discount rates should be based on market determined interest rates for
similar obligations.
The terms of pension contracts are not market determined because pensions are
not bought and sold in an open market and pension sponsors do not compete with
one another for participants. However, group annuity contracts, which are very
similar to employer sponsored pensions, are sold in a competitive market by
insurance companies. Group annuity contracts obligate the seller to provide a
stream of annual cash payments, in exchange for a competitively priced premium,
to individuals covered by the policy. W e take the view, as Congress has in the past,
that pension discount rates should reflect the risk embodied in assets held by
insurance companies to m a k e group annuity payments. These assets consist
largely of bonds issued by firms with high credit ratings. Furthermore, the insurance
companies issuing the group annuity contracts also have high credit ratings.
Therefore, the Administration proposes that the new pension discount rate be
based upon an index of interest rates on high-grade corporate bonds.
2. Pension discount rates should be designed to ensure that liabilities reflect the
timing of future benefit payments.
Each pension plan has a unique schedule of future benefit payments - or cash flow
profile - that depends on the characteristics of the work force covered by the plan.
These characteristics include the percent of participants that are retired, the age of
current workers covered by the plan, the percent receiving lump s u m s and whether
the covered work force has been growing or shrinking overtime. Plans with more
retirees and older workers, more lump s u m payments, and shrinking workforces will
m a k e a higher percentage of their pension payments in the near future, while plans
with younger workers, fewer retirees, fewer lump sums, and growing workforces will
m a k e a higher percentage of payments in later years.
One approach to liability computation applies the same discount rate to all future
payments regardless of when they occur. This approach produces inaccurate
liability estimates because it ignores a basic reality of financial markets: that the
rate of interest earned on an investment or paid on a loan varies with the length of
time of the investment or the loan. If a consumer goes to a bank to buy a Certificate
of Deposit, he will expect to receive a higher rate on a five-year C D than on a oneyear C D . Likewise, that s a m e consumer w h o borrows money to buy a house
expects to pay a higher interest rate for a 30-year than a 15-year mortgage.
Pension discount rates must recognize this simple financial reality. Pension
payments due next year should be discounted at a different, and typically lower,
rate than payments due 20 years from now. W h y is this important? Pension plans
covering mostly retired workers that use a 20-year interest rate to discount all their
benefit payments will understate their true liabilities. This will lead to plan
underfunding that could undermine retiree pension security, especially for workers
w h o are nearing retirement age. Proper matching of interest rates to payment
schedules cannot be accomplished using any single discount rate.
Computing liabilities by matching interest rates on zero-coupon bonds that mature
on the s a m e date that benefit payments are due is not complicated. O n c e expected
pension cash flows are calculated by the actuary it is no more difficult to discount
benefit payments on a spreadsheet with an array of different interest rates than it is
if only one discount rate is used.
It is also important to understand that the discount rate used does not change the
actual obligation - the liability is what it is. Choosing the proper discount rate gives
us an accurate measure in today's dollars of future benefit payments; it does not

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change those payments. But if we don't measure that value properly today, plans
may not have sufficient funds set aside in the future to make good on those pension
promises.
The Administration proposes that benefit payments made in future years be
discounted to today's dollars using discount rates taken from a corporate
bond yield curve (a table or graph that illustrates the interest rates on bonds
that mature at different dates in the future). Liabilities would be computed by
using interest rates on bonds that mature on a specific date in the future to
discount benefit payments due to be m a d e that s a m e year.
Furthermore, implementation of the yield curve would be phased in over five
years. The phase-in would start with the use of a single long-term corporate
bond rate as recommended in H R 1776 (proposed by Congressmen Portman
and Cardin) for the first two years. In the third year a phase-in to the
appropriate yield curve discount rate would begin. The yield curve would be
fully applicable by the fifth year.1
This phase-in period would provide some short term funding relief for sponsors, but
achieve the desired level of accuracy at the end of five years.
3. Pension discount rates should be based on current financial conditions.
Pension liability computations should reflect the current market value of future
benefit payments - this is a key component of accuracy. Plan sponsors and
investors are interested in the current value of liabilities in order to determine the
demands pension liabilities will place on the company's future earnings. Workers
and retirees are interested in the current value of liabilities so that they can
determine whether their plans are adequately funded.
Some argue that discount rates should be averaged (smoothed) over long periods
of time. Under current law they are smoothed over four years. Such smoothing is
intended to reduce the volatility of liability measures and helps make contribution
requirements more predictable. Unfortunately current smoothing rules reduce the
accuracy of liability measures while failing to achieve stability in annual
contributions. Smoothing can mask changes in pension plan solvency of which
workers and retirees should be aware. As I mentioned earlier, w e would like to work
with Congress to identify permanent reforms of the funding rules that would reduce
volatility in annual contributions, without the corollary effect of reducing
measurement accuracy.

1

In years 1 and 2 pension liabilities for minimum funding purposes would
be computed using a discount rate that falls within a corridor of between 90
and 105 percent of a 4 year weighted average of the interest rate on a
long-term highly-rated corporate bond. In years 3 and 4, pension liabilities
would be an average of that calculated using a long-term corporate rate
and that using a yield curve. In year 3, the corporate rate would receive a
2/3 weight and the yield curve a 1/3 weight. In year 4 the weights would be
switched and in year five liabilities would be computed using the yield
curve.

The Administration proposes to decrease smoothing gradually during the 5
year phase-in. In years one and two, four year smoothing is maintained.
Smoothing is reduced in years three and four and finally, in year five, set at a
90-day moving average to eliminate the impact of day-to-day market volatility.
This will provide an appropriately current measure of interest rates.
4. Pension discount rates should apply to annuities and lump sum payments in a
consistent and neutral manner.
Retirees and departing workers in some plans can opt to receive a single payment
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for their pension benefits rather than regular payments over their lifetimes. The
value of these so-called lump s u m payments is the present value of the worker's
expected retirement annuity. Using different discount rates for annuities and lump
sums creates an economic incentive for choosing one form of payment over the
other.
The Administration proposes that the yield curve used to measure pension
liabilities also be used to compute lump s u m payments so as to reflect
accurately the life expectancy of retirees in the amounts that they will receive.
In order to minimize the disruption of plans of workers w h o will receive
benefits in the immediate future, lump s u m s would be computed using the 30year Treasury rate as under current law in years one and two. In the third year
a phase-in to the appropriate yield curve discount rate would begin. B y the
fifth year lump s u m s will be computed using the yield curve.
Workers receiving lump sums, especially those in their 50's, 60's and older, would
be better off under the Administration proposal than under an alternative that would
compute lump sums using a single long term corporate interest rate. Workers
electing lump sums at relatively younger ages would have a higher proportion of
their future payments discounted at long-term interest rates than workers retiring at
relatively older ages. This is appropriate given the different time frames over which
they had been expecting to receive their benefits. While moving from the 30-year
Treasury rate to any corporate bond based rate will result in lower lump s u m
payments for younger workers w h o leave their jobs, under the yield curve approach
older workers closer to retirement age will be little affected by the change.
However, some workers who will soon be leaving their jobs have been anticipating
taking their pension benefits in the form of a lump s u m with the expectation that
those benefits would be computed using the 30-year Treasury rate. Computing
lump sums using the yield curve rather than the 30-year Treasury rate m a y result in
lower lump s u m payments for those w h o leave at a young age. The Administration
proposal is for the benefits of younger and older workers alike to be consistently
and accurately valued, whether a lump s u m or a traditional annuity benefit.
Concluding Observations
In closing I would like to make a few general observations about the
Administration's proposed permanent discount rate for pension liabilities.
Because discounting pension payments using a yield curve is already considered a
best practice in financial accounting, large sponsors are almost certainly making
these computations now or know how to make them 2. Sponsors certainly know
what their expected future pension cash flows are.
The mechanics of discounting future pension cash flows are in fact quite simple.
This is true whether one uses a single rate to discount all payments or uses
different rates to discount payments m a d e in each year. Such calculations, which
can be done with a simple spreadsheet, should not pose serious problems even for
small plans let alone plans sponsored by large, financially sophisticated firms.
Yield curves used to discount pension benefit payments have been available for a
number of years. O n e example of such a pension yield curve is the one developed
by Salomon Brothers in 1994 for the Securities and Exchange Commission.
Monthly Salomon Brothers yield curves dating back to January 2002 can be found
on the Society of Actuaries web site at http://www.actuariallibrary.org/ 3. W e
envision that the Treasury Department would adopt a similar methodology. Using
this widely accepted approach, w e would develop and publish a yield curve
reflecting interest rates for high-quality zero-coupon call adjusted corporate bonds
of varying maturities.
The adjustments that we would anticipate making - through a rulemaking process
subject to public comment - would only be to reflect accurately the time structure of
the yield curve. The procedure w e envision would involve two types of adjustments:
(1) standardizing the corporate rates as zero coupon, call adjusted rates; and (2)
extrapolating the shape of the corporate yield curve using the shape of the Treasury
yield curve because of the thinness of the market for corporate bonds of s o m e
durations, especially long-term bonds. The yield curve rates would not be adjusted
to reflect expenses, mortality or any other actuarial or administrative concerns. The
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-556: Testimony of the Honorable Peter R. Fisher Before the Subcommittee on Select...
high-grade corporate rates used to construct the curve will only be adjusted so that
they accurately reflect the time structure of benefit payments.
As I mentioned, the Treasury would undertake this process using a formal notice
and comment rulemaking process to ensure market transparency and to
incorporate input from all interested parties in final development of the yield curve.
Although the groundwork is well established, w e certainly plan to work with all
stakeholders to finalize the methodological details of the ultimate yield curve.
While we believe that important near-term considerations warrant beginning the
transition by allowing plans to use a long-term corporate bond index for the first two
years, staying there would result in greater underfunding over time than w e face
today. Such an outcome would be counterproductive and harmful, and would
certainly m o v e the defined benefit system in the wrong direction. Most importantly
it would put workers' pensions at greater risk.
Some have alleged that there would be adverse macroeconomic consequences to
using a yield curve. Such critics allege that the economy would suffer because the
resulting increased pension contributions would deplete funds from the economy.
That argument is, w e submit, incorrect. A firm's pension contributions are invested
by the plan for the future benefit of the plan's participants. Those contributions go
right back into the economy as savings. They are not withdrawn from the economy.
Pension funds are a significant source of capital investment in our e c o n o m y investment that creates jobs and growth. And again, an accurate measurement of
liabilities is necessary to ensure appropriate funding of pension promises to
America's workers.
The macroeconomic effect w e should be worried about is that which would result if
plan sponsors failed to fund the pension promises that America's workers are
depending upon for their retirement security. This is why the Administration is
urging that pension liabilities be accurately measured and why w e intend to return
before your Committees with further recommendations to fix the pension funding
rules. Only if our pension liabilities are accurately measured will w e be able to have
an informed dialogue about such comprehensive reforms.
Some have alleged that this proposal would place sponsors of plans with older
workforces at a disadvantage by requiring them to put more money into their plans
than they would under alternative proposals. The fact of the matter is that more
money is needed in those plans to ensure that older workers receive the benefits
they have earned through decades of hard work. These obligations of employers to
our older workers exist whether our measurement system accurately recognizes
them or not. W e think that older workers have the s a m e right to well funded
pensions that younger workers have and that they should not be systematically
disadvantaged by the funding rules.

2

S e e Financial Accounting Standard 87.
This address o p e n s a w i n d o w to the Society's site search engine. T o see
discount curve examples simply type S a l o m o n Brothers Pension Discount
Curve into the query window.
3

Finally, w e should also not overlook other positive consequences of more accurate
pension liability measures. W e live in an era when Americans are rightly demanding
increased accuracy and transparency in corporate accounting. Surely this is the
standard w e should pursue for the pension systems on which Americans' workers
depend. Uncertainty about the size of pension liabilities has negative effects on
sponsor stock prices. Increased accuracy of pension liability measurement will
greatly reduce that uncertainty when such measures become available to the public
under the enhanced disclosure measures that will be discussed by Assistant
Secretary C o m b s . W e see all of these recommendations as working together to
clarify our pension funding challenges, better informing the public, employers and
policy makers about what must be done to ensure adequate worker retirement

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security.
As I stated at the outset, the Administration's permanent discount rate replacement
proposal is designed to strengthen American's retirement security by producing
accurate measures of pension liabilities. And accurate measurement is the
essential first step in ensuring that pension promises m a d e are pension promises
kept.

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JS-557: Treasury Secretary John Snow's Statement on the Administration's Mid-Year Bu...

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PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
July 15, 2003
JS-557
Secretary Snow Cites Spending Discipline And Economic Growth As A Cure
To Deficits And
Authorizes The Treasury Department To Release A n Estimate of H o w The
Administration's
Tax Relief Proposals Have Provided Powerful And Necessary Economic
Stimulus
Treasury Secretary John Snow's Statement
on the Administration's Mid-Year Budget Review
"While the projected federal deficits in today's report remain manageable, they are
unwelcome and w e need to do everything w e can to bring them down. But today's
report also confirms that our country, over the past two years, has faced challenges
that have had an impact on our economy and the budget. The recession, war on
terror, and corporate scandals have all played a part in slowing the growth of our
economy and increasing the deficit in the short term. The best way to battle
deficits is to take steps to control wasteful Washington spending, while boosting our
economy as w e did by passing the Jobs and Growth Act. Today's report makes m e
doubly committed to keeping federal spending under control and our economy
strong."
In concert with the Secretary's above statement, the Department today also
released an estimate of what U.S. economic performance would have been without
fiscal stimulus measures implemented under President Bush. The Department
used the Macroeconomic Advisers (MA) macroeconometric model to estimate how
the economy would have performed had there been no fiscal stimulus from 2001
through 2004. To do this, Treasury eliminated the tax and spending provisions of
the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, June
2001), the Job Creation and Worker Assistance Act of 2002 (JCWAA, March 2002),
and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, May
2003). The Department's findings (assuming interest rates set by the Federal
Reserve are taken as unchanged from their actual levels):
By the second quarter in 2003, had there not been the fiscal stimulus measures
proposed by President Bush:
• The unemployment rate would have been nearly 1 percentage point higher.
• The economy would have created as many as 1.5 million fewer jobs.
• Real GDP would have been as much as 2 percent lower.
By the end of 2004, had there not been the fiscal stimulus measures proposed by
President Bush:
• The unemployment rate would be as much as 1.6 percentage points higher.
• The economy would have created as many as 3 million fewer jobs.
• Real GDP would be as much as 3.5 to 4 percent lower.
This analysis demonstrates the importance of President Bush's economic stimulus
measures to the economy. These measures helped make the recession one of the
shallowest in our nation's history. Growing the economy and strict spending
controls are the best ways to attack deficits.

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JS-558: Supporting Economic Development in Haiti John B. Taylor

Page

PRLSS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
July 15, 2003
JS-558
Supporting Economic Development in Haiti
John B. Taylor
Under Secretary of Treasury for International Affairs
Testimony before the Senate Foreign Relations Committee
Chairman Lugar, Ranking M e m b e r Biden, and other members of the Committee,
thank you for inviting m e to discuss the Administration's efforts to promote
economic development in Haiti and to help address the most critical humanitarian
needs of the Haitian people.
The Economic Situation in Haiti
The people of Haiti are impoverished. Per capita GDP in Haiti is 1/5th the average
for the Latin America and Caribbean region as a whole and 4 0 % lower than the
second poorest country in the hemisphere, Nicaragua. Haiti has been poor for
m a n y years. Real per capita income in Haiti has actually fallen over the past four
decades. Other indicators tell a similar story. Infant mortality stands at 79 per
1,000 live births. Illiteracy is near 50 percent. And 54 percent of Haiti's population
lacks access to clean water. These facts explain w h y Haiti w a s ranked 150th out of
175 countries on the UNDP's H u m a n Development Index in 2002.
Years of economic mismanagement, political instability, and weak rule of law have
produced this tragedy. Fiscal and monetary policy mistakes have fed economic
uncertainty and produced high inflation. These macroeconomic factors combined
with poor infrastructure, irregular supplies of electricity, corruption, and customs
delays to create a poor investment climate. The most basic needs of the Haitian
people in the areas of education, health, and personal security have not been met.
W e r e it not for the violence and instability that have characterized life in Haiti, the
Haitian people would have been able to apply their energies to successfully build a
better future for themselves and their children. Indeed, Haitians outside of Haiti
have done just that, sending back remittances to relatives that total as much as
1/4th of Haiti's G D P per year.
As experience all over the world has shown, chronic, unsustainable public deficits,
misallocation of public resources, corruption, and instability strangle growth and
increase poverty. Aid cannot overcome these obstacles. The Haitian government
must be accountable for its performance. In the absence of good policies,
development assistance does not improve the lives of the poor.
In fact, a poor policy environment has undermined the effectiveness of World Bank
assistance in Haiti. In 2002, the World Bank's Operations Evaluation Department
analyzed the World Bank's activities in Haiti in the mid-1990s. It concluded that
these projects had a negligible impact on improving the lives of Haitians. T o take
one example, a $50 million Road Maintenance and Rehabilitation Project—
designed to address the urgent lack of regular road maintenance in Haiti—suffered
from waste and diversion of funds to other projects. Even the improvement of
roads that did take place under the project w a s judged unlikely to be sustainable,
due to the lack of institutional reform at the public works ministry and failure to
establish a fund for regular repairs.
We must commit ourselves to avoiding the mistakes of the past. We need to
deliver our humanitarian assistance so that the people of Haiti actually benefit from
that assistance. And w e need to focus our economic development assistance so
that it can help the Haitian people raise their living standards and achieve the
benefits of long-term economic growth.

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This Administration seeks to help countries pursue policies that create the
conditions for increased economic growth, higher living standards, and lower
poverty. This is the concept behind President Bush's Millennium Challenge
Account (MCA). M C A assistance is designed to reward those countries that are
ruling justly, investing in people, and promoting economic freedom.
The Government of Haiti has recently taken strong steps to reign in the fiscal deficit,
restrict monetary financing of the government, and eliminate wasteful subsidies.
The United States welcomes these important actions. At the s a m e time, Haiti has a
long w a y to go in creating an environment conducive to investment, entrepreneurial
activity, and growth of the private sector.
Establishing greater political stability, improving governance and reducing
corruption are central to this effort. Improved governance has political, legal, and
administrative dimensions, which others have noted today. Rule of law is also
critical if people are to put their capital at risk. Haiti needs to take steps to establish
the integrity of the police and the judicial system for matters both criminal and civil.
O n the administrative side, improving governance entails steps to m a k e the
government bureaucracy more effective and responsive in meeting the needs of the
public, whether in the area of education, health, or other basic services. A key part
of this is implementing better and more transparent tracking of government
spending, to ensure that public resources are used for their intended purposes.
Outside donors can provide assistance in strengthening governance in Haiti. For
example, the international financial institutions are encouraging Haiti to undertake
audits of public enterprises so that the managers are accountable for the resources
under their control and the resources are used in ways that serve public not
personal interests.
Progress on these critical issues will not only create a foundation for the
revitalization of economic activity in Haiti, it will also help attract foreign investment.
Foreign direct investment fell from $30 million in 1999 to about $5 million in 2002.
The United States is committed to helping the Haitian government put in place a
framework that will allow the country to promote the private investment needed to
raise living standards.
Recent Progress
I am pleased to report that progress has been made recently. The Government of
Haiti has taken important actions to strengthen public finances and create
conditions for greater macroeconomic stability.
The Haitian government amended the draft budget for FY2002/03 to cut the fiscal
deficit by half, limiting central bank financing of the government. Broad money
growth is targeted to decelerate to 1 0 % during the period April-September 2003,
down from 2 6 % from October 2002-March 2003. This helped launch a one-year
Staff Monitored Program (SMP) with the IMF that outlines a framework to help
stabilize Haiti's economy, increase accountability and improve economic
governance.
The Haitian government has also committed to steps to give the finance minister
more control over budget execution, so that he can implement the budget as
passed by the legislature and reduce corruption. The plan envisages the
consolidation of separate ministerial accounts, which have undermined spending
control. Furthermore, the Haitian government has agreed to conduct external
audits of the five major public enterprises during the next year, to ensure that
resources within these public concerns are being used appropriately.
The Staff Monitored Program gives Haiti an opportunity to demonstrate its ability to
implement economic policies designed to promote macroeconomic stability.
Finance Minister Faubert Gustave has stressed the importance of the program for
improving economic policy and budgetary control in Haiti. W e very m u c h want the
IMF and multilateral development banks to support those in Haiti w h o are working
to strengthen its institutions.
To this end, we are pleased that Haiti took a crucial step forward last week when it
cleared arrears of $32 million to the IDB. With arrears to the IDB cleared, the IDB
can n o w m o v e forward with a number of projects already in train, and can reengage

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with Haiti to discuss future lending. The IDB is strongly committed to working with
Haiti and in late July will send a staff team to remain in Haiti as long as needed to
outline a transitional lending program.
Next week we expect that the IDB will approve a $50 million Investment Sector
Loan and disburse the first portion of that loan in the amount of $35 million, which
the Haitian government will use to repay the loan provided by the central bank to
clear IDB arrears. W e also expect the IDB to begin disbursing in subsequent
weeks on $146 million in previously approved project loans for basic education,
reform of the national health system, rehabilitation and maintenance of roads, and
investments in water and sanitation systems. These funds would go directly to
suppliers and would disburse over time as progress is m a d e under each project.
With substantially better policy performance and financial accountability, Haiti could
tap into other development assistance as well. Policy performance and
governance are rightly key determinants of the allocation of World Bank IDA
resources, the World Bank's window for the poorest countries. The World Bank
role in Haiti has been sharply constrained by persistent expenditure monitoring and
control problems. The World Bank has not been able to ensure that project
assistance and budget assistance will be used for their intended purposes. Haiti's
three-year IDA allocation is only $6 million. With major improvements in Haiti's
policy performance, Haiti's IDA allocation could expand considerably and enable
Haiti to more easily clear its arrears to the World Bank.
Haiti is not now eligible for the President's grants initiative in IDA-13, except
possibly for HIV/AIDS-related projects. W e will work with the international
community for a substantial portion of Haiti's assistance from the World Bank and
IDB to be provided in the form of grants in the future.
One final point must be made in connection with assistance to Haiti from the IMF
and multilateral development banks. It stems from legislation passed in 2000
related to trafficking in persons. Haiti's failure to take sufficient action to address
trafficking in persons has placed it in the Tier Three category for which sanctions
apply. The United States has urged Haiti to m a k e a more concerted effort in this
area, but barring progress by Haiti before October 1 or a presidential waiver, the
U.S. Executive Directors would be required to vote "no" and use their best efforts to
deny lending or other assistance to Haiti by the international financial institutions.
In the case of the IDB, a "no" vote from the United States would block assistance to
Haiti.
The Haitian government as taken positive first steps in improving its economic
policies. Fundamental challenges remain. The Government of Haiti must n o w take
the steps needed to lay the foundations for sustained economic growth and
improved living standards for its people. Consistent with O A S Resolution 822, U.S.
policy does not link economic and financial support for Haiti from the international
financial institutions to resolution of Haiti's political issues. Rather, our objective is
to encourage the Haitian government to take the economic policy actions needed to
form the basis for effective engagement by the international financial institutions in
support of economic development in Haiti. The United States is committed to
helping Haiti in this effort.
U.S. Humanitarian Assistance to Haiti
At the same time, the United States has continued to provide substantial
humanitarian support to the Haitian people in recent years through periods of
political turbulence. Working through non-governmental organizations in order to
avoid misuse of funds, the United States has delivered more than $120 million in
humanitarian assistance over the last two years and remains Haiti's largest donor.
The United States has provided more than $900 million in assistance since fiscal
year 1995. Between fiscal years 1995 and 2001, the U.S. provided 28 percent of
total external assistance to Haiti, more than three times the second-largest bilateral
contribution from Canada.
U.S. humanitarian assistance efforts are geared toward alleviating the dire
conditions experienced by the Haitian people. In the past year the United States
delivered more than $3 million in emergency assistance to respond to communities
affected by droughts and flooding. U.S.-backed health projects provide maternal
and child health services, child immunizations, and assistance in the prevention of
HIV/AIDS, including expansion of a voluntary counseling and testing network to

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prevent mother-to-child transmission of HIV. The U.S.-supported network reaches
approximately 2.7 million Haitians.
Haiti is one of two Caribbean countries eligible for assistance to fight HIV/AIDS,
malaria, and tuberculosis under the President's Emergency Initiative, as embodied
in the recently passed HIV/AIDS authorization legislation—this assistance will
supplement the funds provided to Haiti from the Global Fund to Fight AIDS,
Tuberculosis & Malaria.
Next Steps
The United States will continue to work closely with Haiti and other key players to
help the Government of Haiti lay the basis for economic growth and poverty
reduction. Agreement on an IMF Staff Monitored Program and the expected
resumption of IDB assistance signal progress in breaking the logjam in relations
with the international financial institutions created by Haiti's overdue payments.
With arrears cleared at the IDB, concrete backing for development efforts can n o w
m o v e forward.
We will work hard with Haiti's government to maintain this positive momentum. The
pace of re-engagement with the international financial institutions is largely in the
Haitian government's hands. For our part, w e will work to ensure that the
international community provides m a x i m u m incentives for rapid policy progress in
Haiti.

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JS-559: Deputy Assistant Secretary Michael Dawson's Remarks on USA PATRIOT Act
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PRESS ROOM

FROM THE OFFICE OF PUBLIC AFFAIRS
July 16,2003
JS-559
Remarks by
Michael A. D a w s o n
Deputy Assistant Secretary
Critical Infrastructure Protection and Compliance Policy
Department of the Treasury
T o the
Bankers' Association for Finance and Trade
Washington, D.C.
July 15,2003
Implementation of the USA PATRIOT Act with respect to Participation by U.S.
Domestic Financial Institutions in International Financial Services
Thank you for inviting me to speak to you this evening. I am especially pleased to
be here tonight because the Bankers' Association for Finance and Trade has been
thinking about anti-money laundering issues since President Reagan w a s in the
White House, when money laundering w a s finally m a d e a crime. Indeed, since its
beginning, almost exactly 82 years ago in the S u m m e r of 1921, the B A F T has been
and remains a catalyst in developing solutions in international banking legislation
and regulation. And T o m Farmer has been associated with you for the last few
years, and is someone w h o has effectively represented you and the more than 150
m e m b e r s of the B A F T
Needless to say, international financial services are an important component of the
U.S. and world economy. In the United States, you and your membership provide
important parts of the foundation of international finance. For example, you ensure
that the dollar clearing operations operate smoothly and in an orderly fashion,
financing not only American trade, but much of the trade of an entire world. In
addition to supporting trade, international financial services support trade, help
multinational companies hedge risk, and promote economic development around
the world.
It would be a mistake to conclude that international financial services are rarified
products that benefit only the very wealthy or global companies. Indeed,
international financial services in one way or another are part of the array of
financial services offered by very small banks, and by the banks in the City of
Manhattan in Riley County, Kansas, as well as by the banks on Manhattan island in
N e w York. International financial services benefit people at all income levels within
both poor and rich countries. For example, 12 million Americans work in jobs that
depend on exports of U.S. products and services - U.S. international financial
services finance the trade that creates these jobs. Later in m y remarks, I wish to
focus on another example- the international retail money transfer business. T o
borrow a description of remittances from Don Terry at the Inter-American Dialogue,
this year 100 million people working abroad will send $100 billion to their families
back home. For every sender, there is typically not just one recipient, but a family
of recipients. Each year, therefore, as m a n y as 500 to 600 million people benefit
from the international money transfer business. That's about one out of every ten
people on the planet. This helps demonstrate the reach and importance of
international financial services.
Our challenge at the Treasury, as regulators, is to preserve the important
contributions that international financial services m a k e to the well-being of people in
the United States and around the world while ensuring that international financial
services are not abused by terrorists and money launderers to exploit our financial
system. This requires a risk-based approach in which w e ask financial institutions
to guard against real and active threats with significant consequence, rather than
against threats that are imagined or of relatively little practical significance.

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We do this best, we believe, by setting targets rather than by micromanagement of
your operations by regulation, and by fostering a system in which transparency
exists. Indeed, President Jefferson wrote to Treasury Secretary Gallatin in 1803
that transparency in financial institutions "gives a chance for the public eye
penetrating into the sanctuary of those proceedings and practices." What President
Jefferson said 200 years ago about the importance of transparency in the financial
system is as true today.
In my remarks tonight, I will report on our progress in implementing the provisions
of the U S A P A T R I O T Act that bear on international financial services. I will also
share s o m e observations on the degree to which other important financial centers
have followed suit. I will then focus on a specific international financial service remittances - international transfers of money by people working abroad in the U S
to their families back home. I will conclude with s o m e suggestions about next steps
and future directions.
Implementation of the Provisions of the USA PATRIOT Act that Bear on
International Financial Services.
President Bush noted on October 26, 2001, that the USA PATRIOT Act "will give
intelligence and law enforcement officials important n e w tools to fight a present
danger." Title III of this Act gives the Treasury the responsibility to forge those n e w
tools within the financial services sector, balancing the national needs to be vigilant
against money laundering and terrorist financing, while ensuring that these tools
actually work and can be meaningfully operated in the reality of modern financial
institutions.
I want to focus my remarks on our progress in implementing provisions of the USA
P A T R I O T Act that bear most directly on international financial services. I should
note, however, that in a very real sense virtually all of the regulations w e issue
under the U S A P A T R I O T Act impact international financial services in one w a y or
another.
Starting immediately after passage of the Act, the Treasury began efforts that
resulted in late 2001 in the implementation of Sections 313 and 319 with a ban on
ties by U.S. banks with foreign shell banks. The banking industry responded
heroically by providing its energy, thoughts, and best efforts to ensure that w e had
quickly up and in place a ban on all such activities, both direct and indirect. Shell
banks had been abused on many occasions by criminals, and it w a s time for the
government and the banking industry to act to stop their perfidious activity.
Indeed, your industry was able to help us craft a meaningful process for
certifications that would in fact meet the two goals of stopping these activities and
doing so in a w a y that w a s workable. In so doing, you were not only furthering the
responsibilities set before you by law, but were also doing a service for the
American people.
A further area of effort was the establishment of formal customer identification
programs pursuant to Section 326 of the P A T R I O T Act. Although the
implementation of this effort is still underway, I want to note the superb quality of
comments provided by the industry, and your ready willingness to meet with us to
clarify or shed light on all comments made.
We finalized these requirements in May, thanks to the many excellent points made,
and are working to consider areas where w e can further be of assistance in
clarifying the intent of the regulations issued. I would also note here the
tremendous assistance provided to us by all those within the regulatory community,
including the independent regulatory agencies. The joint 326 rule is, I a m told, one
of the largest, most complicated joint rulemakings that our experts can remember.
Another tool is the requirement under Section 312 of the PATRIOT Act that we
promulgate rules requiring enhanced due diligences for foreign correspondent
accounts and private banking accounts. I know that this topic is of intense interest
to m a n y of you. Our rulemaking is still in progress, however, and I can't tell you
anything about what the final rule will say. What I can tell you is that w e appreciate
the m a n y fine comments w e have received, and that w e are working on finalizing
these regulations.

httr.://www.treas.gov/press/releases/j s5 5 9.htm

4/26/2005

J

s-559: Deputy Assistant Secretary Michael Dawson's Remarks on U S A P A T R I O T Act

Still another important tool is the authority under Section 311 of the PATRIOT Act to
require U.S. financial institutions to take one or more special measures with respect
to a "primary money laundering concern." This is an extremely powerful tool. Our
General Counsel, David Aufhauser, has called this the "smart bomb" of terrorist
financing. It can be directed against a country, an institution, or a practice. And it
can require special measures ranging from increased recordkeeping and recording
obligations, to enhanced due diligence, to termination of banking relationships. W e
have used this extremely powerful tool, most notably with regard to Nauru, and
stand ready in appropriate circumstances to use it again. While w e are mindful of
the fact that such measures should be used sparingly, and not generally as a first
resort, w e will not hesitate to use these extraordinary special powers again if the
circumstance warrants its use.
Progress of Other Financial Centers in Improving Their Anti-Money
Laundering and Anti-Terrorist Financing Rules.
As we increase the anti-money laundering and anti-terrorist financing burdens on
U.S. financial institutions, w e must ensure that other jurisdictions are following suit.
This is for two reasons. First, raising the obligations for U.S. financial institutions
will do little good if money launderers or terrorists can, as the 2002 National Money
Laundering Strategy notes, "escape detection merely by moving funds to countries
with weak anti-money laundering regimes." Second, the obligations raise costs for
U.S. financial institutions serving legitimate customers. Unless other jurisdictions
impose similar obligations on their institutions, our institutions will suffer a
competitive disadvantage.
Fortunately, other jurisdictions are following suit.
In Switzerland, for example, the number of reports on suspicious money
transactions received by the Swiss government increased by 56 percent in 2002.
Interestingly, for the first time, the majority of reports have originated from the nonbanking sector. Both the marked increase and the fact that reports from the
banking sector no longer predominate, are attributed by the Swiss to a change and
tightening of reporting regulations on international money transactions. This is
another example of the importance of various countries working together and
learning from one another benefits us in the United States, as well as those abroad.
Similarly, the U.K. government has been a leader in anti-money laundering
requirements, that work to balance benefits with burden. However, as the U.K.
government itself as noted, there are challenges remaining in achieving that level of
balance. Indeed, recent U.K proposals to examine the administrative structure of
U.K. agencies devoted to countering money laundering evidence the persistent
challenge of money laundering, and the need by all governments to ensure that
suspicious activity reports are actually used, and that meaningful and concrete
information is provided to the financial institutions charged with making reports of
suspicious activity.
One challenge we face going forward is to keep our focus on anti-money laundering
and, especially, anti-terrorist financing regulations. Moving beyond these objectives
and attempting to use anti-money laundering regulations to address other issues
risks undermining the broad private sector and public sector support for these
initiatives. A second challenge is to ensure that other jurisdictions enforce the laws
they enact. Otherwise, our successes will be illusory. A third challenge is to
measure the effectiveness of our domestic and international efforts to fight moneylaundering and terrorist financing. Only then can w e ensure that our regulations are
well-calibrated to stop money-laundering and terrorist financing while expanding
access to financial services and minimizing the impact on consumers' interest in
privacy.
Remittances.
I wish to focus for a few moments on one of the most important international
financial services - remittance. A s I mentioned at the beginning of m y remarks
about 100 million people send $100 billion to as m a n y as 500 million people around
the world. O n e out of every ten people on the planet participate in these
transactions. They are extremely important. The numbers are staggering. In 2001,
$10 billion w a s sent to India, by Indian workers around the world. Another $10
billion w a s sent to Mexico. Most of that money comes from Mexicans working in
the United States, making the U.S.-Mexico remittance market the single biggest

http://www.treas.gov/press/releases/js559.htm 4/26/2005

Page 3 of 4

JS-559: Deputy Assistant Secretary Michael Dawson's Remarks on U S A P A T R I O T Act

Page 4 of 4

remittance market in the world. In some countries remittances amount to
significant portion of G D P . In 2001, $6.4 billion w a s remitted to the Philippines that's 8.9% of G D P in the Philippines. Remittances are particularly significant to a
number of countries in the Western Hemisphere. In 2001, remittances amount to
7.9% of G D P in Ecuador, 8.5% in Honduras, 9.3% in the Dominican Republic,
13.5% in Jamaica, 13.8% in El Salvador, and 16.2% in Nicaragua.
At Treasury, we are focused on ensuring that the regulations we promulgate under
the U S A P A T R I O T Act do not impede competition or impose undue burdens on the
businesses - money transmitters, banks, and credit unions - that that have stepped
in to provide these important services. While remittances are very large in the
aggregate, they are typically very small in any one particular instance. Even a
slight increase in costs that flow from increased regulations can have a significant
impact for the recipients.
As one customer told Time Magazine, in describing the significance of cost
competition a m o n g financial services institutions, "[t]wo dollars is not a big
difference here, but it's a big difference in Nicaragua." The lower w e can keep
compliance costs while at the s a m e time preventing the use of international money
transfers in money laundering and terrorist financing, the better.
Next Steps.
In the course of my remarks, I have mentioned many of the challenges that we face
as w e continue to implement the anti-money laundering and anti-terrorist financing
provisions of the U S A P A T R I O T Act. I would like to close by emphasizing what I
regard as one of the most important challenges - measuring our effectiveness and
sharing that information with the private sector.
A s I have said before, it is in the government's interest to provide financial
institutions with this information. The government, like you, wants to ensure that
your resources are put to their most productive use in the financial front of the war
on terrorism. W e , quite literally, want to maximize the bang w e get out of your
bucks. W e want to sustain your institutions' commitment to the financial front of the
war on terror, by showing you h o w valuable your efforts are. Of course, there are
limits to what information w e can share. W e can't compromise open investigations.
W e can't compromise sources and methods of collecting intelligence. There are
also limits to the information w e have. It is difficult to quantify the deterrent impact
of the regulations. It is also difficult to trace s o m e of the specific successes in the
financial front of the war on terror to the efforts of specific institutions to comply with
specific provisions of the U S A P A T R I O T Act. Our principal challenge is to work
together within these constraints to develop and share information that helps
maximize the effectiveness of the regulations and sustains the strong private sector
commitment to fighting terror.
I have been encouraged by recent improvements in information sharing. For
example, at the most recent meeting of the Bank Secrecy Act Advisory Group, field
agents described their experiences in using Section 314 requests as an
investigative tool. They documented, first, that the majority of these requests were
related to terrorist financing cases, alleviating a concern in the industry that the
Section 314 requests would be used for less significant cases. They also explained
h o w useful the information generated by the requests has been. Financial Crimes
Enforcement Network Director James Sloan also detailed steps that w e have taken
to improve the Section 314 process to minimize the compliance burden on financial
institutions while preserving the effectiveness of the requests as an important law
enforcement tool. I wish to note, in particular, the efforts of the Bank Secrecy Act
Advisory Group to improve information sharing between law enforcement and the
private sector. I look forward to seeing other examples of such improved
information sharing across government.

http://www.treas.gov/press/releases/js559.htm

4/26/2005

JS-560: Treasury and I R S Issue Final Regulations for " 1 0 or M o r e E m p l o y e r " Welfare Be... P a g e 1 of 1

PRESS ROOM

F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the Microsoft Word content on this page, download the free Microsoft Word
Viewer.
July 16, 2003
JS-560
Treasury and IRS Issue Final Regulations for
"10 or More Employer" Welfare Benefit Fund

Today, the Treasury Department and the IRS issued final regulations
regarding the requirements for a welfare benefit fund that is part of a 10 or
more employer plan under section 419A(f)(6) of the Internal Revenue
Code.
Section 419A(f)(6) provides an exception to the general rules limiting
employers' deductions for contributions to welfare benefit funds to an
amount based on the cost of benefits provided during the year (plus
additional amounts for reserves). The exception applies to contributions to
a fund that is part of a 10 or more employer plan only if the plan does not
maintain experience-rating arrangements with respect to individual
employers.
"Clarifying the rules will provide guidance for taxpayers on the scope of
section 419A(f)(6) and will aid practitioners w h o have advised their clients
against investing in schemes that have been devised using section 419A(f)
(6)," stated Treasury Assistant Secretary for Tax Policy P a m Olson.
The regulations clarify the meaning of "experience-rating arrangements
with respect to individual employers". These regulations respond to the
proliferation of tax shelter arrangements which promise unlimited current
deductions for employer contributions by purporting to qualify for the
exception under section 419A(f)(6) but which in practice pass through
favorable experience to individual employers. The regulations accomplish
this by aligning the definition of experience rating with the legislative history
of the provision which suggests the statutory exception to limits on the
deductions for contributions w a s m a d e available for those limited situations
where the economics of the arrangement would serve to prevent excess
contributions.
The regulations will generally apply for employer contributions paid or
incurred in an employer's first taxable years beginning after July 11, 2002
(the date of publication of the proposed regulations). Since these
regulations only clarify existing law, however, contributions m a d e prior to
that date that would be nondeductible under the regulations m a y also be
nondeductible.

Related Documents:
• The text of the final regulations

http7/www.treas.gov/press/releases/js560.htm

4/27/2005

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
July 15, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 4-WEEK BILLS
Term: 28-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

July 17, 2003
August 14, 2003
912795NH0

High Rate: 0.840% Investment Rate 1/: 0.850% Price: 99.935
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 75.26%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

19,762,100
47,007
100,000

$

7,853,050
47,007
100,000

SUBTOTAL 19,909,107 8,000,057
Federal Reserve 2,224,154 2,224,154
TOTAL $ 22,133,261 $ 10,224,211
Median rate 0.830%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.820%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 19,909,107 / 8,000,057 = 2.49
1/ Equivalent coupon-issue yield.

http://www.publicdebt.treas.gov

J^

5

/

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
July 14, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

July 17, 2003
January 15, 2004
912795PF2

High Rate: 0.930% Investment Rate 1/: 0.950% Price: 99.530
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 96.01%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

27,860,043
1,136,871
50,000

$

16,813,548
1,136,871
50,000

SUBTOTAL 29,046,914 18,000,419 2/
Federal Reserve 6,240,393 6,240,393
TOTAL $ 35,287,307 $ 24,240,812
Median rate 0.920%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.895%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 29,046,914 / 18,000,419 = 1.61
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $8 64,300,000

http://www.publicdebt.treas.gov

5 ^

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
July 14, 2003

202-691-3550

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 91-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:

July 17, 2003
October 16, 2003
912795NS6

High Rate: 0.880% Investment Rate l/: 0.895% Price: 99.778
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 14.42%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)

$

33,946,388
1,440,343
319,000

$

14,241,148
1,440,343
319,000

SUBTOTAL 35,705,731 16,000,491 2/
Federal Reserve 5,218,542 5,218,542
TOTAL $ 40,924,273 $ 21,219,033
Median rate 0.870%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.850%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 35,705,731 / 16,000,491 = 2.23
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,097,289,000

http://www.publicdebt.treas.gov

^ 3

O t T H . I. o r l>| Bl.lt \l I \1US • 150.. P L N N s Y I . V W I \. \\ K M

EMBARGOED UNTIL 11:00 A.M.
July 14, 2003

I , \.\V. • \. A M l l N t M O V ! ) . . . • _!H.22il •<1\>1\ (,11><>ftll

Contact:

Office of Financing
202/691-3550

TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $8,000 million to refund
an estimated $13,000 million of publicly held 4-week Treasury bills maturing
July 17, 2003, and to pay down approximately $5,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDirect will not be accepted.
The Federal Reserve System holds $13,683 million of the Treasury bills maturing
on July 17, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.

0O0

Attachment

J^5 $rf

HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED JULY 17, 2003
July 14, 2003
Offering Amount $ 8,000 million
Maximum Award (35% of Offering Amount)... $ 2,800
Maximum Recognized Bid at a Single Rate.. $ 2,800
NLP Reporting Threshold
$ 2 ,800
NLP Exclusion Amount
$10,500

million
million
million
million

Description of Offering:
Term and type of security
28-day bill
CUSIP number
912795 NH 0
Auction date
July 15, 2003
Issue date
July 17 , 2003
Maturity date
August 14 , 2003
Original issue date
February 13, 2003
Currently outstanding
$41,140 million
Minimum bid amount and multiples....$1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate.award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern daylight saving time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern daylight saving time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.

iureau of the Public Debt: Treasury Calls 8 3/4 Percent Bonds of 2003-08

Page 1 of 1

B u r e a u of the

Public #
0epar r/nen r ut rk e J: ean _.</ v

Treasury Calls 8 3/4 Percent Bonds of 2003-08
:0R IMMEDIATE RELEASE
|U|y 15, 2003
The Treasury today announced the call for redemption at par on November 15, 2003, of the 8-3/4% Treasury Bonds of 2003-08, issued
November 15, 1978, due N o v e m b e r 15, 2008 (CUSIP No. 912810CE6). There are $5,230 million of these bonds outstanding, of which
£3,322 million are held by private investors. Securities not redeemed on November 15, 2003 will stop earning interest.

These bonds are being called to reduce the cost of debt financing. The 8-3/4% interest rate is significantly above the current cost o
securing financing for the five years remaining to their maturity. In current market conditions, Treasury estimates that interest savings
rom the call and refinancing will be about $870 million.
Payment will be made automatically by the Treasury for bonds in book-entry form, whether held on the books of the Federal Reserve
Banks or in TreasuryDirect accounts. Bonds held in coupon or registered form should be presented for redemption to financial institutions
.r mailed directly to the Bureau of the Public Debt, Definitives Section, P.O. Box 426, Parkersburg, W V 26106-0426. For more
information concerning called coupon or registered bonds, you m a y contact the Definitives Section at (304) 480-7936.
Intellectual Property | Privacy & Security Notices ] Terms & Conditions I Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated September 27, 2004

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