Bulletin No. 2009-39September 28, 2009

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2009–27, page 404.Interest rates; underpayments and overpayments. Therates for interest determined under section 6621 of the Codefor the calendar quarter beginning October 1, 2009, will be 4percent for overpayments (3 percent in the case of a corpo-ration), 4 percent for underpayments, and 6 percent for largecorporate underpayments. The rate of interest paid on the por-tion of a corporate overpayment exceeding $10,000 will be 1.5percent.

Rev. Rul. 2009–28, page 391.Fringe benefits aircraft valuation formula. The StandardIndustry Fare Level (SIFL) cents-per-mile rates and terminalcharge in effect for the second half of 2009 are set forth forpurposes of determining the value of noncommercial flightson employer-provided aircraft under section 1.61–21(g) of theregulations.

Rev. Proc. 2009–41, page 439.This procedure provides guidance under section 7701 of theCode for an eligible entity that requests relief for a late clas-sification election filed with the applicable IRS service centerwithin 3 years and 75 days of the requested effective date ofthe eligible entity’s classification. The procedure also providesguidance for those eligible entities that do not qualify for reliefunder this revenue procedure and that are required to requesta letter ruling in order to request relief for a late entity classifi-cation election. Rev. Proc. 2002–59 superseded.

EMPLOYEE PLANS

Rev. Rul. 2009–30, page 391.Automatic contribution increases under automatic con-tribution arrangements. This ruling provides guidance onhow automatic enrollment in a section 401(k) plan can workwhen there is an escalator feature included. An escalator fea-ture means that the amount of an employee’s compensationthat is contributed to the plan, without the employee’s affirma-tive election, is increased periodically according to the termsof the plan. Two situations are described. One involves a basicautomatic contribution arrangement and the other involves aneligible automatic contribution arrangement described in sec-tion 414(w) of the Code. Rev. Rul. 2009–30 is part of the“Savings Initiative” guidance issued by the Service.

Rev. Rul. 2009–31, page 395.Annual paid time off contributions. This ruling providesguidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit annual contributions of anemployee’s unused paid time off under the employer’s paid timeoff plan. A paid time off plan generally refers to a sick andvacation arrangement that provides for paid leave whether theleave is due to illness or incapacity. The amendment relates toa contribution (including a section 401(k) contribution) or cashout of the unused paid time off, determined as of the end of theplan year (December 31). Rev. Rul. 2009–31 is companionguidance to Rev. Rul. 2009–32 and is part of the “SavingsInitiative’ guidance issued by the Service.

(Continued on the next page)

Finding Lists begin on page ii.Index for begins on page iv.

Rev. Rul. 2009–32, page 398.Paid time off contributions at termination of employ-ment. This ruling provides guidance on the tax consequencesof an amendment to a tax-qualified retirement plan to permitcontributions for an employee’s accumulated and unused paidtime off under the employer’s paid time off plan at a partici-pant’s termination of employment. A paid time off plan gener-ally refers to a sick and vacation arrangement that provides forpaid leave whether the leave is due to illness or incapacity. Theamendment relates to a post-severance contribution (includinga section 401(k) contribution) or cash out of the accumulatedand unused paid time off. Rev. Rul. 2009–32 is companionguidance to Rev. Rul. 2009–31 and is part of the “SavingsInitiative” guidance issued by the Service.

Notice 2009–65, page 413.Adding automatic enrollment to section 401(k) plans– sample amendments. This notice provides two sampleamendments that sponsors of section 401(k) plans can useto add automatic enrollment features to their plans. The firstsample amendment can be used to add a basic automaticcontribution arrangement with, if elected by an adoptingemployer, an escalation feature. The second sample amend-ment can be used to add an “eligible automatic contributionarrangement (“EACA”) as described in section 414(w) of theCode with, if elected by an adopting employer, as escalationfeature. Final regulations (T.D. 9447, 2009–12 I.R.B. 694)under section 414(w) and this notice, by providing sampleamendments, facilitate the use of EACAs in section 401(k)plans. This notice is part of the “Savings Initiative” guidanceissued by the Service.

Notice 2009–66, page 418.Automatic enrollment in SIMPLE IRAs. This notice pro-vides guidance to facilitate automatic enrollment in SIMPLEIRA plans, including questions and answers relating to the in-clusion in a SIMPLE IRA plan of an automatic contribution ar-rangement. This notice also requests comments on whetherthe Department of the Treasury and the Service should issueguidance regarding SIMPLE IRA plans that include eligible auto-matic contribution arrangements under section 414(w) of theCode. This notice provides guidance, in the form of questionsand answers, on automatic contribution arrangements underSIMPLE IRA plans. Notice 2009–66 is companion guidance toNotice 2009–67 and is part of the “Savings Initiative” guidanceissued by the Service.

Notice 2009–67, page 420.Adding automatic enrollment to SIMPLE IRA plans – sam-ple amendment. This notice provides a sample amendmentthat can be used by a sponsor of a SIMPLE IRA plan describedin section 408(p) of the Code to add an automatic contributionarrangement to the plan. Only SIMPLE IRA plans that use adesignated financial institution described in section 408(p)(7)can use the sample amendment. Notice 2009–67 is compan-ion guidance to Notice 2009–66 and is part of the “SavingsInitiative” guidance issued by the Service.

Notice 2009–68, page 423.Safe harbor explanations — eligible rollover distribu-tions. This notice contains two safe harbor explanations thatmay be provided to recipients of eligible rollover distributionsfrom an employer plan in order to satisfy section 402(f) of theCode. The first safe harbor explanation applies to a distributionnot from a designated Roth account, as described in section402A. The second safe harbor explanation applies to a distri-bution from a designated Roth account. These safe harbor ex-planations update the safe harbor explanations that were pub-lished in Notice 2002–3, 2002–1 C.B. 289, to reflect changesin the law. This notice is part of the “Savings Initiative” guid-ance issued by the Service. Notice 2002–3 modified and su-perseded.

Notice 2009–75, page 436.Rollovers from employer plans to Roth IRAs. This noticedescribes the federal income tax consequences of rolling overan eligible rollover distribution from a qualified plan under sec-tion 401(a) of the Code, an annuity plan described in section403(a), a plan described in section 403(b), or an eligible gov-ernmental plan under section 457(b) to a Roth IRA describedin section 408A. This notice supplements the regulations un-der section 408A and Notice 2008–30, 2008–12 I.R.B. 638to provide additional guidance. Notice 2008–30 amplified andclarified.

ADMINISTRATIVE

Rev. Proc. 2009–40, page 438.This procedure publishes the amount of unused housingcredit carryovers allocated to qualified states under section42(h)(3)(D) of the Code for calendar year 2009.

September 28, 2009 2009–39 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helping themunderstand and meet their tax responsibilities and by applying

the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2009–39 I.R.B. September 28, 2009

September 28, 2009 2009–39 I.R.B.

Place missing child here.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 61.—Gross IncomeDefined

26 CFR 1.61–21: Taxation of fringe benefits.

Fringe benefits aircraft valuation for-mula. The Standard Industry Fare Level(SIFL) cents-per-mile rates and terminalcharge in effect for the second half of 2009are set forth for purposes of determiningthe value of noncommercial flights onemployer-provided aircraft under section1.61–21(g) of the regulations.

Rev. Rul. 2009–28

For purposes of the taxation of fringebenefits under section 61 of the Inter-nal Revenue Code, section 1.61–21(g) ofthe Income Tax Regulations provides arule for valuing noncommercial flightson employer-provided aircraft. Section1.61–21(g)(5) provides an aircraft valua-tion formula to determine the value of suchflights. The value of a flight is determinedunder the base aircraft valuation formula(also known as the Standard Industry Fare

Level formula or SIFL) by multiplyingthe SIFL cents-per-mile rates applicablefor the period during which the flight wastaken by the appropriate aircraft multipleprovided in section 1.61–21(g)(7) and thenadding the applicable terminal charge. TheSIFL cents-per-mile rates in the formulaand the terminal charge are calculated bythe Department of Transportation and arereviewed semi-annually.

The following chart sets forth the termi-nal charge and SIFL mileage rates:

Period During Whichthe Flight Is Taken

TerminalCharge

SIFL MileageRates

7/1/09 - 12/31/09 $45.71 Up to 500 miles= $.2501 per mile

501–1500 miles= $.1907 per mile

Over 1500 miles= $.1833 per mile

DRAFTING INFORMATION

The principal author of this revenueruling is Kathleen Edmondson of theOffice of Division Counsel/AssociateChief Counsel (Tax Exempt/GovernmentEntities). For further informationregarding this revenue ruling, contactMs. Edmondson at (202) 622–0047 (not atoll-free call).

Section 401.—QualifiedPension, Profit-Sharing,and Stock Bonus Plans

Automatic contribution increasesunder automatic contribution arrange-ments. This ruling provides guidance onhow automatic enrollment in a section401(k) plan can work when there is anescalator feature included. An escalatorfeature means that the amount of an em-ployee’s compensation that is contributedto the plan, without the employee’s affir-mative election, is increased periodicallyaccording to the terms of the plan. Twosituations are described. One involves abasic automatic contribution arrangementand the other involves an eligible auto-

matic contribution arrangement describedin section 414(w) of the Code. Rev. Rul.2009–30 is part of the “Savings Initiative”guidance issued by the Service.

Rev. Rul. 2009–30

ISSUES

1. Will default contributions to aprofit-sharing plan fail to be consideredelective contributions merely becausethey are made pursuant to an automaticcontribution arrangement under which aneligible employee’s default contributionpercentage automatically increases in planyears after the first plan year of the eligibleemployee’s participation in the automaticcontribution arrangement based in part onincreases in the eligible employee’s plancompensation?

2. Will default contributions underan automatic contribution arrangementfail to satisfy the qualified percentagerequirement (including uniformity andminimum percentage requirements) relat-ing to a “qualified automatic contributionarrangement” under section 401(k)(13) ofthe Internal Revenue Code (providing anautomatic enrollment nondiscrimination

safe harbor) or the uniformity requirementrelating to an “eligible automatic contri-bution arrangement” under section 414(w)(permitting 90-day withdrawals) merelybecause default contributions are madepursuant to an arrangement under whichthe default contribution percentage forall eligible employees increases on a dateother than the first day of a plan year?

FACTS

Situation 1

Employer X maintains Plan A, a profit-sharing plan intended to satisfy the re-quirements of sections 401(a), 401(k), and401(m), and maintained on a calendar-yearbasis. Plan A is not intended to satisfy therequirements to be a qualified automaticcontribution arrangement or eligible auto-matic contribution arrangement.

Under Plan A, any eligible employeeof Employer X may affirmatively electto receive his or her compensation en-tirely in cash or to have Employer X makespecified contributions on the eligibleemployee’s behalf to Plan A in lieu ofreceiving those amounts as cash compen-sation. Subject to certain limitations set

2009–39 I.R.B. 391 September 28, 2009

forth in Plan A, the eligible employeemay designate the amount of these elec-tive contributions as a percentage of theeligible employee’s “plan compensation,”defined under Plan A as base pay (exclud-ing overtime, bonuses, and other specialcompensation).

Under Plan A, if any eligible employeeof Employer X does not affirmativelyelect to receive cash or to have a specifiedamount contributed to Plan A, default con-tributions are automatically contributed toPlan A (with a corresponding reduction inthe eligible employee’s cash compensa-tion) beginning with the first pay periodof the first plan year of the eligible em-ployee’s participation in the automaticcontribution arrangement. For that firstplan year, the default contribution per-centage is 4 percent of plan compensation.Any eligible employee may elect at anytime not to make elective contributions(including not to make default contribu-tions) or to have Employer X contributeto Plan A a different percentage of plancompensation.

Employer X usually provides annual in-creases in base pay for its employees ef-fective for pay periods beginning on or af-ter the employment anniversary date foreach employee. Under Plan A, for planyears after the first plan year of the eli-gible employee’s participation in the au-tomatic contribution arrangement, the de-fault contribution percentage is automat-ically increased beginning with the firstpay period that begins on or after the eli-gible employee’s employment anniversarydate. The increase in the default contri-bution percentage is equal to the greaterof (1) 1 percentage point, or (2) a numberof percentage points calculated as 30 per-cent of the percentage increase in the el-igible employee’s base pay for such firstpay period over the eligible employee’sbase pay for the immediately precedingpay period (rounded to the nearest wholepercentage). However, under Plan A, thedefault contribution percentage may neverexceed 11 percent. For example, the de-fault contribution percentage for an em-ployee with default contributions begin-ning in 2009 would increase by 1 percent-age point each plan year for pay periodsbeginning on or after the employee’s em-ployment anniversary date (to 5 percent in2010, 6 percent in 2011, etc., up to 11 per-cent in 2016 and later plan years), even if

his or her base pay were not to increase. Ifthe employee’s base pay were to increaseby at least 5 percent during one or moreplan years before 2016, the default con-tribution percentage would increase to 11percent even earlier.

Eligible employees are provided no-tices satisfying the timing and content re-quirements of section 1.401(k)–1(e)(2)(ii)of the Income Tax Regulations that explainthe default contribution percentage, auto-matic increases in the default contributionpercentage in plan years after the first planyear, and the eligible employees’ rightto elect to have no elective contributions(including no default contributions) madeto Plan A or to alter the amount of thosecontributions.

Plan A provides that elective contribu-tions are immediately nonforfeitable and,if the eligible employee has not attainedage 59–1/2, cannot be distributed prior tothe eligible employee’s death or severancefrom employment, except in the case ofhardship. Plan A also provides that, foreach eligible employee, Employer X willmake matching contributions to Plan A onaccount of the eligible employee’s electivecontributions up to a specified percentageof the eligible employee’s plan compensa-tion.

Plan A provides that default contribu-tions and related matching contributionswill, absent a contrary election, be in-vested in a qualified default investmentalternative (QDIA), as described in sec-tion 2550.404c–5 of Department of Laborregulations.

Situation 2

Employer Y maintains Plan B, a profit-sharing plan intended to satisfy the re-quirements of sections 401(a), 401(k), and401(m), and maintained on a calendar-yearbasis. Plan B is also intended to satisfy therequirements to be a qualified automaticcontribution arrangement and an eligibleautomatic contribution arrangement.

Under Plan B, any eligible employeeof Employer Y may affirmatively electto receive his or her compensation en-tirely in cash or to have Employer Y makespecified contributions on the eligibleemployee’s behalf to Plan B in lieu ofreceiving those amounts as cash com-pensation. Subject to certain limitationsset forth in Plan B, the eligible employee

may designate the amount of these elec-tive contributions as a percentage of theeligible employee’s “plan compensation,”defined under Plan B.

Under Plan B, if any eligible employeeof Employer Y does not affirmativelyelect to receive cash or to have a specifiedamount contributed to Plan B, default con-tributions are automatically contributed toPlan B (with a corresponding reduction inthe eligible employee’s cash compensa-tion) beginning with the first pay periodof the first plan year of the eligible em-ployee’s participation in the automaticcontribution arrangement. For that firstplan year, the default contribution per-centage is 3 percent of plan compensation.Any eligible employee may elect at anytime not to make elective contributions(including not to make default contribu-tions) or to have Employer Y contributeto Plan B a different percentage of plancompensation.

Employer Y usually provides annual in-creases in compensation for its employeeseffective for pay periods beginning on orafter April 1 each year. Under Plan B, forplan years after the first plan year of theeligible employee’s participation in the au-tomatic contribution arrangement, the de-fault contribution percentage is automat-ically increased beginning with the firstpay period that begins on or after April1. The increase in the default contributionpercentage is equal to 1 percentage point.However, under Plan B, the default con-tribution percentage may never exceed 10percent.

Eligible employees are provided no-tices satisfying the timing and contentrequirements of sections 401(k)(13)(E)and 414(w)(4) that explain the default con-tribution percentage, automatic increasesto the default contribution percentage inplan years after the first plan year, and theeligible employees’ right to elect to haveno elective contributions (including nodefault contributions) made to Plan B orto alter the amount of those contributions.

Plan B provides that elective contri-butions are immediately nonforfeitableand, if the eligible employee has not at-tained age 59–1/2, cannot be distributedprior to the eligible employee’s death orseverance from employment, except inthe case of hardship or in the case of adistribution that satisfies the requirementsof section 414(w)(2). Plan B also pro-

September 28, 2009 392 2009–39 I.R.B.

vides that, for each eligible employee,Employer Y will make specified matchingcontributions to Plan B on account of theeligible employee’s elective contributionsup to a specified percentage of the eligibleemployee’s plan compensation under amatching formula that satisfies the rulesof sections 401(k)(13)(D)(i)(I), (ii), (iii),and (iv) and 401(m)(12).

Plan B provides that default contribu-tions and related matching contributionswill, absent a contrary election, be investedin a QDIA.

LAW

Automatic Contribution Arrangementsunder a Qualified Cash or DeferredArrangement

Section 401(k) provides that a profit-sharing or stock bonus plan, a pre-ERISAmoney purchase plan, or a rural cooper-ative plan can meet the requirements ofsection 401(a) even if it includes a quali-fied cash or deferred arrangement. Section401(k) also sets forth the requirements thata cash or deferred arrangement must sat-isfy in order to be a qualified cash or de-ferred arrangement.

Section 1.401(k)–1(a)(2)(i) defines acash or deferred arrangement as an ar-rangement under which an employee maymake a cash or deferred election with re-spect to contributions to, or accruals orother benefits under, a plan that is intendedto satisfy the requirements of section401(a).

Section 1.401(k)–1(a)(3)(i) defines acash or deferred election as any election(or modification of an earlier election) byan employee to have the employer eitherprovide an amount to the employee inthe form of cash (or some other taxablebenefit) that is not currently available orcontribute an amount to a trust (or providean accrual or other benefit) under a plandeferring the receipt of compensation.

Section 1.401(k)–1(a)(3)(ii) providesthat, for purposes of determining whetheran election is a cash or deferred election,it is irrelevant whether the default thatapplies in the absence of an affirmativeelection is (1) for the employee to receivean amount in cash or some other taxablebenefit or (2) for the employer to con-tribute an amount to a trust or provide

an accrual or other benefit under a plandeferring the receipt of compensation.

Section 1.401(k)–1(e)(2)(ii) providesthat a qualified cash or deferred arrange-ment must provide an employee with aneffective opportunity to make (or change)a cash or deferred election at least onceduring each plan year, and that whetheran employee has an effective opportunityis determined based on all the relevantfacts and circumstances, including the ad-equacy of notice of the availability of theelection, the period of time during whichan election may be made, and any otherconditions on elections.

Qualified Automatic ContributionArrangements (Automatic EnrollmentNondiscrimination Safe Harbor)

In general, section 401(k)(3) imposesnondiscrimination standards on qualifiedcash or deferred arrangements, includingan actual deferral percentage (ADP) test.Similarly, in general, section 401(m) im-poses nondiscrimination standards on em-ployer matching contributions made to adefined contribution plan on behalf of theemployee, including an actual contributionpercentage (ACP) test.

Sections 401(k)(13) and 401(m)(12)provide alternative design-based safe har-bors for a cash or deferred arrangementthat provides for automatic contributionsat a specified level and meets certain em-ployer matching contribution (or employernonelective contribution), uniformity, no-tice, and other requirements. A cash ordeferred arrangement that satisfies theserequirements is a qualified automatic con-tribution arrangement that is treated assatisfying the ADP test and the ACP test.

Sections 1.401(k)–3 and 1.401(m)–3prescribe rules for qualified automaticcontribution arrangements. These rules in-clude, under section 1.401(k)–3(j)(1)(i), arequirement that the default election undera qualified automatic contribution arrange-ment be a contribution equal to a qualifiedpercentage multiplied by the employee’seligible compensation from which electivecontributions are permitted to be madeunder the cash or deferred arrangement.Under section 1.401(k)–3(j)(2), in gen-eral a default contribution percentage isa qualified percentage only if it is uni-form for all eligible employees, does notexceed 10 percent, and satisfies certain

minimum percentage requirements. Un-der section 1.401(k)–3(j)(2)(iii), severalexceptions to the uniformity requirementapply, including that a plan does not fail tosatisfy the uniformity requirement merelybecause the default contribution percent-age varies based on the number of years(or portions of years) since the begin-ning of the initial period for an employee.For this purpose, the initial period beginswhen the employee first has contributionsmade pursuant to a default election underan arrangement that is intended to be aqualified automatic contribution arrange-ment for a plan year and ends on the lastday of the following plan year. Section1.401(k)–3(j)(2)(ii) sets out the minimumpercentage requirements. In general, theminimum percentage is 3 percent for theinitial period. The minimum percentageis 4 percent for the next succeeding planyear, 5 percent for the next succeedingplan year, and 6 percent for all succeedingplan years.

Eligible Automatic ContributionArrangements (Permitting 90-dayWithdrawals)

Section 414(w) provides limited re-lief from generally-applicable distributionrestrictions under sections 401(k)(2)(B),403(b)(7), 403(b)(11), and 457(d)(1)(A)in the case of an eligible automatic contri-bution arrangement. In particular, sections414(w)(1) and 414(w)(2) provide thatan applicable employer plan that con-tains an eligible automatic contributionarrangement is permitted to allow em-ployees, within 90 days after the date ofthe first default contribution with respectto the employee under the arrangement,to elect to receive a distribution equalto the amount of default contributions(and attributable earnings) made with re-spect to the employee beginning with thefirst payroll period to which the eligibleautomatic contribution arrangement ap-plies to the employee and ending with theeffective date of the election. Sections414(w)(1)(A) and 414(w)(1)(B) providethat the amount of the distribution is in-cludible in gross income for the taxableyear in which the distribution is made, butis not subject to the additional income taxunder section 72(t). Under section 414(w),an automatic contribution arrangementmust satisfy uniformity, notice, and other

2009–39 I.R.B. 393 September 28, 2009

requirements in order to be an eligibleautomatic contribution arrangement.

Section 1.414(w)–1 prescribes rulesunder section 414(w), including, undersection 1.414(w)–1(b)(2)(i), that the de-fault contribution election under an eli-gible automatic contribution arrangementbe a uniform percentage of compensa-tion. Under section 1.414(w)–1(b)(2)(ii),several exceptions to the uniformity re-quirement apply by cross-reference tosection 1.401(k)–3(j)(2)(iii), including amodified version of the exception underwhich a plan does not fail to satisfy theuniformity requirement merely becausethe default contribution percentage variesbased on the number of years (or portionsof years) since the beginning of the initialperiod for an employee.

ANALYSIS

Situation 1

The default contributions made for aneligible employee in Situation 1 are elec-tive contributions made pursuant to a cashor deferred election and satisfy the require-ment in section 1.401(k)–1(a)(3)(i) thatthe amount that each eligible employeemay defer as an elective contribution beavailable to the eligible employee in cash(or some other taxable benefit). Pursuantto section 1.401(k)–1(a)(3)(ii), the elec-tion is a cash or deferred election and thecontributions are elective contributionseven though the contributions are madepursuant to a default election in the ab-sence of an affirmative election.

Because a default contribution per-centage can be increased or otherwisechanged over time pursuant to a plan-spec-ified schedule, the default contributionsin Situation 1 do not cease to be electivecontributions merely because default con-tribution percentages increase over timeand such increases are, in part, determinedby reference to the amount of, and arescheduled to take effect at or by referenceto the time of, future increases in base pay.

The structure of increases in the defaultcontribution percentage for years after thefirst plan year of an eligible employee’sparticipation in the automatic contributionarrangement results in default contributionpercentages for eligible employees that arenot uniform percentages of plan compen-sation for all eligible employees, and the

percentages do not vary based solely onthe number of years (or portions of years)since the beginning of the initial period de-scribed in section 1.401(k)–3(j)(2)(iii)(A).However, because the automatic con-tribution arrangement in Situation 1 isnot intended to be an eligible automaticcontribution arrangement or a qualifiedautomatic contribution arrangement, thisnonuniformity is permissible.

Situation 2

The default contributions describedin Situation 2 are elective contributionsmade pursuant to cash or deferred elec-tions and satisfy the requirement in sec-tion 1.401(k)–1(a)(3)(i) that the amountthat each eligible employee may defer asan elective contribution be available tothe eligible employee in cash (or someother taxable benefit). Pursuant to section1.401(k)–1(a)(3)(ii), the election is a cashor deferred election and the contributionsare elective contributions even thoughthe contributions are made pursuant to adefault election in the absence of an affir-mative election.

The default contributions described inSituation 2 do not cause the arrangementto fail to satisfy the requirements for aqualified automatic contribution arrange-ment and an eligible automatic contribu-tion arrangement. In particular, the pro-visions in Plan B under which, for planyears after the first plan year of an eligibleemployee’s participation in the automaticcontribution arrangement, the default con-tribution percentage is automatically in-creased beginning with the first pay pe-riod that begins on or after April 1, do notcause Plan B to fail the uniformity require-ment of sections 1.401(k)–3(j)(2)(i) and1.414(w)–1(b)(2)(i). The increases are eli-gible for an exception to the uniformity re-quirement because they apply in the samemanner to all eligible employees for whomthe same number of years or portions ofyears have elapsed since default contribu-tions were first made for them under theautomatic contribution arrangement.

Also, the default contribution percent-ages for each plan year after the first planyear satisfy the minimum default contri-bution percentage requirements of section1.401(k)–3(j)(2)(ii) for periods beginningboth before and on or after April 1 ofsuch a plan year. This is because, under

section 1.401(k)–3(j)(2)(ii)(B), the min-imum default contribution percentage of4 percent is not required to apply untilafter the end of the plan year following thefirst plan year of an eligible employee’sparticipation in the automatic contributionarrangement, whereas, under Plan B, theincreased default contribution percentageof 4 percent applies earlier, beginningwith the first pay period that begins on orafter April 1 of the plan year followingthe first plan year. Similarly, the mini-mum default contribution percentages of5 percent and 6 percent set out in section1.401(k)–3(j)(2)(ii)(C) and (D) are satis-fied under Plan B earlier than required.Alternatively, if under Plan B increaseddefault contribution percentages had notbegun to apply until April 1 of the secondplan year following the first plan year, theminimum default contribution percentagerequirements could have been satisfiedby using an initial default contributionpercentage of 4 percent (rather than 3 per-cent).

HOLDINGS

1. Default contributions to aprofit-sharing plan will not fail to beconsidered elective contributions merelybecause they are made pursuant to anautomatic contribution arrangement un-der which an eligible employee’s defaultcontribution percentage automatically in-creases in plan years after the first planyear of the eligible employee’s participa-tion in the automatic contribution arrange-ment based in part on increases in theeligible employee’s plan compensation.

2. Default contributions under an au-tomatic contribution arrangement will notfail to satisfy the qualified percentage re-quirement (including uniformity and min-imum percentage requirements) relating toa qualified automatic contribution arrange-ment or the uniformity requirement relat-ing to an eligible automatic contributionarrangement merely because default con-tributions are made pursuant to an arrange-ment under which the default contributionpercentage for all eligible employees in-creases on a date other than the first dayof a plan year.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Roger Kuehnle of the Employee

September 28, 2009 394 2009–39 I.R.B.

Plans, Tax Exempt and Government En-tities Division. Questions regarding thisrevenue ruling may be sent via e-mail toRetirementPlanQuestions@irs.gov.

Annual paid time off contributions.This ruling provides guidance on thetax consequences of an amendment to atax-qualified retirement plan to permitannual contributions of an employee’s un-used paid time off under the employer’spaid time off plan. A paid time off plangenerally refers to a sick and vacationarrangement that provides for paid leavewhether the leave is due to illness or in-capacity. The amendment relates to acontribution (including a section 401(k)contribution) or cash out of the unusedpaid time off, determined as of the end ofthe plan year (December 31). Rev. Rul.2009–31 is companion guidance to Rev.Rul. 2009–32 and is part of the “SavingsInitiative’ guidance issued by the Service.

Rev. Rul. 2009–31

ISSUES

1. Do the amendments described belowto an existing qualified profit-sharingplan requiring or permitting certainannual contributions of the dollarequivalent of unused paid time offcause the plan to fail to meet the re-quirements of § 401(a) and, if applica-ble, § 401(k) of the Internal RevenueCode (Code)?

2. When is a participant required torecognize gross income with respectto the contributions to the qualifiedprofit-sharing plan and payments tothe participant as described below?

FACTS

For purposes of each situation below, itis assumed that the employer is a corpora-tion to which subchapter C of Chapter 1,Subtitle A, of the Code applies; that eachparticipant is an individual who accountsfor gross income under the cash receiptsand disbursements method of accountingand has a calendar year taxable year; thatall employees of the employer are eligibleto participate in the paid time off plan (thePTO Plan) on substantially the same termsand conditions; that prior to its amend-ment, the PTO Plan qualifies as a bona fide

sick and vacation leave plan for purposesof § 409A and § 1.409A–1(a)(5) of the In-come Tax Regulations; that all paymentsfor paid time off (whether paid for used orunused time off) are made from the gen-eral assets of the employer; and that theemployer has two-week pay periods. Forthis purpose, a paid time off plan refers to asick and vacation leave plan under which aparticipant may take paid leave without re-gard to whether the leave is due to illnessor incapacity.

Situation 1

Company Z maintains the Company ZPTO Plan (Z PTO Plan), under which allparticipants are granted up to 240 hours ofpaid time off each January 1 (prorated fornew hires commencing employment dur-ing the calendar year), with the numberof hours depending solely on the partici-pant’s number of years of service. For thispurpose, salaried employees are treated asworking 8 hours per work day. Under theZ PTO Plan, no unused paid time off hoursremaining as of the close of business onDecember 31 may be carried over to thefollowing year.

Company Z also maintains the Com-pany Z Profit Sharing Plan (Z Profit Shar-ing Plan), which is a profit-sharing planthat, without regard to the amendment de-scribed in this Situation 1, meets the re-quirements of § 401(a). The Z Profit Shar-ing Plan includes a qualified cash or de-ferred arrangement under § 401(k) thatprovides for elective contributions and thatdoes not provide for catch-up contribu-tions under § 414(v). The Z Profit SharingPlan has a calendar year plan year and lim-itation year.

In December 2008, Company Zamended the Z Profit Sharing Plan and theZ PTO Plan, effective January 1, 2009, toprovide that (1) the dollar equivalent ofany unused paid time off as of the closeof business on December 31 is forfeitedunder the Z PTO Plan and the dollar equiv-alent of the amount forfeited is contributedto the Z Profit Sharing Plan and allocatedto the participant’s account as of Decem-ber 31, to the extent the contribution (incombination with prior annual additions)does not exceed the applicable limitationsunder § 415(c), and (2) the dollar equiva-lent of any remaining paid time off is paidto the employee by February 28 of the

following year. Under the Z Profit SharingPlan, the amounts attributable to paid timeoff are in addition to other contributionsunder the plan and are treated as nonelec-tive contributions. For these purposes, thedollar equivalent of the unused paid timeoff is determined as the number of hoursof unused paid time off multiplied by theparticipant’s hourly rate of compensationas of December 31 of that year (deter-mined for salaried employees by treatingthe employee as working 8 hours per workday).

A is an employee of Company Z whoparticipates in the Z PTO Plan and theZ Profit Sharing Plan. As of the closeof business on December 31, 2009, Ahas 20x hours of unused paid time offand earns $25 per hour, and therefore thedollar equivalent of A’s unused paid timeoff is $500x. Because of the application ofthe limitations under § 415(c), CompanyZ may contribute only $400x of unusedpaid time off to the Z Profit Sharing Planfor allocation to A’s account in the 2009limitation year (in combination with priorannual additions).

Company Z contributes $400x to theZ Profit Sharing Plan on behalf of Aon February 28, 2010, and allocates thisamount to A’s account under the Z ProfitSharing Plan as of December 31, 2009.Company Z pays A the remaining $100xin cash on February 28, 2010.

Situation 2

Company Y maintains the Company YPTO Plan (Y PTO Plan), under which par-ticipants ratably accrue up to 240 hoursof paid time off each calendar year on apay-period basis beginning on January 1and at the end of the year may carry overto the following year an amount of un-used paid time off not to exceed a speci-fied number of hours (the carryover limit).For this purpose, salaried employees aretreated as working 8 hours per work day.The dollar equivalent of any unused paidtime off for a year in excess of the carry-over limit is paid to the participant by Feb-ruary 28 of the following year.

Company Y also maintains the Com-pany Y Section 401(k) Plan (Y 401(k)Plan), which is a profit-sharing plan that,without regard to the amendment de-scribed in this Situation 2, meets therequirements of § 401(a). The Y 401(k)

2009–39 I.R.B. 395 September 28, 2009

Plan includes a qualified cash or deferredarrangement under § 401(k) that providesfor elective contributions and that does notprovide for catch-up contributions under§ 414(v). The Y 401(k) Plan has a calen-dar year plan year and limitation year.

In December 2008, Company Yamended the Y 401(k) Plan and the YPTO Plan, effective January 1, 2009, toprovide that a participant may elect toreduce all or part of the dollar equivalentof any unused paid time off that may notbe carried over to the following year andhave that amount contributed by CompanyY to the Y 401(k) Plan and allocated to theparticipant’s account as of the beginningof the third pay period of the followingyear, to the extent that the contribution (incombination with prior annual additions)does not exceed the applicable limitationsunder § 415(c) and to the extent that thecontributions (in combination with priorelective deferrals) do not exceed the appli-cable limitation under § 401(a)(30). Underthe terms of the Y 401(k) Plan, contribu-tions of the dollar equivalent of paid timeoff are in addition to other contributionsunder the Y 401(k) Plan and are treatedas elective contributions (for example, thesame distribution restrictions apply). Thedollar equivalent of any unused paid timeoff that is not contributed to the Y 401(k)Plan under the terms of the amended YPTO Plan is paid to the participant byFebruary 28 of the following year. Forthese purposes, the dollar equivalent ofthe unused paid time off is determined asthe number of hours of unused paid timeoff multiplied by the participant’s hourlyrate of compensation as of December 31of the initial year (determined for salariedemployees by treating the employee asworking 8 hours per work day).

B is an employee of Company Y whoparticipates in the Y PTO Plan and the Y401(k) Plan. As of the close of businesson December 31, 2009, B has 15x hoursof unused paid time off in excess of thecarryover limit and earns $30 per hour, sothe dollar equivalent of B’s unused paidtime off in excess of the carryover limit is$450x.

Pursuant to a valid and timely election,B elects to have 60% of the dollar equiv-alent of the unused paid time off in ex-cess of the carryover limit, or $270x, con-tributed to the Y 401(k) Plan, the contribu-tion of which would not cause the plan to

exceed the limitations under §§ 401(a)(30)and 415(c) for the applicable year. OnFebruary 1, 2010, Company Y contributes$270x to the Y 401(k) Plan and allocates$270x to B’s account under the plan as ofFebruary 1, 2010. Under the terms of theY 401(k) Plan, this amount is treated as acontribution for the 2010 plan year. Com-pany Y pays B the remaining $180x onFebruary 1, 2010.

LAW

Section 401(a) provides that a trust cre-ated or organized in the United States andforming part of a stock bonus, pension, orprofit-sharing plan of an employer for theexclusive benefit of its employees or theirbeneficiaries constitutes a qualified trustunder that section if a series of conditionsis met. Section 401(a)(4) provides as oneof those conditions that the contributionsor benefits provided under the plan do notdiscriminate in favor of highly compen-sated employees (within the meaning of§ 414(q)). A plan maintained pursuant to acollective bargaining agreement is deemedto satisfy the nondiscrimination require-ments. In other cases, under the regula-tions under § 401(a)(4), the amount of non-elective contributions under a profit-shar-ing plan must satisfy either a design-basedsafe harbor or a test based on the contribu-tions made for individual participants.

Section 401(a)(30) of the Code pro-vides that in the case of a trust which ispart of a plan under which elective defer-rals (within the meaning of § 402(g)(3))may be made with respect to any individ-ual during a calendar year, such trust doesnot constitute a qualified trust unless theplan provides that the amount of such de-ferrals under such plan and all other plans,contracts, or arrangements of an employermaintaining such plan may not exceed theamount of the limitation in effect under§ 402(g)(1)(A) for taxable years beginningin such calendar year. Under § 402(g)(3),elective contributions under a qualifiedcash or deferred arrangement are includedin the definition of elective deferrals.

Section 401(k)(2)(A) provides, in perti-nent part, that a qualified cash or deferredarrangement is any arrangement which ispart of a profit sharing plan or stock bonusplan, a pre-ERISA money purchase plan,or a rural cooperative plan, which meetsthe requirements of § 401(a), and under

which a covered employee may elect tohave the employer make payments as con-tributions to a trust under the plan on be-half of the employee, or to the employeedirectly in cash.

Section 1.401(k)–1(a)(3)(i) providesthat a cash or deferred election is anyelection by an employee to have the em-ployer either: (A) provide an amount tothe employee in the form of cash or someother taxable benefit that is not currentlyavailable or (B) contribute an amount to atrust, or provide an accrual or other ben-efit, under a plan deferring the receipt ofcompensation.

Section 1.401(k)–6 defines nonelectivecontributions as employer contributions(other than matching contributions) withrespect to which the employee may notelect to have the contributions paid to theemployee in cash or other benefits insteadof being contributed to the plan. Section1.401(k)–6 defines elective contributionsas contributions made pursuant to a cash ordeferred election under a cash or deferredarrangement (whether or not qualified).

Under § 401(k)(3)(A)(ii), elective con-tributions under a qualified cash or de-ferred arrangement generally must satisfythe actual deferral percentage test. Section1.401(k)–2(a)(4)(i) provides generally thatfor purposes of the actual deferral percent-age test, elective contributions are takeninto account for a year if the elective con-tribution is allocated to the participant’saccount under the plan as of a date withinthat year, and certain other requirementsare satisfied.

Section 402(a) provides that anyamount actually distributed to any dis-tributee by an employees’ trust describedin § 401(a) which is exempt from tax un-der § 501(a) is taxable to the distributee inthe taxable year of the distributee in whichdistributed, under § 72. Section 72(t) pro-vides, in pertinent part, that the incometax applicable to any amount a participantreceives from a qualified plan generally isincreased by an amount equal to 10 percentof the portion of the amount includiblein gross income unless the amounts aredistributed on or after the date on whichthe participant attains age 591/2 or after theparticipant’s separation from service afterattainment of age 55.

Section 402(e)(3) provides, in pertinentpart, that contributions made by an em-ployer on behalf of an employee to a trust

September 28, 2009 396 2009–39 I.R.B.

which is part of a qualified cash or deferredarrangement (as defined in § 401(k)(2)) arenot treated as distributed or made availableto the employee nor as contributions madeto the trust by the employee merely be-cause the arrangement includes provisionsunder which the employee has an electionwhether the contribution will be made tothe trust or received by the employee incash.

Section 415(a)(1)(B) provides that atrust which is part of a pension, profit-shar-ing, or stock bonus plan shall not consti-tute a qualified trust under § 401(a) if inthe case of a defined contribution plan,contributions and other additions underthe plan with respect to any participantfor any taxable year exceed the limitationof § 415(c). Section 415(c)(1) providesthat contributions and other additions withrespect to a participant exceed the limi-tation of § 415(c) if, when expressed asan annual addition to the participant’s ac-count, the annual addition is greater thanthe lesser of $40,000 or 100 percent ofthe participant’s compensation. Section415(d)(1)(C) provides that the Secretaryshall adjust annually the $40,000 amountfor increases in the cost-of-living.

Section 1.415(c)–1(b)(1)(i) generallydefines the term “annual addition” asthe sum, credited to a participant’s ac-count for any limitation year, of (A)employer contributions; (B) employeecontributions; and (C) forfeitures. Under§ 1.415(c)–1(b)(6), an annual additiongenerally is treated as credited to theaccount of a participant for a particularlimitation year if it is allocated to the par-ticipant’s account under the terms of theplan as of any date within that limitationyear.

Section 415(c)(3)(A) provides that, ingeneral, the term “participant’s compensa-tion” means the compensation of the par-ticipant from the employer for the year.Section 1.415(c)–2(b)(1) provides that, forpurposes of § 415, compensation includesamounts received for personal services ac-tually rendered in the course of employ-ment with the employer maintaining theplan, to the extent that the amounts areincludible in gross income (or to the ex-tent the amounts would have been receivedand includible in gross income but for cer-tain elections, including an election de-scribed in § 402(e)(3)). However, un-der § 1.415(c)–2(b)(2), contributions by an

employer to a plan of deferred compen-sation (other than certain elective contri-butions described in § 402(e)(3)) are notincluded in compensation for purposes of§ 415.

Section 1.415(c)–2(e)(1)(i) states inpertinent part that, in order to be takeninto account for a limitation year, com-pensation within the meaning of section415(c)(3) must be actually paid or madeavailable to an employee (or, if earlier,includible in the gross income of the em-ployee) within the limitation year. Section1.415(c)–2(e)(1)(ii) states in pertinentpart that, except as otherwise providedin § 1.415(c)–2(e), in order to be takeninto account for a limitation year, com-pensation within the meaning of section415(c)(3) must be paid or treated as paidto the employee (in accordance with therules of § 1.415–2(e)(1)(i)) prior to theemployee’s severance from employmentwith the employer maintaining the plan.

Section 451(a) and § 1.451–1(a) pro-vide that an item of gross income is in-cludible in gross income in the taxable yearin which it is actually or constructively re-ceived by a taxpayer using the cash re-ceipts and disbursements method of ac-counting. Under § 1.451–2(a), income isconstructively received in the taxable yearduring which it is credited to a taxpayer’saccount, set apart or otherwise made avail-able so that the taxpayer may draw on itat any time. However, income is not con-structively received if the taxpayer’s con-trol of its receipt is subject to substantiallimitations or restrictions.

Section 409A(a)(1)(A)(i) provides, inpertinent part, that if at any time during ataxable year a nonqualified deferred com-pensation plan fails to meet certain re-quirements set forth under § 409A(a), oris not operated in accordance with such re-quirements, all compensation deferred un-der the plan for the taxable year and allpreceding taxable years shall be includiblein gross income for the taxable year to theextent not subject to a substantial risk offorfeiture and not previously included ingross income. Section 409A(a)(1)(B) pro-vides, in pertinent part, that any compen-sation required to be included in gross in-come under § 409A(a)(1)(A) for a taxableyear shall be subject to the additional taxesset forth in § 409A(a)(1)(B).

Section 409A(d)(1) provides that theterm “nonqualified deferred compensa-

tion plan” means any plan that providesfor the deferral of compensation, otherthan: (A) a qualified employer plan and(B) any bona fide vacation leave, sickleave, compensatory time, disability pay,or death benefit plan. Section 409A(d)(2)provides, in pertinent part, that the term“qualified employer plan” means anyplan, contract, pension, account or trustdescribed in § 219(g)(5)(A) or (B) (with-out regard to § 219(g)(5)(A)(iii)). Section219(g)(5)(A)(i) refers to a plan describedin § 401(a), which includes a trust exemptfrom tax under § 501(a).

ANALYSIS

Situation 1

The amendment of the Z Profit SharingPlan to require certain contributions of thedollar equivalent of unused paid time offto the Z Profit Sharing Plan does not causethe Z Profit Sharing Plan to fail to meetthe requirements of § 401(a), providedthat the contributions made pursuant tothe arrangement satisfy the nondiscrim-ination requirements of § 401(a)(4) (incombination with other contributions andforfeitures allocated for the year). Be-cause A is not provided a right to electa payment of the dollar equivalent of theunused paid time off in lieu of a plancontribution, Company Z’s contributionof $400x to the Z Profit Sharing Plan isnot an elective contribution that is madepursuant to a cash or deferred electionwithin the meaning of § 401(k)(2)(A) and§ 1.401(k)-(1)(a)(3)(i). Rather, CompanyZ’s contribution to the Z Profit SharingPlan is a nonelective employer contribu-tion within the meaning of § 1.401(k)–6.

The amount contributed and allocatedfor each participant will vary based on theamount of the participant’s unused paidtime off. Thus, contributions for unusedpaid time off are likely to preclude a planfrom satisfying a design-based safe har-bor under § 401(a)(4). Therefore, testingbased on the contributions made for in-dividual participants generally will be re-quired.

The contributions made pursuant to thearrangement must also not exceed the lim-itations under § 415(c) (in combinationwith prior annual additions). Because thecontribution of $400x on behalf of A wasallocated to A’s account as of December

2009–39 I.R.B. 397 September 28, 2009

31, 2009, and made February 28, 2010(before the end of the 30 day period fol-lowing the deadline for Company Z to fileits income tax return), it is subject to thelimitations under § 415(c) applicable forthe 2009 limitation year and is taken intoaccount for § 401(a)(4) purposes for the2009 plan year. Under the facts presented,the contribution of $400x does not causethe plan to exceed the limitations under§ 415(c).

If the requirements of § 401(a)(4) aremet, the amount contributed will be in-cludible in A’s gross income in accordancewith § 402(a) only when distributed toA. Like any other distribution from theZ Profit Sharing Plan, the distribution ofamounts attributable to the dollar equiva-lent of the unused paid time off is subject toan additional 10% income tax under § 72(t)unless the distribution satisfies one of theexceptions described in § 72(t)(2), such asbeing made on or after the date on whichthe participant attains age 591/2 or after theparticipant separates from service after at-tainment of age 55.

Under the Z PTO Plan as amended, thedollar equivalent of unused paid time offis not paid, set apart, or otherwise madeavailable so that A may draw on it either (i)during the 2009 calendar year or (ii) uponconversion in 2009 to a contribution to aqualified plan or cash payment in 2010.Therefore, under the doctrine of construc-tive receipt and § 451, such amount is notincludible in A’s gross income in 2009. Inaddition, the amendment to the Z PTO Planand the operation of the plan in accordancewith the terms of the amendment do notcause the Z PTO Plan to fail to qualify as abona fide sick and vacation leave plan forpurposes of § 409A and § 1.409A–1(a)(5).The $100x payment is includible in A’sgross income in 2010, the taxable year inwhich it is paid to A.

Situation 2

The amendment of the Y 401(k) Planto permit certain contributions of thedollar equivalent of unused paid timeoff to the Y 401(k) Plan does not causethe Y 401(k) Plan to fail to meet therequirements of §§ 401(a) and 401(k),provided that the contributions (takinginto account other contributions, priordeferrals, and prior annual additions, asapplicable) satisfy the nondiscrimination

requirements of § 401(k) and theapplicable limitations of §§ 401(a)(30)and 415(c).

Because B is provided a right to electeither a payment of cash or a plan contri-bution for the dollar equivalent of unusedpaid time off that may not be carried overto the subsequent year, Company Y’s con-tribution of $270x to the Y 401(k) Plan andallocation to B’s account under the planis an elective contribution. Because thecontribution is made on February 1, 2010and is not treated as allocated for 2009, itis taken into consideration for the nondis-crimination requirements of § 401(k) andthe limitations of §§ 401(a)(30) and 415(c)for 2010.

Under the facts presented, the allo-cation of $270x would not cause theY 401(k) Plan to exceed the limitationsof § 415(c) for the 2010 limitation year.Although the dollar equivalent of theunused paid time off was made availableto D in 2010, pursuant to § 402(e)(3), the$270x is not treated as made availableto D if the amount was contributed tothe plan as part of a qualified cash ordeferred arrangement. If the requirementsof §§ 401(k) and 401(a)(30) are met, thecontribution will have been made pursuantto a qualified cash or deferred arrangementunder § 401(k) and will be includible in B’sgross income in accordance with § 402(a)only when distributed to B. Like any otherdistribution from the Y 401(k) Plan, thedistribution of amounts attributable to thedollar equivalent of the unused paid timeoff is subject to an additional 10% incometax under § 72(t) unless the distributionsatisfies one of the exceptions described in§ 72(t)(2), such as being made on or afterthe date on which the participant attainsage 591/2 or after the participant separatesfrom service after attainment of age 55.

Under the Y PTO Plan, as amended, thedollar equivalent of unused paid time offis not paid, set apart, or otherwise madeavailable so that B may draw on it either (i)during the 2009 calendar year or (ii) uponconversion in 2009 to a contribution to aqualified plan or cash payment in 2010.Therefore, under the doctrine of construc-tive receipt and § 451, such amount is notincludible in B’s gross income in 2009.In addition, the amendment to the Y PTOPlan and the operation of the plan in ac-cordance with the terms of the amendmentdo not cause the Y PTO Plan to fail to

qualify as a bona fide sick and vacationleave plan for purposes of § 409A and§ 1.409A–1(a)(5). The $180x payment isincludible in B’s gross income in 2010, thetaxable year in which it is paid to B.

HOLDING

1. Under the facts presented, the amend-ments requiring or permitting certaincontributions of the dollar equivalentof unused paid time off to a qualifiedprofit-sharing plan do not cause theplan to fail to meet the qualificationrequirements of § 401(a), providedthat the contributions satisfy the ap-plicable requirements of §§ 401(a)(4)and 415(c) and, where applicable,§§ 401(k) and 401(a)(30).

2. Under the facts presented, assumingthe applicable qualification require-ments are satisfied, a participant doesnot include in gross income contribu-tions of the dollar equivalent of un-used paid time off to the profit-shar-ing plan in accordance with § 402(a)until distributions are made to the par-ticipant from the plan and does not in-clude in gross income an amount paidfor the dollar equivalent of unusedpaid time off that is not contributedto the profit-sharing plan until the tax-able year in which the amount is paidto the participant.

DRAFTING INFORMATION

The principal authors of this revenueruling are Robert Gertner, Roger Kuehnle,and Alice Lynch of the Employee Plans,Tax Exempt and Government EntitiesDivision. Questions regarding this rev-enue ruling may be sent via e-mail toretirementplanquestions@irs.gov.

Paid time off contributions at termi-nation of employment. This ruling pro-vides guidance on the tax consequencesof an amendment to a tax-qualified retire-ment plan to permit contributions for anemployee’s accumulated and unused paidtime off under the employer’s paid timeoff plan at a participant’s termination ofemployment. A paid time off plan gener-ally refers to a sick and vacation arrange-ment that provides for paid leave whetherthe leave is due to illness or incapacity.The amendment relates to a post-severance

September 28, 2009 398 2009–39 I.R.B.

contribution (including a section 401(k)contribution) or cash out of the accumu-lated and unused paid time off. Rev. Rul.2009–32 is companion guidance to Rev.Rul. 2009–31 and is part of the “SavingsInitiative” guidance issued by the Service.

Rev. Rul. 2009–32

ISSUES

1. Do the amendments described belowto an existing qualified profit-sharingplan requiring or permitting certaincontributions to the plan of the dollarequivalent of unused paid time off ata participant’s termination of employ-ment cause the plan to fail to meet therequirements of § 401(a) and, if ap-plicable, § 401(k) of the Internal Rev-enue Code (Code)?

2. When is a participant required torecognize gross income with respectto the contributions to the qualifiedprofit-sharing plan and payments tothe participant as described below?

FACTS

For purposes of each situation below, itis assumed that the employer is a corpora-tion to which subchapter C of Chapter 1,Subtitle A of the Code applies; that eachparticipant is an individual who accountsfor gross income under the cash receiptsand disbursements method of accountingand has a calendar year taxable year; thatall employees of the employer are eligibleto participate in the paid time off plan (thePTO plan) on substantially the same termsand conditions; that prior to its amend-ment, the PTO plan qualifies as a bona fidesick and vacation leave plan for purposesof § 409A and § 1.409A–1(a)(5) of the In-come Tax Regulations; that payments un-der the PTO plan for unused paid timeoff constitute payment for unused accruedbona fide sick, vacation, or other leave forpurposes of § 1.415(c)–2(e)(3)(iii)(A); thatall payments for paid time off (whetherpaid for used or unused time off) are madefrom the general assets of the employer;and that the employer has two-week payperiods. For this purpose, a paid time offplan refers to a sick and vacation pay orleave plan under which a participant maytake paid leave without regard to whetherthe leave is due to illness or incapacity.

Situation 1

Company X maintains the Company XPTO Plan (X PTO Plan), under which allparticipants are granted up to 240 hours ofpaid time off each January 1 (prorated fornew hires commencing employment dur-ing the calendar year), with the numberof hours depending solely on the partici-pant’s number of years of service. For thispurpose, salaried employees are treated asworking 8 hours per work day. Under theX PTO Plan, a participant at the end ofthe year may carry over to the followingyear an amount of unused paid time offnot to exceed a specified number of hours(the carryover limit), and any hours of un-used paid time off in excess of the carry-over limit are forfeited. If a participantterminates employment, the dollar equiva-lent of any hours of unused paid time offremaining at the termination of employ-ment are paid to the terminated participantwithin 60 days after the termination of em-ployment, with the dollar equivalent deter-mined as the number of hours of unusedpaid time off multiplied by the terminatedparticipant’s hourly rate of compensationfor the pay period during which the partic-ipant terminates employment (determinedfor salaried employees by treating the em-ployee as working 8 hours per work day).

Company X also maintains the Com-pany X Profit Sharing Plan (X Profit Shar-ing Plan), which is a profit-sharing planthat, without regard to the amendment de-scribed in this Situation 1, meets the re-quirements of § 401(a). The X Profit Shar-ing Plan includes a qualified cash or de-ferred arrangement under § 401(k) thatprovides for elective contributions and thatdoes not provide for catch-up contribu-tions under § 414(v). The X Profit SharingPlan has a calendar year plan year and limi-tation year. The X Profit Sharing Plan pro-vides that amounts for unused paid time offpaid by the later of 21/2 months after termi-nation of employment with Company X orthe end of the limitation year that includesthe date of the severance from employmentare treated as compensation under the planfor purposes of § 415, to the extent per-missible under § 415. The X Profit Shar-ing Plan provides that § 415 compensationis determined using only amounts actuallypaid during the limitation year.

In December 2008, Company Xamended the X Profit Sharing Plan and the

X PTO Plan, effective January 1, 2009,to provide that the dollar equivalent ofany unused paid time off at the time of aparticipant’s termination of employment isforfeited under the X PTO Plan and is con-tributed to the X Profit Sharing Plan andallocated to the participant’s account as ofthe first day of the second pay period be-ginning immediately after the participant’stermination of employment, to the extentthe contribution (in combination with priorannual additions) does not exceed the ap-plicable limitations under § 415(c). Underthe X Profit Sharing Plan, contributions ofthe dollar equivalent of paid time off are inaddition to other contributions under theplan and are treated as nonelective con-tributions. Under the terms of the X PTOPlan, the dollar equivalent of any unusedpaid time off that is not contributed to theX Profit Sharing Plan is paid to the termi-nated participant within 60 days after thetermination of employment. For these pur-poses, the dollar equivalent of the unusedpaid time off is determined as the numberof hours of unused paid time off multipliedby the terminated participant’s hourly rateof compensation for the pay period duringwhich the participant terminates employ-ment (determined for salaried employeesby treating the employee as working 8hours per work day).

C is an employee of Company X whoparticipates in the X PTO Plan and theX Profit Sharing Plan. C’s employmentterminates on October 1, 2009. As of theclose of business on October 1, 2009, Chas 12x hours of unused paid time off, andearns $25 per hour, and so has unused paidtime off with a dollar equivalent of $300x.12x hours does not exceed the sum of thehours in the remaining work days for 2009plus the carryover limit.

A contribution of $300x to the X ProfitSharing Plan on behalf of C, in combi-nation with prior annual additions, wouldnot cause C’s total contributions and an-nual additions to exceed the limitationsunder § 415(c) for the 2009 limitationyear. Company X contributes $300x tothe X Profit Sharing Plan on October 19,2009, and allocates this amount to C’saccount under the X Profit Sharing Plan,effective as of October 19, 2009.

2009–39 I.R.B. 399 September 28, 2009

Situation 2

The facts are the same as in Situation 1,except that C’s employment terminates onDecember 28, 2009, and any payment forunused paid time off on account of termi-nation will be paid to C in 2010 and willbe the only payment of compensation thatC will receive from Company X in 2010. Chas 12x hours of unused paid time off andearns $25 per hour, and therefore, has un-used paid time off with a dollar equivalentof $300x. The 12x hours of unused paidtime off does not exceed the sum of thehours in the remaining work days for 2009plus the carryover limit. The $300x doesnot exceed the § 415(c) applicable dollarlimit for 2010. Company X contributes$150x to the X Profit Sharing Plan on Jan-uary 18, 2010, and allocates the amountto C’s account under the X Profit SharingPlan as of January 18, 2010. This contri-bution is not treated as a contribution to theX Profit Sharing Plan for 2009. CompanyX pays the remaining $150x to C on Jan-uary 18, 2010.

Situation 3

Company W maintains the Company WPTO Plan (W PTO Plan), under which par-ticipants ratably accrue up to 240 hoursof paid time off each calendar year on apay-period basis beginning on January 1.For this purpose, salaried employees aretreated as working 8 hours per work day.Under the W PTO Plan, a specified numberof unused paid time off hours remaining asof the close of business on December 31may be carried over to the following year,and any hours of unused paid time off inexcess of the carryover limit are forfeited.If a participant terminates employment, thedollar equivalent of any hours of unusedpaid time off remaining at the termina-tion of employment are paid to the termi-nated participant within 60 days after thetermination of employment, with the dol-lar equivalent determined as the number ofhours of unused paid time off multipliedby the terminated participant’s hourly rateof compensation for the pay period duringwhich the participant terminates employ-ment (determined for salaried employeesby treating the employee as working 8hours per work day).

Company W also maintains the Com-pany W Section 401(k) Plan (W 401(k)

Plan), which is a profit-sharing plan that,without regard to the amendment de-scribed in this Situation 3, meets therequirements of § 401(a). The W 401(k)Plan includes a qualified cash or deferredarrangement under § 401(k) that does notprovide for catch-up contributions under§ 414(v). The W 401(k) Plan has a calen-dar year plan year and limitation year. TheW 401(k) Plan provides that for purposesof §§ 401(k) and 415(c), amounts con-tributed to the plan are taken into accountfor the year in which falls the date theamounts are allocated to the participant’saccount under the plan. The W 401(k)Plan also provides that amounts for un-used paid time off paid by the later of 21/2months after termination of employmentwith Company W or the end of the lim-itation year that includes the date of theseverance from employment, are treated ascompensation under the plan for purposesof § 415, to the extent permissible under§ 415(c). The W 401(k) Plan providesthat, for purposes of § 415, compensationis determined by including only amountsactually paid during the limitation year.

In December 2008, Company Wamended the W 401(k) Plan and theW PTO Plan, effective January 1,2009, to provide that a participant mayelect to reduce all or part of the dollarequivalent of any unused paid time offat the time of a participant’s terminationof employment and have that amountcontributed by Company W and allocatedto the participant’s account under theW 401(k) Plan as of the first day of thesecond pay period beginning immediatelyafter the participant’s termination ofemployment, to the extent that thecontribution (in combination with priorannual additions) does not exceed theapplicable limitations under § 415(c)and to the extent the contributions (incombination with prior elective deferrals)do not exceed the applicable limitationunder § 401(a)(30). Under the terms ofthe W 401(k) Plan, contributions of thedollar equivalent of paid time off are inaddition to other contributions and treatedas elective contributions. Under the termsof the W PTO Plan, the dollar equivalentof any unused paid time off that is notcontributed to the W 401(k) Plan is paidto the employee on the first day of thesecond pay period beginning immediatelyafter the participant’s termination of

employment. For these purposes, thedollar equivalent of the unused paidtime off is determined as the number ofhours of unused paid time off multipliedby the terminated participant’s hourlyrate of compensation for the pay periodduring which the participant terminatesemployment (determined for salariedemployees by treating the employee asworking 8 hours per work day).

D is an employee of Company W whoparticipates in the W PTO Plan and theW 401(k) Plan. D terminates employmenton October 1, 2009. As of the close ofbusiness on October 1, 2009, D has 15xhours of unused paid time off, and earns$20 per hour, and so has unused paid timeoff with a dollar equivalent of $300x. 15xhours does not exceed the sum of the hoursin the remaining work days for 2009 plusthe carryover limit.

D has a valid and timely election ineffect to have 70% of the dollar equivalentof the unused paid time off contributedto the W 401(k) Plan. The contribu-tion of $210x (70% of $300x) would notexceed the applicable limitations under§§ 401(a)(30) and 415(c). Company Wcontributes $210x to the W 401(k) Planon October 19, 2009, and allocates thatamount to D’s account under the W 401(k)Plan as of October 19, 2009. Company Wpays the remaining $90x to D on October19, 2009.

Situation 4

The facts are the same as in Situation 3,except that D’s employment terminates onDecember 28, 2009, and any payment forunused paid time off on account of termi-nation will be paid to D in 2010 and willbe the only payment of compensation thatD will receive from Company W in 2010.As of the close of business on December28, 2009, D has 15x hours of unused paidtime off, and earns $20 per hour, and so hasunused paid time off with a dollar equiva-lent of $300x. 15x hours does not exceedthe sum of the hours in the remaining workdays for 2009 plus the carryover limit.

D has a valid and timely election ineffect to have 70% of the dollar equivalentof the unused paid time off contributedto the W 401(k) Plan. The contribu-tion of $210x (70% of $300x) would notexceed the applicable limitations under§§ 401(a)(30) and 415(c). Company W

September 28, 2009 400 2009–39 I.R.B.

contributes $210x to the W 401(k) Planon January 18, 2010 and allocates thatamount to D’s account under the W 401(k)Plan as of January 18, 2010. Company Wpays the remaining $90x to D on January18, 2010.

LAW

Section 401(a) provides that a trust cre-ated or organized in the United States andforming part of a stock bonus, pension, orprofit-sharing plan of an employer for theexclusive benefit of its employees or theirbeneficiaries constitutes a qualified trustunder that section if a series of conditionsis met. Section 401(a)(4) provides as oneof those conditions that the contributionsor benefits provided under the plan do notdiscriminate in favor of highly compen-sated employees (within the meaning of§ 414(q)). A plan maintained pursuant to acollective bargaining agreement is deemedto satisfy the nondiscrimination require-ments. In other cases, under the regula-tions under § 401(a)(4), the amount of non-elective contributions under a profit-shar-ing plan must satisfy either a design-basedsafe harbor or a test based on the contribu-tions made for individual participants.

Section 401(a)(30) of the Code pro-vides that in the case of a trust which ispart of a plan under which elective defer-rals (within the meaning of § 402(g)(3))may be made with respect to any individ-ual during a calendar year, such trust doesnot constitute a qualified trust unless theplan provides that the amount of such de-ferrals under such plan and all other plans,contracts, or arrangements of an employermaintaining such plan may not exceed theamount of the limitation in effect under§ 402(g)(1)(A) for taxable years beginningin such calendar year. Under § 402(g)(3),elective contributions under a qualifiedcash or deferred arrangement are includedin the definition of elective deferrals.

Section 401(k)(2)(A) provides, in perti-nent part, that a qualified cash or deferredarrangement is any arrangement which ispart of a profit sharing plan or stock bonusplan, a pre-ERISA money purchase plan,or a rural cooperative plan, which meetsthe requirements of § 401(a), and underwhich a covered employee may elect tohave the employer make payments as con-tributions to a trust under the plan on be-

half of the employee, or to the employeedirectly in cash.

Section 1.401(k)–1(a)(3)(i) providesthat a cash or deferred election is anyelection by an employee to have the em-ployer either: (A) provide an amount tothe employee in the form of cash or someother taxable benefit that is not currentlyavailable or (B) contribute an amount to atrust, or provide an accrual or other ben-efit, under a plan deferring the receipt ofcompensation.

Section 1.401(k)–6 defines nonelectivecontributions as employer contributions(other than matching contributions) withrespect to which the employee may notelect to have the contributions paid to theemployee in cash or other benefits insteadof being contributed to the plan. Section1.401(k)–6 defines elective contributionsas contributions made pursuant to a cash ordeferred election under a cash or deferredarrangement (whether or not qualified).

Under § 401(k)(3)(A)(ii), elective con-tributions under a qualified cash or de-ferred arrangement generally must satisfythe actual deferral percentage test. Section1.401(k)–2(a)(4)(i) provides generally thatfor purposes of the actual deferral percent-age test, elective contributions are takeninto account for a year if the elective con-tribution is allocated to the participant’saccount under the plan as of a date withinthat year, and certain other requirementsare satisfied.

Section 402(a) provides that anyamount actually distributed to any dis-tributee by an employees’ trust describedin § 401(a) which is exempt from tax un-der § 501(a) is taxable to the distributeein the taxable year of the distributee inwhich distributed, under § 72. Section72(t) provides, in pertinent part, that theincome tax applicable to any amount aparticipant receives from a qualified plangenerally is increased by an amount equalto 10 percent of the portion of the amountincludible in gross income unless suchamounts are distributed on or after the dateon which the participant attains age 591/2or after the participant’s separation fromservice after attainment of age 55.

Section 402(e)(3) provides, in pertinentpart, that contributions made by an em-ployer on behalf of an employee to a trustwhich is part of a qualified cash or deferredarrangement (as defined in § 401(k)(2)) arenot treated as distributed or made available

to the employee nor as contributions madeto the trust by the employee merely be-cause the arrangement includes provisionsunder which the employee has an electionwhether the contribution will be made tothe trust or received by the employee incash.

Section 415(a)(1)(B) provides that atrust which is part of a pension, profit-shar-ing, or stock bonus plan does not constitutea qualified trust under § 401(a) if in thecase of a defined contribution plan, contri-butions and other additions under the planwith respect to any participant for any tax-able year exceed the limitation of § 415(c).Section 415(c)(1) provides that contribu-tions and other additions with respect to aparticipant exceed the limitation of § 415if, when expressed as an annual additionto the participant’s account, the annual ad-dition is greater than the lesser of $40,000or 100 percent of the participant’s com-pensation. Section 415(d)(1)(C) providesthat the Secretary shall adjust annuallythe $40,000 amount for increases in thecost-of-living in accordance with regula-tions prescribed by the Secretary.

Section 1.415(c)–1(b)(1)(i) generallydefines the term “annual addition” asthe sum, credited to a participant’s ac-count for any limitation year, of (A)employer contributions; (B) employeecontributions; and (C) forfeitures. Under§ 1.415(c)–1(b)(6), an annual additiongenerally is treated as credited to theaccount of a participant for a particularlimitation year if it is allocated to the par-ticipant’s account under the terms of theplan as of any date within that limitationyear.

Section 415(c)(3)(A) provides that ingeneral, the term “participant’s compensa-tion” means the compensation of the par-ticipant from the employer for the year.Section 1.415(c)–2(b)(1) provides that, forpurposes of § 415, compensation includesamounts received for personal services ac-tually rendered in the course of employ-ment with the employer maintaining theplan, to the extent that the amounts areincludible in gross income (or to the ex-tent the amounts would have been receivedand includible in gross income but for cer-tain elections, including an election de-scribed in § 402(e)(3)). However, un-der § 1.415(c)–2(b)(2), contributions by anemployer to a plan of deferred compensa-tion (other than certain elective contribu-

2009–39 I.R.B. 401 September 28, 2009

tions, including contributions described in§ 402(e)(3)) are not included in compensa-tion for purposes of § 415.

Section 1.415(c)–2(e)(1)(i) states inpertinent part that, in order to be takeninto account for a limitation year, com-pensation within the meaning of section415(c)(3) must be actually paid or madeavailable to an employee (or, if earlier,includible in the gross income of the em-ployee) within the limitation year. Section1.415(c)–2(e)(1)(ii) states in pertinentpart that, except as otherwise providedin § 1.415(c)–2(e), in order to be takeninto account for a limitation year, com-pensation within the meaning of section415(c)(3) must be paid or treated as paidto the employee (in accordance with therules of § 1.415(c)–2(e)(1)(i)) prior to theemployee’s severance from employmentwith the employer maintaining the plan.

Section 1.415(c)–2(e)(3) provides thata plan may provide that certain amountsare included in the participant’s compen-sation (within the meaning of § 415(c)(3))if those amounts are paid by the laterof 21/2 months after severance from em-ployment with the employer maintainingthe plan or the end of the limitation yearthat includes the date of severance fromemployment with the employer maintain-ing the plan, and those amounts wouldhave been included in the definition ofcompensation had they been paid priorto the employee’s severance from em-ployment with the employer maintainingthe plan. Section 1.415(c)–2(e)(3)(iii)(A)provides that an amount is described in§ 1.415(c)–2(e)(3)(iii) (and therefore maybe included in § 415(c) compensation sub-ject to certain conditions) if the amountis payment for unused accrued bona fidesick, vacation, or other leave, but only ifthe employee would have been able to usethe leave if employment had continued.

Section 451(a) and §1.451–1(a) providethat an item of gross income is includi-ble in gross income in the taxable year inwhich it is actually or constructively re-ceived by a taxpayer using the cash re-ceipts and disbursements method of ac-counting. Under §1.451–2(a), income isconstructively received in the taxable yearduring which it is credited to a taxpayer’saccount, set apart or otherwise made avail-able so that the taxpayer may draw on itat any time. However, income is not con-structively received if the taxpayer’s con-

trol of its receipt is subject to substantiallimitations or restrictions.

Section 409A(a)(1)(A)(i) provides, inpertinent part, that if at any time during ataxable year a nonqualified deferred com-pensation plan fails to meet certain re-quirements set forth under § 409A(a), oris not operated in accordance with such re-quirements, all compensation deferred un-der the plan for the taxable year and allpreceding taxable years shall be includiblein gross income for the taxable year to theextent not subject to a substantial risk offorfeiture and not previously included ingross income. Section 409A(a)(1)(B) pro-vides, in pertinent part, that any compen-sation required to be included in gross in-come under § 409A(a)(1)(A) for a taxableyear shall be subject to the additional taxesset forth in § 409A(a)(1)(B).

Section 409A(d)(1) provides that theterm “nonqualified deferred compensa-tion plan” means any plan that providesfor the deferral of compensation, otherthan: (A) a qualified employer plan and(B) any bona fide vacation leave, sickleave, compensatory time, disability pay,or death benefit plan. Section 409A(d)(2)provides, in pertinent part, that the term“qualified employer plan” means anyplan, contract, pension, account or trustdescribed in § 219(g)(5)(A) or (B) (with-out regard to § 219(g)(5)(A)(iii)). Section219(g)(5)(A)(i) refers to a plan describedin § 401(a), which includes a trust exemptfrom tax under § 501(a).

ANALYSIS

Situation 1

The amendment to the X Profit SharingPlan to require certain contributions of thedollar equivalent of unused paid time off tothe X Profit Sharing Plan does not causethe X Profit Sharing Plan to fail to meetthe requirements of § 401(a), provided thatthe contributions satisfy the requirementsof § 401(a)(4) (in combination with othercontributions and forfeitures allocated forthe year). Because C is not provided aright to elect a payment of cash for unusedpaid time off in lieu of a plan contribution,Company X’s contribution of $300x to theX Profit Sharing Plan is not an electivecontribution that is made pursuant to a cashor deferred election within the meaning of§ 401(k)(2)(A) and § 1.401(k)-(1)(a)(3)(i).

Rather, Company X’s contribution to theX Profit Sharing Plan is a nonelective em-ployer contribution within the meaning of§ 1.401(k)–6.

The amount contributed and allocatedfor each participant will vary based on theamount of the participant’s unused paidtime off. Thus, the contributions for un-used paid time off are likely to precludea plan from satisfying a design-based safeharbor under § 401(a)(4). Therefore, test-ing based on the contributions made for in-dividual participants generally will be re-quired.

The contributions made pursuant to thearrangement must also not exceed the lim-itations under § 415(c) (in combinationwith prior annual additions). Because thecontribution of $300x was allocated to C’saccount as of October 12, 2009, and madeon that date (before the end of the 30 dayperiod following the deadline for Com-pany X to file its income tax return), thecontribution is subject to the limitationsunder § 415(c) applicable for the 2009 lim-itation year and is taken into account for§ 401(a)(4) purposes for the 2009 planyear. Under the facts presented, the contri-bution of $300x (in combination with priorannual additions) does not exceed the lim-itations of § 415(c) for 2009.

If the requirements of § 401(a)(4) aremet, the amount contributed will be in-cluded in C’s gross income in accordancewith § 402(a) only when the amount is dis-tributed to C. Like any other distributionfrom the X Pr