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Pension Resource

Treas. Reg. § 1.401(m)-2

ACP test.
CFR 1998 annual edition (revised as of 1998-04-01) · superseded Apr 1, 1999 · last amended by T.D. 8581, 59 FR 66179, Dec. 23, 1994
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(a) In general. The rules in this section prevent the multiple use of the alternative methods of compliance with sections 401 (k) and (m) contained in section 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) respectively. Paragraph (b) of this section discusses the scope of this section and contains the general rule for determination of a multiple use of the alternative limitation. Paragraph (c) of this section contains rules for the correction of multiple use. The consequences of multiple use of the alternative methods of compliance are described in § 1.401(m)-1(a)(1).
(b) General rule for determination of multiple use
(1) In general.
(i) Multiple use of the alternative limitation occurs if all of the conditions of this paragraph (b)(1) are satisfied:
(A) One or more highly compensated employees of the employer are eligible employees in both a cash or deferred arrangement subject to section 401(k) and a plan maintained by the employer subject to section 401(m).
(B) The sum of the actual deferral percentage of the entire group of eligible highly compensated employees under the arrangement subject to section 401(k) and the actual contribution percentage of the entire group of eligible highly compensated employees under the plan subject to section 401(m) exceeds the aggregate limit of paragraph (b)(3) of this section.
(C) The actual deferral percentage of the entire group of eligible highly compensated employees under the arrangement subject to section 401(k) exceeds the amount described in section 401(k)(3)(A)(ii)(I).
(D) The actual contribution percentage of the entire group of eligible highly compensated employees under the arrangement subject to section 401(m) exceeds the amount described in section 401(m)(2)(A)(i).
(ii) The actual deferral percentage and actual contribution percentage of the group of eligible highly compensated employees are determined after use of qualified nonelective contributions and qualified matching contributions to meet the requirements of section 401(k)(3)(A)(ii) and after use of qualified nonelective contributions and elective contributions to meet the requirements of section 401(m)(2)(A). The actual deferral percentage and actual contribution percentage of the group of eligible highly compensated employees are determined after any corrective distribution or forfeiture of excess deferrals, excess contributions, or excess aggregate contributions and after any recharacterization of excess contributions required without regard to this section. Only plans and arrangements maintained by the same employer are taken into account under this paragraph (b)(1). If the employer maintains two or more plans after application of the rules under § 1.401(k)- 1(g)(11), multiple use is tested separately with respect to each plan. Thus, for example, if an employer maintains a cash or deferred arrangement with matching contributions, under which elective contributions may be made under either an ESOP or a non-ESOP, multiple use is tested separately with respect to elective contributions and matching contributions under the ESOP, and with respect to elective contributions and matching contributions under the non-ESOP.
(2) Alternative limitation. For purposes of this section, the term “alternative limitation” means the 200 percent or 2 percentage point limits in sections 401(k)(3)(A)(ii)(ii) and 401(m)(2)(A)(ii).
(3) Aggregate limit— (i) In general. For purposes of this section, the aggregate limit is the greater of:
(A) The sum of—
( 1 ) 1.25 times the greater of the relevant actual deferral percentage or the relevant actual contribution percentage, and
( 2 ) Two percentage points plus the lesser of the relevant actual deferral percentage or the relevant actual contribution percentage. In no event, however, may this amount exceed twice the lesser of the relevant actual deferral percentage or the relevant actual contribution percentage; or
(B) The sum of—
( 1 ) 1.25 times the lesser of the relevant actual deferral percentage or the relevant actual contribution percentage, and
( 2 ) Two percentage points plus the greater of the relevant actual deferral percentage or the relevant actual contribution percentage. In no event, however, may this amount exceed twice the greater of the relevant actual deferral percentage or the relevant actual contribution percentage.
(ii) Relevant actual deferral percentage and relevant actual contribution percentage defined. For purposes of paragraph (b)(3)(i) of this section, the term “relevant actual deferral percentage” means the actual deferral percentage of the group of nonhighly compensated employees eligible under the arrangement subject to section 401(k) for the plan year, and the term “relevant actual contribution percentage” means the actual contribution percentage of the group of nonhighly compensated employees eligible under the plan subject to section 401(m) for the plan year beginning with or within the plan year of the arrangement subject to section 401(k).
(iii) Examples. The provisions of this paragraph (b) are illustrated by the following examples:

Example 1.

(i) Assume that Employer G maintains a plan that contains a cash or deferred arrangement under which the actual deferral percentages of highly compensated and nonhighly compensated employees are 5.5 and four percent respectively. The plan also permits employee contributions, and the actual contribution percentages for the two groups are 4.2 and three percent respectively. The multiple use of the alternative limitation is tested as follows:

(1) Greater of the relevant actual deferral percentage or the relevant actual contribution percentage4.00
(2) 1.25 times (1)5.00
(3) Lesser of the relevant actual deferral percentage or the relevant actual contribution percentage3.00
(4) (3) plus two percentage points5.00
(5) (2)+(4)10.00
(6) 1.25 times (3)3.75
(7) (1) plus two percentage points6.00
(8) (6)+(7)9.75
(9) Aggregate limit greater of (5) or (8)10.00

(ii) In this case, the sum of the actual deferral percentage and the actual contribution percentage of highly compensated employees is 9.70 percent, which is less than the aggregate limit. Therefore, there is no multiple use of the alternative limitation.

Example 2.

Employer F maintains a plan subject to section 401(k) with a plan year beginning January 1, and a plan subject to section 401(m) with a plan year beginning July 1. The plan subject to section 401(k) does not correct excess contributions by recharacterization. The first actual deferral percentage taken into account is that for the plan year beginning January 1, 1989. The first actual contribution percentage taken into account is that for the plan year beginning July 1, 1989.

Example 3.

(i) Employer E maintains a plan that contains a cash or deferred arrangement and provides for matching contributions. The actual deferral and contribution percentages for a plan year are as follows:

 Actual deferral percentageActual contribution percentage
Highly compensated3.61.69
Nonhighly compensated1.81.35

(ii) The actual deferral percentage of the highly compensated employees exceeds the normal limit (1.25 times 1.8, or 2.25%) but not the alternative limit (two plus 1.8, but not more than twice 1.8, or 3.6%). The actual contribution percentage of the highly compensated employees does not exceed the normal limit (1.25 times 1.35, or 1.69%). Accordingly, the plan satisfies both the actual deferral and contribution percentage tests. Since the actual contribution percentage of the highly compensated employees does not exceed the normal limit, condition (iv) of paragraph (b)(1) of this section is not satisfied. Therefore, there is no multiple use of the alternative limitation.

(c) Correction of multiple use
(1) In general. If multiple use of the alternative limitation occurs with respect to two or more plans or arrangements maintained by an employer, it must be corrected by reducing the actual deferral percentage, the actual contribution percentage of highly compensated employees, or a combination of the two, in the manner described in paragraph (c)(3) of this section. Instead of making this reduction, the employer may eliminate the multiple use of the alternative limitation by making qualified nonelective contributions in accordance with § 1.401(k)-1(b)(5) and (f)(1) or § 1.401(m)-1(b)(5) and (e)(1).
(2) Treatment of required reduction. The required reduction is treated as an excess contribution under the arrangement subject to section 401(k) or excess aggregate contribution under the plan subject to section 401(m). However, if an excess contribution arising under this section is recharacterized as an employee contribution, the recharacterized amount is treated as an excess aggregate contribution.
(3) Required reduction. The amount of the reduction of the actual deferral percentage of the entire group of highly compensated employees eligible in the arrangement subject to section 401(k) is calculated in the manner described in § 1.401(k)-1(f)(2) or the amount of the reduction of the actual contribution percentage of the entire group of highly compensated employees eligible in the plan subject to section 401(m) is calculated in the manner described in § 1.401(m)-1(e)(2), as designated in the plan, so that there is no multiple use of the alternative limitation. The employer may elect to reduce the actual deferral ratios or the actual contribution ratios, as designated in the plan, either for all highly compensated employees under the plan or arrangements subject to reduction or for only those highly compensated employees who are eligible in both the arrangement subject to section 401(k) and the plan subject to section 401(m).
(4) Examples. The principles of this paragraph (c) are illustrated by the following examples. In all cases, the employer maintains both an arrangement subject to section 401(k) and a plan subject to section 401(m). Assume that there is no income or loss allocable to the elective, employee, or matching contributions.

Example 1.

(i) All employees of Employer Q are eligible in both an arrangement subject to section 401(k) and a plan subject to section 401(m). Both plans have a calendar plan year. The plans provide that multiple use of the alternative limitation will be corrected in the plan subject to section 401(m) and that any required reduction in actual contribution ratios will apply only to employees eligible to participate in both arrangements. Employer Q includes elective contributions in compensation as permitted under § 1.414(s)-1(c)(4)(i). See § 1.401(k)-1(g)(2)(i). Employees X and Y are highly compensated. Each received compensation of $100,000, deferred $6,000, received a $3,000 matching contribution, and made employee contributions of $3,000. Actual deferral and contribution percentages under the arrangement and plan for the 1989 plan year are shown below. No excess deferrals, excess contributions, or excess aggregate contributions have yet been required to be distributed, forfeited, or recharacterized under the plan.

Actual deferral percentageActual contribution percentage
Highly compensated66
Nonhighly compensated44

(ii) The aggregate limit and amount required, to be corrected are determined as follows:

 
Step 1: Determination of Aggregate Limit@@Q02
(1) Greater of relevant actual deferral percentage or relevant actual contribution percentage4.0
(2) 1.25 times (1)5.0
(3) Lesser of relevant actual deferral percentage or relevant actual contribution percentage4.0
(4) (3) plus two percentage points6.0
(5) (2)+(4)11.0
(6) 1.25 times (3)5.0
(7) (1) plus two percentage points6.0
(8) (6)+(7)11.0
(9) Aggregate limit Greater of (5) or (8)11.0
 
Step 2: Calculation of Correction Amount@@Q02
(10) Actual deferral percentage of highly compensated6.0
(11) Maximum permitted actual contribution percentage of highly compensated ((9)-(10))5.0
(12) Amount taken into account in determining actual contribution percentage of highly compensated Employee X$6,000
(13) Maximum amount permitted without use of alternative limitation ((11)×compensation of Employee X)$5,000
(14) Excess aggregate contribution ((12)-(13))$1,000

(iii) A similar correction must be made for Employee Y.

Example 2. Same as Example 1, but the plan corrects the multiple use in the arrangement subject to section 401(k) and provides that excess contributions are recharacterized. In this case, the aggregate limit for the plans will be 11 percent. Similarly, the excess contributions for Employees X and Y, determined in a manner analogous to that used in Example 1, will be $1,000. When this is recharacterized, the actual contribution percentage for these employees will increase to seven percent, resulting in an excess aggregate contribution of $1,000 that must be distributed.

Example 3.

Same as Example 1, except that Employee Y is not eligible to participate in the arrangement subject to section 401(k). No reduction of Y's actual contribution ratio is required because Y is only in the plan subject to section 401(m). In order to reduce the actual contribution percentage of the entire group of highly compensated employees eligible for the plan subject to section 401(m) to five percent, the plan must reduce X's actual contribution percentage to four percent. X's employee and matching contributions are limited to $4,000. Therefore X has an excess aggregate contribution of $2,000.

(d) Effective date— (1) General rule. This section is effective for plan years beginning after December 31, 1988, or such later date provided in § 1.402(m)-1(g).
(2) Transition rule. For plan years beginning before January 1, 1992, a reasonable interpretation of the rules set forth in sections 401 (k) and (m) of the Internal Revenue Code (as in effect during those years) may be relied upon to determine whether a plan was qualified during those years. For plan years beginning before January 1, 1992, a plan may be restructured only in accordance with § 1.401(k)-1(h)(3)(iii) or § 1.401(m)-1(g)(5)(ii).
Source credit, amendments & notes

[T.D. 8357, 56 FR 40543, Aug. 15, 1991, as amended at 57 FR 10290, Mar. 25, 1992; T.D. 8581, 59 FR 66179, Dec. 23, 1994]

Treas. Reg. § 1.401(m)-2 — ACP test. · CFR 1998 annual edition (revised as of 1998-04-01) · https://pensionresource.website/EAMain?content=EAMain.Law&id=cfr26-1.401%28m%29-2&asof=1975-03-11 · printed Oct 16, 2026
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  • (a) In general.
  • (b) General rule for determination of multiple use
  • (c) Correction of multiple use
  • (d) (d) Effective date— (1) General rule. This section is effec…
Implements
I.R.C. § 401 Qualified pension, profit-sharing, and stock bonus plans
Cited by (code & regs)
Glossary
ESOP
Employee stock ownership plan.
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EffectiveThroughSourceAmended by
Apr 1, 1997Mar 31, 1999CFR 1998 annual edition (revised as of 1998-04-01) run 127T.D. 8581, 59 FR 66179, Dec. 23, 1994View
Apr 1, 1999Mar 31, 2005CFR 2004 annual edition (revised as of 2004-04-01) run 127T.D. 8581, 59 FR 66179, Dec. 23, 1994View · Redline (sign in)
Apr 1, 2005Mar 31, 2006CFR 2005 annual edition (revised as of 2005-04-01) run 127T.D. 9169, 69 FR 78184, Dec. 29, 2004View · Redline (sign in)
Apr 1, 2006Mar 31, 2009CFR 2008 annual edition (revised as of 2008-04-01) run 127T.D. 9237, 71 FR 10, Jan. 3, 2006View · Redline (sign in)
Apr 1, 2009Jul 18, 2024eCFR editorial change effective 2016-05-18 run 2674 FR 12551, Mar. 25, 2009View · Redline (sign in)
Jul 19, 2024Sep 16, 2024eCFR amendment effective 2024-07-19 run 2674 FR 12551, Mar. 25, 2009View · Redline (sign in)
Sep 17, 2024currenteCFR amendment effective 2024-09-17 run 2T.D. 10001, 89 FR 85906, July 19, 2024View · Redline (sign in)
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