3927 / What miscellaneous qualification requirements must be met in order for a plan to be qualified?
A. Permanence. A qualified plan must be a permanent program. Thus, although an employer may reserve the right to amend or terminate the plan, the abandonment of the plan for any reason other than business necessity within a few years after its establishment will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. This will especially be true if, for example, a pension plan is abandoned soon after pensions have been funded for the highly-paid or stockholder employees. The permanency of a plan will be indicated by all of the surrounding facts and circumstances, including the likelihood of the employer's ability to continue contributions as provided under the plan. In the case of a profit-sharing plan, other than a profit-sharing plan which covers employees and owner-employees (see section 401(d)(2)(B)), it is not necessary that the employer contribute every year or that he contribute the same amount or contribute in accordance with the same ratio every year. However, merely making a single or occasional contribution out of profits for employees does not establish a plan of profit-sharing. Since 1985, plan sponsors no longer must have profits to make contributions to profit-sharing plans.1 In the event a plan is abandoned, the employer should promptly notify the district director, stating the circumstances which led to the discontinuance of the plan. 2
B. Benefits after merger. The plan must provide that in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit the participant would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan had then terminated).3 (This requirement does not apply to certain multiemployer plans.) Shifting assets between funding media used for a single plan (e.g., between trusts and annuity contracts) is not a transfer of assets or liabilities.4
C. Early retirement benefit. If a plan provides for payment of an early retirement benefit, a vested participant who terminates employment after having satisfied the service requirements, but not the age requirement for the early benefit, must be entitled, upon satisfaction of the age requirement, to receive a benefit not less than the benefit to which the participant would be entitled at normal retirement age, actuarially reduced in accordance with reasonable actuarial assumptions.5 In the case of a defined contribution plan, the employee, upon reaching early retirement age following termination after having satisfied service requirements, must be entitled to receive a benefit equal in value to the vested portion of his account balance at early retirement age.6
D. Social Security offset. The plan must not permit benefits to be reduced by reason of any increase in Social Security benefit levels or wage base occurring (1) after separation from service, in the case of a participant who has separated from service with nonforfeitable rights to benefits, or (if earlier) (2) after first receipt of benefits, in the case of a participant or beneficiary who is receiving benefits under the plan.7 This requirement also applies to plans that supplement benefits provided under state or federal laws other than the Social Security Act, such as the Railroad Retirement Act of 1937.8
E. Withdrawal of employee contributions. The plan must preclude forfeitures of accrued benefits derived from employer contributions (whether forfeitable or nonforfeitable) solely because a benefit derived from the participant's contributions is voluntarily withdrawn by him after the participant has a nonforfeitable right to 50 percent of the accrued benefit derived from employer contributions.9
F. Compensation. Generally, a plan will not be qualified unless (for the purpose of any of the qualification rules) not more than $360,000 (for 2026) of annual compensation of any employee is taken into account under the plan for any plan year.10 This amount is indexed for inflation in increments of $5,000.11
1. IRC § 401(a)(27), added by P.L.99-514.
2. Treas. Reg. § 1.401-1(b)(2). This regulation has not been amended to reflect the addition of section 401(a)(27), eliminating the requirement that contributions be made from profits.
3. IRC § 401(a)(12).
4. Treas. Reg. § 1.414(l)-1.
5. IRC § 401(a)(14); Treas. Reg. § 1.401(a)-14(c).
6. TIR 1334 (1/8/75), M-3.
7. IRC § 401(a)(15).
8. Treas. Reg. § 1.401(a)-15(b).
9. IRC § 401(a)(19); Treas. Reg. § 1.401(a)-19(b).
10. IRC § 401(a)(17)(A).
11. IRC § 401(a)(17)(B); Treas. Reg. § 1.401(a)(17)-1(a).