Cases: Fujinon Optical, Inc. v. Commissioner, 76 T.C. 499 (1981)
Final rules 3
(a) Participation
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(1) Minimum age and service conditions
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(A) General rule A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part requires, as a condition of participation in the plan, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the following dates—
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(i) the date on which the employee attains the age of 21; or
Amended 1984
- 1984 Pub. L. 98-397 Pub. L. 98–397, § 202(a)(1), substituted “21” for “25”.
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(ii) the date on which he completes 1 year of service.
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(B) Special rules for certain plans
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(i) In the case of any plan which provides that after not more than 2 years of service each participant has a right to 100 percent of his accrued benefit under the plan which is nonforfeitable (within the meaning of section 411) at the time such benefit accrues, clause (ii) of subparagraph (A) shall be applied by substituting “2 years of service” for “1 year of service”.
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1113(c), substituted “2 years of service” for “3 years of service” in two places.
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(ii) In the case of any plan maintained exclusively for employees of an educational institution (as defined in section 170(b)(1)(A)(ii)) by an employer which is exempt from tax under section 501(a) which provides that each participant having at least 1 year of service has a right to 100 percent of his accrued benefit under the plan which is nonforfeitable (within the meaning of section 411) at the time such benefit accrues, clause (i) of subparagraph (A) shall be applied by substituting “26” for “21”. This clause shall not apply to any plan to which clause (i) applies.
Amended 1984
- 1984 Pub. L. 98-397 Pub. L. 98–397, § 202(a)(2), substituted “ ‘26’ for ‘21’ ” for “ ‘30’ for ‘25’ ”.
(2) Maximum age conditions A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part excludes from participation (on the basis of age) employees who have attained a specified age.
Amended 1976, 1986, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239 struck out comma before period at end.
- 1986 Pub. L. 99-509 Pub. L. 99–509 substituted a period for “unless—
“(A) the plan is a—
“(i) defined benefit plan, or
“(ii) target benefit plan (as defined under regulations prescribed by the Secretary), and
“(B) such employees begin employment with the employer after they have attained a specified age which is not more than 5 years before the normal retirement age under the plan.”
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
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(3) Definition of year of service
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(A) General rule For purposes of this subsection, the term “year of service” means a 12-month period during which the employee has not less than 1,000 hours of service. For purposes of this paragraph, computation of any 12-month period shall be made with reference to the date on which the employee’s employment commenced, except that, under regulations prescribed by the Secretary of Labor, such computation may be made by reference to the first day of a plan year in the case of an employee who does not complete 1,000 hours of service during the 12-month period beginning on the date his employment commenced.
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(B) Seasonal industries In the case of any seasonal industry where the customary period of employment is less than 1,000 hours during a calendar year, the term “year of service” shall be such period as may be determined under regulations prescribed by the Secretary of Labor.
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(C) Hours of service For purposes of this subsection, the term “hour of service” means a time of service determined under regulations prescribed by the Secretary of Labor.
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(D) Maritime industries For purposes of this subsection, in the case of any maritime industry, 125 days of service shall be treated as 1,000 hours of service. The Secretary of Labor may prescribe regulations to carry out this subparagraph.
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(4) Time of participation A plan shall be treated as not meeting the requirements of paragraph (1) unless it provides that any employee who has satisfied the minimum age and service requirements specified in such paragraph, and who is otherwise entitled to participate in the plan, commences participation in the plan no later than the earlier of—
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(A) the first day of the first plan year beginning after the date on which such employee satisfied such requirements, or
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(B) the date 6 months after the date on which he satisfied such requirements,
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unless such employee was separated from the service before the date referred to in subparagraph (A) or (B), whichever is applicable.
(5) Breaks in service
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(A) General rule Except as otherwise provided in subparagraphs (B), (C), and (D), all years of service with the employer or employers maintaining the plan shall be taken into account in computing the period of service for purposes of paragraph (1).
(B) Employees under 2-year 100 percent vesting In the case of any employee who has any 1-year break in service (as defined in section 411(a)(6)(A)) under a plan to which the service requirements of clause (i) of paragraph (1)(B) apply, if such employee has not satisfied such requirements, service before such break shall not be required to be taken into account.
“Regulations prescribed by the Secretary” leaves this to Treasury. Cited by Reg. § 1.411(b)(5)-1(d)(2)(ii)(C), Reg. § 54.4978-1T(c)(4)
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1113(d)(A), substituted “2-year” for “3-year” in heading.
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(C) 1-year break in service In computing an employee’s period of service for purposes of paragraph (1) in the case of any participant who has any 1-year break in service (as defined in section 411(a)(6)(A)), service before such break shall not be required to be taken into account under the plan until he has completed a year of service (as defined in paragraph (3)) after his return.
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(a)(61)(A), substituted “purposes of paragraph (1)” for “purposes of subsection (a)(1)”.
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(D) Nonvested participants
Amended 1976, 1984
- 1984 Pub. L. 98-397 Pub. L. 98–397, § 202(d)(1), amended subpar. (D) generally.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(a)(61)(A), substituted “purposes of paragraph (1)” for “purposes of subsection (a)(1)”.
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(i) In general For purposes of paragraph (1), in the case of a nonvested participant, years of service with the employer or employers maintaining the plan before any period of consecutive 1-year breaks in service shall not be required to be taken into account in computing the period of service if the number of consecutive 1-year breaks in service within such period equals or exceeds the greater of—
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(I) 5, or
(II) the aggregate number of years of service before such period.
(ii) Years of service not taken into account If any years of service are not required to be taken into account by reason of a period of breaks in service to which clause (i) applies, such years of service shall not be taken into account in applying clause (i) to a subsequent period of breaks in service.
(iii) Nonvested participant defined For purposes of clause (i), the term “nonvested participant” means a participant who does not have any nonforfeitable right under the plan to an accrued benefit derived from employer contributions.
(E) Special rule for maternity or paternity absences
Amended 1984
- 1984 Pub. L. 98-397 Pub. L. 98–397, § 202(e)(1), added subpar. (E).
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(i) General rule In the case of each individual who is absent from work for any period—
(I) by reason of the pregnancy of the individual,
(II) by reason of the birth of a child of the individual,
(III) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or
(IV) for purposes of caring for such child for a period beginning immediately following such birth or placement,
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the plan shall treat as hours of service, solely for purposes of determining under this paragraph whether a 1-year break in service (as defined in section 411(a)(6)(A)) has occurred, the hours described in clause (ii).
(ii) Hours treated as hours of service The hours described in this clause are—
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(I) the hours of service which otherwise would normally have been credited to such individual but for such absence, or
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(II) in any case in which the plan is unable to determine the hours described in subclause (I), 8 hours of service per day of such absence,
except that the total number of hours treated as hours of service under this clause by reason of any such pregnancy or placement shall not exceed 501 hours.
(iii) Year to which hours are credited The hours described in clause (ii) shall be treated as hours of service as provided in this subparagraph—
(I) only in the year in which the absence from work begins, if a participant would be prevented from incurring a 1-year break in service in such year solely because the period of absence is treated as hours of service as provided in clause (i); or
(iv) Year defined For purposes of this subparagraph, the term “year” means the period used in computations pursuant to paragraph (3).
(v) Information required to be filed A plan shall not fail to satisfy the requirements of this subparagraph solely because it provides that no credit will be given pursuant to this subparagraph unless the individual furnishes to the plan administrator such timely information as the plan may reasonably require to establish—
(I) that the absence from work is for reasons referred to in clause (i), and
(II) the number of days for which there was such an absence.
(b) Minimum coverage requirements
Amended 1986
- 1986 Pub. L. 99-514 Pub. L. 99–514, § 1112(a), substituted “Minimum coverage requirements” for “Eligibility” as subsec. (b) heading and amended subsec. generally, revising and restating as pars. (1) to (6) provisions formerly contained in pars. (1) to (3).
Cases: Bronk v. Mountain States Telephone & Telegraph, Inc., 140 F.3d 1335 (10th Cir. 1998)
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(1) In general A trust shall not constitute a qualified trust under section 401(a) unless such trust is designated by the employer as part of a plan which meets 1 of the following requirements:
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(A) The plan benefits at least 70 percent of employees who are not highly compensated employees.
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(B) The plan benefits—
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
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(i) a percentage of employees who are not highly compensated employees which is at least 70 percent of
(ii) the percentage of highly compensated employees benefiting under the plan.
(C) The plan meets the requirements of paragraph (2).
(2) Average benefit percentage test
Amended 1980
- 1980 Pub. L. 96-605 Pub. L. 96–605 added par. (2), redesignated former par. (2) as (3) and substituted “paragraphs (1) and (2)” for “paragraph (1)”.
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(A) In general A plan shall be treated as meeting the requirements of this paragraph if—
(i) the plan benefits such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated employees, and
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(ii) the average benefit percentage for employees who are not highly compensated employees is at least 70 percent of the average benefit percentage for highly compensated employees.
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(B) Average benefit percentage For purposes of this paragraph, the term “average benefit percentage” means, with respect to any group, the average of the benefit percentages calculated separately with respect to each employee in such group (whether or not a participant in any plan).
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(C) Benefit percentage For purposes of this paragraph—
(i) In general The term “benefit percentage” means the employer-provided contribution or benefit of an employee under all qualified plans maintained by the employer, expressed as a percentage of such employee’s compensation (within the meaning of section 414(s)).
(ii) Period for computing percentage At the election of an employer, the benefit percentage for any plan year shall be computed on the basis of contributions or benefits for—
(I) such plan year, or
(II) any consecutive plan year period (not greater than 3 years) which ends with such plan year and which is specified in such election.
An election under this clause, once made, may be revoked or modified only with the consent of the Secretary.
(D) Employees taken into account For purposes of determining who is an employee for purposes of determining the average benefit percentage under subparagraph (B)—
(i) except as provided in clause (ii), paragraph (4)(A) shall not apply, or
(ii) if the employer elects, paragraph (4)(A) shall be applied by using the lowest age and service requirements of all qualified plans maintained by the employer.
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(E) Qualified plan For purposes of this paragraph, the term “qualified plan” means any plan which (without regard to this subsection) meets the requirements of section 401(a).
(3) Exclusion of certain employees For purposes of this subsection, there shall be excluded from consideration—
Amended 1980, 2006
- 2006 Pub. L. 109-280 Pub. L. 109–280, in concluding provisions, substituted “For purposes of subparagraph (B), management pilots who are not represented in accordance with title II of the Railway Labor Act shall be treated as covered by a collective bargaining agreement described in such subparagraph if the management pilots manage the flight operations of air pilots who are so represented and the management pilots are, pursuant to the terms of the agreement, included in the group of employees benefitting under the trust described in such subparagraph. Subparagraph (B) shall not apply in the case of a plan which provides contributions or benefits for employees whose principal duties are not customarily performed aboard an aircraft in flight (other than management pilots described in the preceding sentence).” for “Subparagraph (B) shall not apply in the case of a plan which provides contributions or benefits for employees whose principal duties are not customarily performed aboard aircraft in flight.”
- 1980 Pub. L. 96-605 Pub. L. 96–605 added par. (2), redesignated former par. (2) as (3) and substituted “paragraphs (1) and (2)” for “paragraph (1)”.
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(A) employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers,
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(B) in the case of a trust established or maintained pursuant to an agreement which the Secretary of Labor finds to be a collective bargaining agreement between air pilots represented in accordance with title II of the Railway Labor Act and one or more employers, all employees not covered by such agreement, and
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(C) employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)).
Amended 1981
- 1981 Pub. L. 97-34 Pub. L. 97–34 substituted “section 911(d)(2)” for “section 911(b)”.
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Subparagraph (A) shall not apply with respect to coverage of employees under a plan pursuant to an agreement under such subparagraph. For purposes of subparagraph (B), management pilots who are not represented in accordance with title II of the Railway Labor Act shall be treated as covered by a collective bargaining agreement described in such subparagraph if the management pilots manage the flight operations of air pilots who are so represented and the management pilots are, pursuant to the terms of the agreement, included in the group of employees benefitting under the trust described in such subparagraph. Subparagraph (B) shall not apply in the case of a plan which provides contributions or benefits for employees whose principal duties are not customarily performed aboard an aircraft in flight (other than management pilots described in the preceding sentence).
(4) Exclusion of employees not meeting age and service requirements
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(A) In general If a plan—
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(i) prescribes minimum age and service requirements as a condition of participation, and
(ii) excludes all employees not meeting such requirements from participation,
then such employees shall be excluded from consideration for purposes of this subsection.
(B) Requirements may be met separately with respect to excluded group If employees not meeting the minimum age or service requirements of subsection (a)(1) (without regard to subparagraph (B) thereof) are covered under a plan of the employer which meets the requirements of paragraph (1) separately with respect to such employees, such employees may be excluded from consideration in determining whether any plan of the employer meets the requirements of paragraph (1).
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(h)(1), substituted “not meeting” for “do not meet” and struck out “and” before “are covered”.
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(C) Requirements not treated as being met before entry date An employee shall not be treated as meeting the age and service requirements described in this paragraph until the first date on which, under the plan, any employee with the same age and service would be eligible to commence participation in the plan.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(h)(11), added subpar. (C).
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(5) Line of business exception
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(A) In general If, under section 414(r), an employer is treated as operating separate lines of business for a year, the employer may apply the requirements of this subsection for such year separately with respect to employees in each separate line of business.
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(B) Plan must be nondiscriminatory Subparagraph (A) shall not apply with respect to any plan maintained by an employer unless such plan benefits such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated employees.
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(6) Definitions and special rules For purposes of this subsection—
(A) Highly compensated employee The term “highly compensated employee” has the meaning given such term by section 414(q).
(B) Aggregation rules An employer may elect to designate—
(i) 2 or more trusts,
(ii) 1 or more trusts and 1 or more annuity plans, or
(iii) 2 or more annuity plans,
as part of 1 plan intended to qualify under section 401(a) to determine whether the requirements of this subsection are met with respect to such trusts or annuity plans. If an employer elects to treat any trusts or annuity plans as 1 plan under this subparagraph, such trusts or annuity plans shall be treated as 1 plan for purposes of section 401(a)(4).
(C) Special rules for certain dispositions or acquisitions
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(i) In general If a person becomes, or ceases to be, a member of a group described in subsection (b), (c), (m), or (o) of section 414, then the requirements of this subsection shall be treated as having been met during the transition period with respect to any plan covering employees of such person or any other member of such group if—
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(I) such requirements were met immediately before each such change, and
(II) the coverage under such plan is not significantly changed during the transition period (other than by reason of the change in members of a group) or such plan meets such other requirements as the Secretary may prescribe by regulation.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 3021(a)(13)(B), inserted “or such plan meets such other requirements as the Secretary may prescribe by regulation” after “of a group)”.
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(ii) Transition period For purposes of clause (i), the term “transition period” means the period—
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(I) beginning on the date of the change in members of a group, and
(II) ending on the last day of the 1st plan year beginning after the date of such change.
(D) Special rule for certain employee stock ownership plans A trust which is part of a tax credit employee stock ownership plan which is the only plan of an employer intended to qualify under section 401(a) shall not be treated as not a qualified trust under section 401(a) solely because it fails to meet the requirements of this subsection if—
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(i) such plan benefits 50 percent or more of all the employees who are eligible under a nondiscriminatory classification under the plan, and
(ii) the sum of the amounts allocated to each participant’s account for the year does not exceed 2 percent of the compensation of that participant for the year.
(E) Eligibility to contribute In the case of contributions which are subject to section 401(k) or 401(m), employees who are eligible to contribute (or elect to have contributions made on their behalf) shall be treated as benefiting under the plan (other than for purposes of paragraph (2)(A)(ii)).
(F) Employers with only highly compensated employees A plan maintained by an employer which has no employees other than highly compensated employees for any year shall be treated as meeting the requirements of this subsection for such year.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(h)(2), added subpar. (F) and redesignated former subpar. (F) as (G).
(G) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(h)(2), added subpar. (F) and redesignated former subpar. (F) as (G).
(c) Application of participation standards to certain plans
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(1) The provisions of this section (other than paragraph (2) of this subsection) shall not apply to—
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(A) a governmental plan (within the meaning of section 414(d)),
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(B) a church plan (within the meaning of section 414(e)) with respect to which the election provided by subsection (d) of this section has not been made,
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(C) a plan which has not at any time after September 2, 1974, provided for employer contributions, and
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(a)(61)(B), substituted “September 2, 1974,” for “the date of the enactment of the Employee Retirement Income Security Act of 1974”.
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(D) a plan established and maintained by a society, order, or association described in section 501(c)(8) or (9) if no part of the contributions to or under such plan are made by employers of participants in such plan.
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(2) A plan described in paragraph (1) shall be treated as meeting the requirements of this section for purposes of section 401(a), except that in the case of a plan described in subparagraph (B), (C), or (D) of paragraph (1), this paragraph shall apply only if such plan meets the requirements of section 401(a)(3) (as in effect on September 1, 1974).
Amended 1976, 1997
- 1997 Pub. L. 105-34 Pub. L. 105–34 amended par. (2) generally. Prior to amendment, par. (2) read as follows: “A plan described in paragraph (1) shall be treated as meeting the requirements of this section, for purposes of section 401(a), if such plan meets the requirements of section 401(a)(3) as in effect on September 1, 1974.”
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(a)(61)(C), substituted “September 1, 1974” for “the day before the date of the enactment of this section”.
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(d) Election by church to have participation, vesting, funding, etc., provisions apply
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(1) In general If the church or convention or association of churches which maintains any church plan makes an election under this subsection (in such form and manner as the Secretary may by regulations prescribe), then the provisions of this title relating to participation, vesting, funding, etc. (as in effect from time to time) shall apply to such church plan as if such provisions did not contain an exclusion for church plans.
Amended 1976
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
(2) Election irrevocable An election under this subsection with respect to any church plan shall be binding with respect to such plan, and, once made, shall be irrevocable.