SECTION 13. DRAFTING

INFORMATION

The principal authors of this notice are Timothy L. Jones and Aviva M. Roth of the Office of Associate Chief Counsel (Tax Exempt & Government Entities). However, other personnel from the IRS and the Treasury Department participated in its development. For further

December 27, 2005 1214 2005–52 I.R.B.

etc.) as the expense for cash compensation recognized for the employee in the income statement. See Staff Accounting Bulletin No. 107, Release No. SAB 107, 17 CFR Part 211 (Mar. 29, 2005); SFAS 123R ¶ 5. In the case of taxpayers utilizing the elective method of measurement, the Treasury Department and the IRS believe that determining whether stock-based compensation is related to the intangible development area on the basis of activities of employees during individual financial reporting periods is administrable both by taxpayers and the IRS and would likely produce results consistent with the purposes of T.D. 9088. Accordingly, provided that certain requirements are satisfied, controlled participants may choose to determine whether stock-based compensation measured by the elective method is related to the intangible development area by analyzing the activities of the employee recipients of the stock-based compensation by reference to financial reporting periods, identifying the related compensation on a period by period basis. In this context, the Treasury Department and the IRS emphasize that activities within the intangible development area are not necessarily coextensive with those activities classified as “research and development” for financial reporting purposes. Consequently, nothing in this notice should be interpreted as eliminating the requirement to take into account all stock-based compensation costs related to the intangible development area. Controlled participants must identify the stock-based compensation that is related to the intangible development area, notwithstanding that the activities conducted to develop intangibles covered by the QCSA may differ from the activities classified as “research and development” for U.S. GAAP purposes.

As an example of the identification of stock-based compensation by analyzing employee activities on the basis of financial reporting periods, assume that the stock-based compensation granted during the term of the QCSA and subject to the elective method vests over a total period that includes some periods in which the employee’s activities are related to the intangible development area and other periods in which the employee’s activities are not so related. Under these circumstances, in computing the intangible development costs related to the intangible develop

amount taken into account for cost-sharing purposes. Generally, this cost is measured and taken into account in accordance with the tax-deduction-based rules set forth in § 1.482–7(d)(2)(iii)(A). In the case of certain options on publicly traded stock, however, controlled participants may choose the elective method of § 1.482–7(d)(2)(iii)(B). Under the elective method, controlled participants take into account stock-option costs in the same amount, and as of the same time, as the fair value of the stock options reflected in audited financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) by or on behalf of the company issuing the publicly traded stock.

On August 22, 2005, the Treasury Department and the IRS issued a notice of proposed rulemaking (REG–144615–02, 2005–40 I.R.B. 625) which would amend, inter alia, the regulations under § 1.482–7(d). The Preamble to the proposed regulation stated that the Treasury Department and the IRS are considering extending availability of the elective method to other forms of publicly traded stock-based compensation and requested comments on which forms of publicly traded stock-based compensation should be eligible for the elective method. In response to comments, this notice extends the elective method to certain stock-based compensation commonly referred to as “restricted shares” or “restricted share units” and addresses the determination of whether stock-based compensation measured under the elective method is related to the intangible development area.

DISCUSSION

A. Certain restricted equity shares or units eligible for the elective method.

The Treasury Department and the IRS believe that the use of the elective method for certain shares or units would provide a reliable and administrable method for measuring the intangible development costs attributable to such compensation for purposes of § 1.482–7(d)(2). Accordingly, the Treasury Department and the IRS have determined that controlled participants may choose to apply the elective method to such shares or units.

Specifically, the elective method will be available with respect to nonvested equity shares or nonvested equity share units within the meaning of Statement of Financial Accounting Standards No. 123, “Share-Based Payment,” Financial Accounting Standards Board (rev. 2004) (SFAS 123R), provided that those shares or share units: (i) constitute or are issued with respect to publicly traded stock within the meaning of § 1.482–7(d)(2)(iii)(B)( 2 ); and (ii) are not subject to market conditions or significant post-vesting restrictions within the meaning of SFAS 123R.

In general, an election to apply the elective method as modified by this notice is made at the same time and in the same manner as described in § 1.482–7(d)(2)(iii)(B)( 4 ). In the case of a QCSA that predates December 8, 2005, if one or more controlled participants offer nonvested equity shares or units, an election to apply the elective method to such shares or units must be made by a written amendment to the cost sharing agreement not later than the latest due date (with regard to extensions) of a Federal income tax return of any controlled participant for the first taxable year beginning after December 8, 2005, and the consent of the Commissioner is not required.

B. Determination of whether stock-based compensation subject to the elective method is related to the intangible development area.

The grant-date identification rule directs that the “determination of whether stock based compensation is related to the intangible development area ... is made as of the date that the stock-based compensation is granted.” Section 1.482–7(d)(2)(ii) further states that all stock-based compensation granted during the term of a QCSA and related to the intangible development area is included as intangible development costs. Under the elective method, stock options are taken into account at the same time, and in the same amount as the value of stock options reflected in financial statements prepared in accordance with U.S. GAAP.

Under U.S. GAAP, companies must classify stock-based compensation expense attributable to a financial reporting period in the same functional area ( e.g., research and development, cost of revenue,

2005–52 I.R.B. 1215 December 27, 2005

REQUEST FOR COMMENTS AND CONTACT INFORMATION

The Treasury Department and the IRS continue to request comments concerning other forms of publicly traded stock-based compensation that should be eligible for the elective method. In addition, comments are requested concerning the interaction of the grant-date identification rule and the elective method; whether the regulations should continue to exclude all stock-based compensation granted prior to the term of the QCSA; whether stock-based compensation that vests after the term of the QCSA should be treated as vested during the term of the QCSA; and what standard the Commissioner should apply in considering requests for consent to changes to or from the elective method. Written comments may be submitted to the Office of Associate Chief Counsel (International), Attention: John E. Hinding (Notice 2005–99), CC:INTL:6, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC 20224. Alternatively, taxpayers may submit comments electronically to notice.comments@irscounsel.treas.gov. Comments will be available for public inspection and copying.

The principal author of this notice is John E. Hinding of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact John E. Hinding at (202) 435–5265 (not a toll-free call).

ment area, the portion of such stock-based compensation that vests during the former periods is taken into account even if the employee’s activities were not related to the intangible development area during the financial reporting period during which such stock-based compensation is granted, while the portion that vests during the latter periods is not taken into account. In contrast, under the grant-date identification rule, the determination whether the stock-based compensation relates to the intangible development area is made with respect to the entire grant of stock-based compensation by reference to the recipient employee’s activities at the time the stock-based compensation is granted.

Taxpayers’ implementation of this identification method based on financial reporting periods must meet four requirements. First, the identification methodology must be applied consistently (under the principles of § 1.482–7(d)(2)(iii)(C)). Second, any stock-based compensation the fair value of which is not reflected as a charge against income in audited financial statements (for example, as in the case of certain stock options the fair value of which was disclosed in footnotes prior to the effective date of SFAS 123R) must be identified for purposes of § 1.482–7 as if the fair value of such compensation were reflected as a charge against income in audited financial statements. Third, as under the grant-date identification rule, controlled participants using this identification methodology must exclude stock-based compensation granted prior to the term of the QCSA. Fourth and finally, stock-based compensation granted but not

vested during the term of the QCSA must be treated as vesting immediately before expiration or termination of the QCSA for purposes of § 1.482–7. Under this final requirement, if costs attributable to stock-based compensation granted during the term of the QCSA are allocable under U.S. GAAP to reporting periods subsequent to the term of the QCSA, the determination of whether these costs must be taken into account as intangible development costs must be based on the employee’s activities as of the financial reporting period during which the date of the expiration or termination of the QCSA occurs.

In the case of a QCSA that predates December 8, 2005, a change of identification methodology pursuant to this notice will not require Commissioner consent under § 1.482–7(d)(2)(iii)(C) if made no later than the latest due date (with regard to extensions) of a Federal income tax return of any controlled participant for the first taxable year beginning after December 8, 2005.

EFFECTIVE DATE

This notice is effective for stock-based compensation granted in taxable years beginning on or after December 8, 2005. Until regulations incorporating the guidance set forth in this notice are issued, taxpayers may rely on the guidance contained in this notice. Taxpayers may elect to apply the provisions of this notice retroactively to grants of stock-based compensation occurring in open taxable years beginning on or after August 26, 2003.

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Tables for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income

Notice 2005–100

1. Table for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income (Forms 668-W(c), 668-W(c)(DO)) and 668-W(ICS) 2006

Publication 1494, shown below, provides tables that show the amount of an individual’s income that is exempt from a notice of levy used to collect delinquent tax in 2006.

(Amounts are for each pay period.)

Filing Status: Single

Filing Status: Unmarried Head of Household

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Filing Status: Married Filing Joint Return (and Qualifying Widow(er)s)

Filing Status: Married Filing Separate Return

2. Table for Figuring Additional Exempt Amount for Taxpayers at Least 65 Years Old and/or Blind

Additional Exempt Amount

• ADDITIONAL STANDARD DEDUCTION claimed on Parts 3, 4, & 5 of levy.

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Examples

These tables show the amount exempt from a levy on wages, salary, and other income. For example:

1. A single taxpayer who is paid weekly and claims three exemptions (including one for the taxpayer) has $289.42 exempt from levy.

2. If the taxpayer in number 1 is over 65 and writes 1 in the ADDITIONAL STANDARD DEDUCTION space on Parts 3, 4, & 5 of the levy, $313.46 is exempt from this levy ($289.42 plus $24.04).

3. A taxpayer who is married, files jointly, is paid bi-weekly, and claims two exemptions (including one for the taxpayer) has $650.00 exempt from levy.

4. If the taxpayer in number 3 is over 65 and has a spouse who is blind, this taxpayer should write 2 in the ADDITIONAL STANDARD DEDUCTION space on Parts 3, 4, & 5 of the levy. Then, $726.92 is exempt from this levy ($650.00 plus $76.92).

III. APPLICATION OF 2005 CUMULATIVE LIST

This notice is being issued in conjunction with the opening of the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107–16 (EGTRRA) determination letter program for individually designed plans. The Service announced the opening of the initial five-year remedial amendment cycle for Cycle A in Rev. Proc. 2005–66. Thus, the Service will start accepting determination letter applications for Cycle A individually designed plans ( i.e., the last digit of the plan sponsor’s employer identification number is 1 or 6) on February 1, 2006. The 12-month submission period for individually designed plans is intended to end January 31, 2007.

The 2005 Cumulative List informs plan sponsors of issues the Service has specifically identified for review in determining whether an individually designed plan has been properly updated. Specifically, the 2005 Cumulative List reflects law changes under EGTRRA (with technical corrections made by the Job Creation and Worker Assistance Act of 2002 (JCWAA), Pub. L. 104–147), the Pension Funding Equity Act of 2004 (PFEA), Pub. L. 108–218, and the American Jobs Creation Act of 2004 (AJCA), Pub. L. 108–357. In order to be qualified, a plan must comply with all relevant qualification requirements (that is, all qualification requirements in effect, or guidance published before the issuance of the Cumulative List), not just those on the 2005 Cumulative List. The only two items on the 2005 Cumulative List that are not yet published are listed under section 402A. The Service will not review plan language for any qualification change that be

2005 Cumulative List of Changes in Plan Qualification Requirements

Notice 2005–101

I. PURPOSE

This notice contains the 2005 Cumulative List of Changes in Plan Qualification Requirements (2005 Cumulative List) described in section 4 of Rev. Proc. 2005–66, 2005–37 I.R.B. 509. The 2005 Cumulative List is to be used primarily by plan sponsors of individually designed plans that fall in Cycle A. Those will be single employer individually designed defined contribution plans, including employee stock ownership plans (ESOPs), and individually designed defined benefit plans.

The 2005 Cumulative List in section 4 of this notice does not extend the deadline by which a plan must be amended to comply with any statutory, regulatory, or guidance changes. The general deadline for timely adoption of an interim or discretionary amendment can be found in section 5.05 of Rev. Proc. 2005–66.

II. BACKGROUND

Rev. Proc. 2005–66 sets forth procedures for issuing opinion, advisory, and determination letters and establishes the five-year remedial amendment cycle for individually designed plans and the six-year remedial amendment cycle for pre-approved plans. In addition, section 5.05 of Rev. Proc. 2005–66 provides the deadline for timely adoption of an interim

amendment or discretionary amendment. Notice 2005–95, 2005–51 I.R.B. 1172 (December 19, 2005), provides transitional relief relating to deadlines that would otherwise apply under Rev. Proc. 2005–66. Under section 4 of Rev. Proc. 2005–66, the Internal Revenue Service intends to annually publish a Cumulative List to identify statutory, regulatory and guidance changes that must be taken into account in plan sponsor’s submissions to the Service for opinion, advisory and determination letters whose remedial amendment period begins on February 1st following issuance of the Cumulative List.

In Notice 2004–84, 2004–2 C.B. 1030, the Service published the 2004 Cumulative List of Changes in Plan Qualification Requirements (2004 Cumulative List). The 2004 Cumulative List was used primarily by plan sponsors and practitioners in drafting defined contribution pre-approved plans (that is, defined contribution plans that are master and prototype or volume submitter plans) that must be submitted to the Service for review by January 31, 2006. Thus, the 2004 Cumulative List set forth only those plan qualification requirements that applied to defined contribution pre-approved plans. Plan qualification requirements included statutory changes and guidance that became effective after December 31, 2001, and any relevant qualification requirements not contained in the 2004 Cumulative List. The Service also stated that plan language for guidance issued after December 14, 2004, would not be reviewed, unless it was on the 2004 Cumulative List.

2005–52 I.R.B. 1219 December 27, 2005

to six months after a hardship distribution.

was amended by § 611(f) of EGTRRA to increase the maximum amount of qualified salary reduction contributions that can be made to SIMPLE 401(k) plans.

amended by § 611(d) of EGTRRA to increase the applicable dollar amount.

was amended by § 666 of EGTRRA to eliminate the multiple use test.

and § 401(m) of the Code were published on December 29, 2004 (69 Fed. Reg. 78144).

7. 402A: Section 402A of the Code was added by § 617 of EGTRRA to offer optional treatment of elective deferrals as designated Roth contributions to defined contribution plans, effective for taxable years beginning after December 31, 2005.

and § 401(m) of the Code relating to designated Roth contributions are expected to be published soon.

§ 402A are expected to be published soon.

8. 404:

amended by § 662(a) of EGTRRA (as amended by § 411(w) of JCWAA) to allow ESOP dividends to be reinvested without the loss of dividend deductions. (New).

285, provides guidance with respect to the changes made to § 404(k) of the Code and on the effective date of § 409(p) of the Code. (New).

9. 408(q): Section 408(q) of the Code was added by § 602 of EGTRRA (as amended by § 411(i) of JCWAA) to allow for deemed individual retirement

comes effective, any guidance published, or any statutes enacted after December 13, 2005, unless it is on the 2005 Cumulative List. Thus, plan sponsors of individually designed plans may not rely on determination letters with respect to plan language reflecting any guidance issued after December 13, 2005, unless that guidance is on the 2005 Cumulative List.

IV. 2005 CUMULATIVE LIST OF CHANGES IN PLAN QUALIFICATION REQUIREMENTS

The following list consists of statutory provisions and associated guidance which reflect changes to plan qualification requirements. Miscellaneous guidance is also provided. The Service has identified below plan qualification requirements which were not on the 2004 Cumulative List as “(New)”. The 2005 Cumulative List adds statutory changes and guidance that have become effective after December 31, 2001, for defined benefit plans and ESOPs. It is also updated for plan qualification requirements published in 2005 for defined contribution plans. Thus, the 2005 Cumulative List contains those plan qualification requirements first listed in the 2004 Cumulative List as well as additional 2005 plan qualification requirements.

1. 72(p): Section 1.72(p)–1 of the Income Tax Regulations relating to plan loans was published on December 3, 2002 (67 Fed. Reg. 71821).

2. 401(a)(4):

of the Regulations relating to new comparability plans were published on June 29, 2001 (66 Fed. Reg. 34535).

of the Regulations relating to new comparability plans were published on June 29, 2001 (66 Fed. Reg. 34535). (New).

of the Regulations were published on April 17, 2002 and June 15,

2004 (67 Fed. Reg. 18834 and 69 Fed. Reg. 33288).

4. 401(a)(17): Section 401(a)(17) of the Code was amended by § 611(c) of EGTRRA to increase the compensation limit to $200,000.

by § 643(b) of EGTRRA to allow employees’ after-tax contributions to be rolled over under certain circumstances.

amended by § 657(a) of EGTRRA (as amended by § 411(t) of JCWAA) to provide for the automatic rollover of certain mandatory distributions. The effective date is March 28, 2005.

of EGTRRA (as amended by § 411(q) of JCWAA) amended the definition of eligible retirement plan in § 402 to include a § 403(b) annuity contract and eligible governmental § 457(b) plan.

ified the definition of eligible rollover distribution to exclude hardship distributions.

6. 401(k) & 401(m):

§ 401(k)(10) of the Code were amended by § 646(a)(1) of EGTRRA to permit distributions of elective deferrals from a § 401(k) plan upon severance from employment.

rected the Secretary of the Treasury to revise the regulations relating to safe harbor hardship distributions of elective deferrals from § 401(k) plans so that the time the employee is prohibited from making elective and employee contributions is reduced from one year

December 27, 2005 1220 2005–52 I.R.B.

accounts (IRAs) in an eligible retirement plan.

Regulations was published on July 22, 2004 (69 Fed. Reg. 43735).

10. 409: Section 409(p) of the Code was added § 656 of EGTRRA relating to restrictions on the allocation of employer securities in an ESOP maintained by an S corporation. (New).

lations was published on July 21, 2003 (68 Fed. Reg. 42970). (New).

ulations was published on December 17, 2004 (69 Fed. Reg. 75455). (New).

599, as modified and superseded by Rev. Proc. 2004–14, 2004–1 C.B. 489, allows a direct rollover from an ESOP maintained by an S corporation to an individual retirement plan (IRA). (New).

286, provides guidance with respect to whether an ESOP maintained by an S corporation is eligible for the delayed effective date of § 409(p) under § 656(d)(2) of EGTRRA. (New).

414, provides guidance relating to synthetic equity owned by a disqualified person in a nonallocation year of an ESOP maintained by an S corporation. (New).

11. 411(a):

amended by § 633 of EGTRRA (as amended by § 411(o) of JCWAA) to provide for faster vesting of matching contributions.

1035. (New).

1036. 411(a)(11): Section 411(a)(11)(D) of the Code was added by § 648(a) of EGTRRA (as amended by § 411(r) of JCWAA) to allow amounts attributable to rollover contributions to be disregarded in determining the value of an account balance for involuntary distributions.

1037. 411(d)(6):

v. Heinz, 124 S.Ct. 2230 (2004). (New).

I.R.B. 991, as modified by Rev. Proc. 2005–76, 2005–50 I.R.B. 1139 (December 12, 2005). (New).

§ 411(d)(6)(E) of the Code were added by § 645 of EGTRRA to permit the elimination of certain optional forms of benefit under certain conditions. (New).

2(e) of the Regulations was published on January 25, 2005 (70 Fed. Reg. 3475) to implement § 411(d)(6)(E). (New).

directed the Secretary of the Treasury to issue regulations under § 411(d)(6). (New).

ulations was published on August 12, 2005 (70 Fed. Reg. 47109). (New).

14. 412:

546, provides guidance with respect to whether a qualified pension plan can be a § 412(i) plan if the plan holds life insurance contracts and annuity contracts for benefits at normal retirement age in excess of a participant’s benefits at normal retirement age under the plan. (New).

447, provides guidance with respect to restrictions placed on plan amendments following an employer’s election of an alternative deficit reduction contribution. (New).

15. 414(v): Section 414(v) of the Code was added by § 631 of EGTRRA (as amended by § 411(o) of JCWAA) to allow for catch-up contributions for individuals age 50 or older.

were published on July 8, 2003 (68 Fed. Reg. 40510).

amended by § 611 of EGTRRA to increase the dollar limit and change the age when the limit is reduced or increased. (New).

Code was amended by § 101(b)(4) of PFEA to fix the percentage at 5.50%. (New).

879, provides the actuarial assumptions that must be used for distributions with annuity starting dates occurring during the plans years beginning in 2004 and 2005. (New).

amended by §§ 611(b) and 632 of EGTRRA (as amended by § 411(p) of JCWAA) to increase the maximum annual additions permitted to the lesser of $40,000 or 100% of compensation.

posed Regulations under § 415 was published on May 31, 2005 (70 Fed. Reg. 31214).

C.B. 925, provided that “compensation” within the meaning of § 415(c) could in certain situations include “deemed § 125 compensation”.

17. 416: Section 416 of the Code was amended by § 613 of EGTRRA (as amended by § 411(k) of JCWAA) to make several changes to the top-heavy rules.

Code was added by § 613(d) of EGTRRA to provide certain safe harbor § 401(k) plans and § 401(m) plans an exemption from the top-heavy rules.

Code was amended by § 613(e) of EGTRRA (as amended by § 411(k)(1) of JCWAA) to provide when a frozen defined benefit

2005–52 I.R.B. 1221 December 27, 2005

plan is exempt from the minimum benefit requirements. (New).

18. 417: Section 1.417(e)–1 of the Regulations was published on July 16, 2003 (68 Fed. Reg. 41906) relating to retroactive annuity starting date. (New).

19. 4975:

amended by § 612 of EGTRRA to allow plan loans for Subchapter S shareholder-employees.

amended by § 240 of AJCA to allow an S corporation distribution on allocated shares to pay off an exempt loan as long as equal amounts are allocated to participant accounts. (New).

20. Katrina Relief:

40 I.R.B. 682. (New).

21. Miscellaneous:

632, provides guidance with respect to the mortality table under § 415(b)(2(E)(v) of the Code

and the applicable mortality table under § 417(e)(3)(A)(ii)(I) of the Code. (New).

76, provides guidance with respect to a situation where a money purchase pension plan is merged or converted into a profit sharing plan.

911, provides guidance with respect to defined contribution retirement plans maintained by professional employer organizations.

C.B. 1211, amplifies Rev. Proc. 2002–21 relating to relief provided for certain defined contribution plans maintained by professional employer organizations.

285, provides guidance with respect to satisfying the nondiscrimination rules under § 401(a)(4) of the Code and the minimum coverage requirements under § 410(b) of the Code when applying the increased compensation limit to former employees. (New).

484, provides guidance with respect to charging administrative expenses to former and current employees.

478, provides guidance with respect to the distribution restric

tions applicable to rollover contributions.

I.R.B. 284, provides guidance with respect to medical reimbursement accounts under a profit sharing plan. (New).

The following guidance contains sample or model amendments: Notice 2001–57, 2001–2 C.B. 279 (miscellaneous EGTRRA amendments); Rev. Rul. 2001–62, 2001–2 C.B. 632 (applicable mortality table); Rev. Proc. 2002–29, 2002–1 C.B. 1176 (required minimum distribution amendments); Rev. Proc. 2003–13, 2003–1 C.B. 317 (required language for deemed IRAs); and Notice 2005–5 (automatic rollover).

DRAFTING INFORMATION

The principal author of this notice is Dana A. Barry of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1–877–829–5500 (a toll-free number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday (a toll-free call). Ms. Barry may be reached at (202) 283–9888 (not a toll-free call).

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