Part IV — Internal Revenue Bulletin 2025-8

Notice of Proposed Rulemaking

Automatic Enrollment Requirements Under Section 414A

REG‑100669‑24

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document sets forth proposed regulations that would provide guidance with respect to the automatic enrollment requirements that apply to certain retirement plans. The proposed regulations reflect statutory changes made by the SECURE 2.0 Act of 2022 requiring that certain cash or deferred arrangements and salary reduction agreements be eligible automatic contribution arrangements that satisfy additional specified requirements. The proposed regulations would affect participants in, beneficiaries of, employers maintaining, and administrators of certain retirement plans that include cash or deferred arrangements or annuity contracts purchased under salary reduction agreements and other retirement plans that include eligible automatic contribution arrangements. This document also provides notice of a public hearing.

DATES: Written or electronic comments must be received by March 17, 2025. A public hearing on this proposed regulation has been scheduled for April 8, 2025, at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by March 17, 2025. If no outlines are received by March 17, 2025, the public hearing will be cancelled.

ADDRESSES: Commenters are strongly encouraged to submit public comments

electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG‑100669‑24) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically or on paper to its public docket on www.regulations.gov . Send paper submissions to: CC:PA:01:PR (REG‑100669‑24), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, call Christina M. Cerasale at (202) 317‑4102 or Kara M. Soderstrom at (202) 317‑6799; concerning submission of comments, the hearing, and the access code to attend the hearing by telephone, call the Publications and Regulations Section at (202) 317‑6901 (not toll‑free numbers) or email publichearings@irs.gov (preferred).

SUPPLEMENTARY INFORMATION:

Authority

These proposed regulations are promulgated under section 7805(a) of the Internal Revenue Code (Code), which provides that “the Secretary shall prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” In addition, section 341 of the SECURE 2.0 Act of 2022 (SECURE 2.0 Act), enacted on December 29, 2022, as Division T of the Consolidated Appropriations Act, 2023, Public Law 117‑328, 136 Stat. 4459 (2022), instructs the Secretaries of the

Treasury and Labor (or their delegates) to adopt regulations related to the consolidation of notices required for defined contribution plans under the Code and the Employee Retirement Income Security Act of 1974, Public Law 93‑406, 88 Stat. 829, as amended (ERISA).

Background

This notice of proposed rulemaking sets forth a proposed regulation under section 414A of the Code that would be added to the Income Tax Regulations (26 CFR part 1). Section 414A, which was added to the Code by section 101 of the SECURE 2.0 Act, provides that certain retirement plans must automatically enroll employees.

In addition to adding a new regulation under section 414A of the Code, this notice of proposed rulemaking sets forth proposed amendments to the regulations under section 414(w). These amendments to §1.414(w)‑1 would reflect the application of section 414A and the exception to the notice requirements for unenrolled participants set forth in section 414(bb), as added to the Code by section 320 of the SECURE 2.0 Act. The proposed amendments to §1.414(w)‑1 also would address section 402A(e)(5)(C) of the Code, which was added to the Code by section 127 of the SECURE 2.0 Act, as well as section 341 of the SECURE 2.0 Act. Section 402A(e) (5)(C) of the Code and section 341 of the SECURE 2.0 Act permit the consolidation of certain notices required under the Code and ERISA.

I. In General

A. Cash or deferred arrangements and salary reduction agreements

Section 401(k)(1) provides that a profit‑sharing, stock bonus, pre‑ERISA money purchase, or rural cooperative plan will not fail to qualify under section 401(a) merely because it includes a cash or deferred arrangement (CODA) ¹ that is a

1 Under §1.401(k)-1(a)(2)(i), a CODA generally is an arrangement providing for an election by an employee to have the employer provide either contributions to a plan described in sec- tion 401(a) or payments directly in cash.

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qualified CODA. Under section 401(k)(2), a CODA is a qualified CODA only if it satisfies certain requirements. These requirements include that elective contributions under the CODA are subject to the section 401(k)(2)(B) restriction on when distributions may be made, and that the arrangement satisfies the actual deferral percentage (ADP) test in section 401(k) (3)(A)(ii). ²

Section 403(b)(1) of the Code provides for an exclusion from gross income of certain contributions that are used to purchase an annuity contract, including contributions that are made under a salary reduction agreement. Although there is no direct definition of salary reduction agreement in section 403(b), several provisions of the Code set forth rules that apply to the use of a salary reduction agreement to purchase an annuity contract described in section 403(b). For example, section 403(b) (11) provides distribution restrictions that apply to “contributions made pursuant to a salary reduction agreement.”

B. Automatic enrollment

Section 902 of the Pension Protection Act of 2006, Public Law 109‑280, 120 Stat. 780 (PPA ‘06), added sections 401(k)(13) and 414(w) to the Code to facilitate automatic contribution arrangements (also referred to as automatic enrollment) in qualified CODAs under section 401(k). Section 414(w) also applies to automatic contribution arrangements under section 403(b) plans; section 457(b) plans maintained by governmental employers described in section 457(e)(1)(A); simplified employee pensions, the terms of which provide for a salary reduction arrangement described in section 408(k) (6); and SIMPLE individual retirement accounts described in section 408(p). An automatic contribution arrangement is a CODA or other similar arrangement providing for elections on the part of eligible employees that includes a default election under which an eligible employee is treated as having elected to have a speci

fied contribution made on the employee’s behalf under the plan while permitting the employee to make an affirmative election to have contributions made in a different amount on the employee’s behalf (including no contributions). ³

1. Qualified automatic contribution arrangements under section 401(k)(13)

Section 401(k)(13) provides a design‑based safe harbor for a CODA that provides for automatic enrollment at a specified level and meets certain employer contribution, notice, and other requirements. A CODA that satisfies these requirements, referred to as a qualified automatic contribution arrangement (QACA), is treated as satisfying the ADP test.

Section 401(k)(13)(C)(ii) provides that the default election in a QACA ceases to apply to any eligible employee if the employee makes an affirmative election to not have any elective contributions made on the employee’s behalf or to have elective contributions made in a specified amount or percentage of compensation on the employee’s behalf. Reflecting that provision, §1.401(k)‑3(j)(1)(ii) provides that the default election ceases to apply with respect to an eligible employee for periods of time with respect to which the employee has an affirmative election that is currently in effect to have elective contributions made in a different amount on the employee’s behalf (in a specified amount or percentage of compensation) or not have any elective contributions made on the employee’s behalf.

Section 401(k)(13)(C)(iii) sets forth a series of minimum default contribution percentages (based on the plan year that the arrangement first applies to an employee) that an automatic contribution arrangement must satisfy to be a QACA and requires that the default contribution percentages apply uniformly. Under §1.401(k)‑3(j)(2)(iii), a plan does not fail to satisfy this uniform percentage requirement merely because: (1) the percentage

varies based on the number of years or portions of years an eligible employee has participated in the automatic contribution arrangement intended to be a QACA; (2) the rate of elective contributions under a cash or deferred election that is in effect immediately prior to the effective date of the default percentage under the QACA is not reduced; (3) the rate of elective contributions is limited so as not to exceed the limits of sections 401(a)(17), 402(g) (determined with or without catch‑up contributions), and 415; or (4) the default election is not applied during the period an employee is not permitted to make elective contributions pursuant to section 414(u)(12)(B)(ii).

Section 401(k)(13)(C)(iv) provides an exception from the application of the default election under a QACA for eligible employees who were eligible to participate in the CODA (or a predecessor CODA) immediately before the effective date of the QACA and who have an election in effect on that effective date. Reflecting that provision, §1.401(k)‑3(j)(1)(iii) provides that an automatic contribution arrangement does not fail to be a QACA merely because the default election is not applied to an employee who was eligible under the CODA (or a predecessor arrangement) immediately prior to the effective date of the QACA and on that effective date had an affirmative election in effect (that remains in effect) to have elective contributions made on the employee’s behalf (in a specified amount or percentage of compensation) or not have elective contributions made on the employee’s behalf.

Section 1.401(k)‑3(j)(2)(iv) provides that minimum percentages in a QACA are determined without regard to whether an employee has continued to be eligible to make contributions under the plan. However, §1.401(k)‑3(j)(2)(iv) provides that a plan is permitted to treat an employee who for an entire plan year did not have contributions made pursuant to a default election under a QACA as if the employee also had not had such contributions for any prior plan year.

2 The ADP test in section 401(k)(3)(A)(ii) compares the average deferral percentage for highly compensated employees with the average deferral percentage for non‑highly compensated employees. As an alternative to satisfying the annual ADP test, a plan may satisfy the provisions of section 401(k)(11), (12), (13), or (16).

3 Section 902 of PPA ’06 also added a new section 514(e) to ERISA, which broadly provides that, notwithstanding any other provision of section 514, title I of ERISA supersedes State laws that would directly or indirectly prohibit or restrict the inclusion of an automatic contribution arrangement in a plan.

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2. Eligible automatic contribution arrangements under section 414(w)

Section 414(w) facilitates automatic enrollment by providing relief from the distribution restrictions under section 401(k) (2)(B), 403(b)(7), 403(b)(11), or 457(d) (1)(A) in the case of an eligible automatic contribution arrangement (EACA). Under this relief, a plan may permit an employee who was automatically enrolled under an EACA to take a distribution within a limited period after the initial default elective contribution with respect to the employee was made.

Under section 414(w)(1) and (2), an applicable employer plan ⁴ that contains an EACA is permitted to allow employees to elect to receive a distribution, called a permissive withdrawal, equal to the amount of default elective contributions (and attributable earnings) made with respect to the employee beginning with the first payroll period to which the EACA applies to the employee and ending with the effective date of the election. The election must be made within 90 days after the date of the first default elective contribution with respect to the employee under the arrangement. ⁵

Section 414(w)(3) defines an EACA as an arrangement under which: (1) a participant may elect to have the employer make payments as contributions under the plan on behalf of the participant, or to the participant directly in cash; (2) the participant is treated as having elected to have the employer make such contributions in an amount equal to a uniform percentage of compensation provided under the plan until the participant specifically elects not to have such contributions made (or specifically elects to have such contributions made at a different percentage); and (3) participants are provided a notice that satisfies the requirements of section 414(w)(4).

Section 414(w)(4) provides that the administrator of a plan that includes an

EACA must, within a reasonable period before each plan year, provide each employee to whom the arrangement applies for the plan year written notice of the employee’s rights and obligations under the arrangement that is sufficiently accurate and comprehensive to apprise the employee of the employee’s rights and obligations. Section 414(w)(4)(A) (ii) requires that the notice be written in a manner calculated to be understood by the average employee to whom the arrangement applies. Section 414(w)(4)(B) provides that the notice must explain: (1) the employee’s rights under the arrangement to elect not to have elective contributions made on the employee’s behalf (or to elect to have contributions made at a different percentage), and (2) how contributions made under the arrangement will be invested in the absence of any investment decision by the employee. In addition, the employee must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election described in the notice.

The Treasury Department and the IRS issued a regulation under section 414(w) on February 24, 2009 (TD 9447, 74 FR 8200). Section 1.414(w)‑1(b)(2) includes rules that address the uniform percentage requirement of section 414(w)(3)(B), including rules that incorporate the exceptions to the uniform percentage requirement for a default elective contribution for a QACA set forth in §1.401(k)‑3(j)(2)(iii).

II. New Automatic Enrollment Requirements and Other Changes Regarding EACAs Under the SECURE 2.0 Act

A. Section 101 of the SECURE 2.0 Act

Section 101 of the SECURE 2.0 Act adds section 414A to the Code. Under section 101(c) of the SECURE 2.0 Act, the amendments made by section 101 apply to

plan years beginning after December 31, 2024. Section 414A(a)(1) of the Code generally provides that a CODA will not be treated as a qualified CODA described in section 401(k) unless the CODA satisfies the automatic enrollment requirements of section 414A(b). Similarly, section 414A(a)(2) generally provides that an annuity contract otherwise described in section 403(b) that is purchased under a salary reduction agreement will not be treated as described in section 403(b) unless the salary reduction agreement satisfies the automatic enrollment requirements of section 414A(b).

Under section 414A(b)(1), a CODA or salary reduction agreement satisfies the automatic enrollment requirements of section 414A(b) if the CODA or salary reduction agreement is an EACA (as defined in section 414(w)(3)) that satisfies the additional requirements of section 414A(b)(2) through (4). Section 414A(b)(2) requires the EACA to allow employees to make permissible withdrawals (as defined in section 414(w) (2)). Under section 414A(b)(3)(A)(i), the minimum initial default contribution percentage under the EACA must be at least 3 percent (but not more than 10 percent), and under section 414A(b)(3)(A)(ii), the default contribution percentage must increase by one percentage point for each plan year beginning after each completed year of participation under the EACA, up to a maximum default contribution percentage of at least 10 percent (but not more than 15 percent). ⁶ Section 414A(b) (4) provides that amounts contributed pursuant to the EACA for which no investment is elected by a participant must be invested in accordance with the requirements of 29 CFR 2550.404c‑5 ⁷ (or any successor regulations).

Section 414A(c) sets forth certain exceptions to the requirements of section 414A(a). In general, section 414A(a) does not apply to any: (1) SIMPLE

4 Section 414(w)(5) defines an applicable employer plan for purposes of section 414(w) as a trust described in section 401(a) that is exempt from tax under section 501(a), a plan described in section 403(b), a section 457(b) plan that is maintained by a governmental employer described in section 457(e)(1)(A), a simplified employee pension the terms of which provide for a salary reduction arrangement described in section 408(k)(6), or a SIMPLE individual retirement account described in section 408(p).

5 Section 414(w)(1)(A) and (B) provides that the amount of the distribution is includible in the gross income of the employee for the taxable year in which the distribution is made but is not subject to the additional income tax on early distributions under section 72(t).

6 Section 414A(b)(3)(B) provides a reduced maximum default contribution percentage of 10 percent for certain plans with respect to certain plan years.

7 The requirements of 29 CFR 2550.404c‑5 relate to investments in qualified default investment alternatives.

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401(k) plan described in section 401(k) (11); (2) qualified CODA established before December 29, 2022 (the date of enactment of the SECURE 2.0 Act); (3) section 403(b) plan established before December 29, 2022; (4) governmental plan described in section 414(d); (5) church plan described in section 414(e); (6) plan maintained by a new business as described in section 414A(c)(4)(A); or (7) plan maintained by a small business as described in section 414A(c)(4)(B).

Certain of the exceptions in section 414A(c) include special rules for plans maintained by more than one employer. Section 414A(c)(2)(B) provides rules that apply in the case of an employer that, after December 29, 2022, adopts a plan maintained by more than one employer. Under that provision, the exception to section 414A(a) for a qualified CODA or 403(b) plan established before December 29, 2022, will not apply to that adopting employer, and the rules of section 414A(a) will apply with respect to that employer as if the plan were a single plan. In addition, under section 414A(c)(4)(C), the new business and small business exceptions to section 414A(a) are applied separately to each participating employer in a plan maintained by more than one employer, and all participating employers to which section 414A(a) applies (after the application of the new business exception in section 414A(c)(4)(A) and the small business exception in section 414A(c)(4)(B)) are treated as maintaining a separate plan for purposes of section 414A.

On December 20, 2023, the Treasury Department and the IRS released Notice 2024‑2, 2024‑2 IRB 316, which provides initial guidance on certain provisions of the SECURE 2.0 Act. Section II.A of Notice 2024‑2 provides initial guidance in the form of questions and answers regarding certain issues related to section 414A of the Code that primarily addresses the scope of the exceptions under section 414A(c)(2) to the requirements of section 414A.

Q&A A‑1 of Notice 2024‑2 provides that, for purposes of section 414A(c)(2) (A)(i) (the exception to section 414A(a) for a qualified CODA established before December 29, 2022), a qualified CODA is established on the date plan terms providing for the CODA are adopted initially,

even if the plan terms providing for the CODA are effective after the adoption date.

Q&A A‑2 of Notice 2024‑2 provides rules that apply in the case of a merger of a plan maintained by a single employer that includes a qualified CODA established before December 29, 2022 (a pre‑enactment qualified CODA), with another plan that includes a pre‑enactment qualified CODA. Under Q&A A‑2, the treatment of the qualified CODA included in the ongoing plan as a pre‑enactment qualified CODA is unaffected by the merger (without regard to whether the ongoing plan is maintained by a single employer or more than one employer).

Q&A A‑3 of Notice 2024‑2 provides that if a plan that includes a qualified CODA that was not established before December 29, 2022, is merged with a plan that includes a pre‑enactment qualified CODA, then, after the merger, the qualified CODA included in the ongoing plan generally will not be treated as a pre‑enactment qualified CODA. However, if, in connection with a disposition, acquisition, or other transaction described in section 410(b)(6)(C), a plan maintained by a single employer that includes a qualified CODA that was not established before December 29, 2022, is merged with another plan maintained by a single employer that includes a pre‑enactment qualified CODA, and the plan that includes the pre‑enactment qualified CODA is designated as the ongoing plan, then the qualified CODA included in the ongoing plan continues to be treated as a pre‑enactment qualified CODA after the merger, provided that the merger occurs by the end of the section 410(b)(6)(C) transition period.

Q&A A‑3 also provides that if a plan maintained by a single employer includes a qualified CODA that was not established before December 29, 2022, and is merged into a plan maintained by more than one employer that includes a pre‑enactment qualified CODA, then the qualified CODA included in the ongoing plan would not be treated as a pre‑enactment qualified CODA with respect to that employer. However, in that case, the merger would not affect whether the qualified CODA is treated as a pre‑enactment qualified CODA with respect to

other employers that participate in the ongoing plan.

Q&A A‑4 of Notice 2024‑2 provides that if a plan that includes a qualified CODA is spun off from a plan that includes a pre‑enactment qualified CODA, the qualified CODA included in the new spun‑off plan generally is also treated as being a pre‑enactment qualified CODA. However, if the plan from which the new plan was spun off was a plan maintained by more than one employer that was established before December 29, 2022, then the qualified CODA included in the spun‑off plan is treated as a pre‑enactment qualified CODA only if the qualified CODA in the plan maintained by more than one employer was treated as a pre‑enactment qualified CODA with respect to the employer sponsoring the spun‑off plan.

Q&A A‑5 of Notice 2024‑2 provides that, in general, the rules of section 414A that apply to qualified CODAs also apply to section 403(b) plans. However, the exception to section 414A(a) for a section 403(b) plan established before December 29, 2022, applies without regard to the date of adoption of plan terms that provide for salary reduction agreements.

Q&A A‑6 of Notice 2024‑2 explains that, unless an exception set forth in section 414A(c) applies (for example, the exception for a new or small business), section 414A(a) applies to a starter 401(k) deferral‑only arrangement described in section 401(k)(16)(B), or to a safe harbor deferral‑only plan described in section 403(b)(16)(B), for plan years beginning after December 31, 2024.

The Treasury Department and the IRS received 12 written comments in response to Notice 2024‑2 that address the guidance provided in Section II.A of the notice. The Treasury Department and the IRS reviewed all 12 comments, and this preamble addresses those that are relevant and within scope for this notice of proposed rulemaking. All written comments responding to Notice 2024‑2 are available for public inspection and copying at www.regulations.gov, and certain of those comments that address Section II.A of Notice 2024‑2 are discussed in the Explanation of Provisions portion of this preamble.

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B. SECURE 2.0 Act changes regarding EACA notices

1. Notice requirements for unenrolled participants

Section 320(b) of the SECURE 2.0 Act adds section 414(bb) to the Code, effective for plan years beginning after December 31, 2022. Section 414(bb)(1) provides that, with respect to any defined contribution plan, no disclosure, notice, or other plan document is required to be furnished under the Code to any unenrolled participant if the unenrolled participant is furnished: (1) an annual reminder notice (as defined in section 414(bb)(3)) of the participant’s eligibility to participate in the plan and any applicable election deadlines under the plan, and (2) any document requested by the participant that the participant would be entitled to receive notwithstanding section 414(bb).

Section 414(bb)(2) defines an unenrolled participant as an employee who: (1) is eligible to participate in a defined contribution plan, (2) has been furnished the summary plan description pursuant to section 104(b) of ERISA for the plan and any other notices related to eligibility under the plan and required to be furnished under the Code or ERISA in connection with the participant’s initial eligibility to participate in the plan, (3) is not participating in the defined contribution plan, and (4) satisfies any other criteria as the Secretary of the Treasury may determine appropriate, as prescribed in guidance issued in consultation with the Secretary of Labor. The last sentence of section 414(bb)(2) of the Code provides that any eligibility to participate in the plan following any period for which the employee was not eligible to participate is to be treated as initial eligibility.

Section 414(bb)(3) provides that the annual reminder notice required under section 414(bb)(1) is the notice described in section 111(c) of ERISA (as added by section 320(a) of the SECURE 2.0 Act).

2. Combining EACA notices with other notices

Section 127 of the SECURE 2.0 Act provides for the creation of pension‑linked

emergency savings accounts (PLESAs) effective for plan years beginning after December 31, 2023. Among other changes, section 127 of the SECURE 2.0 Act redesignates section 402A(e) of the Code as section 402A(f) and adds a new section 402A(e) regarding PLESAs. ⁸ Section 402A(e)(5)(A) requires the plan administrator of a plan with a PLESA feature to furnish initial and annual notices to participants describing certain information regarding the PLESA that meet the requirements of section 402A(e)(5) (B). Section 402A(e)(5)(C) permits the initial and annual notices required under section 402A(e)(5)(A) to be included with any other notice under ERISA, including under section 404(c)(5)(B) or 514(e)(3) of ERISA, or under section 401(k)(13)(E) or 414(w)(4) of the Code, if the other notice is provided to the participant at the time required for that notice.

The Department of Labor has provided frequently asked questions regarding PLESAs, including with respect to the permitted consolidation of notices under section 801(d)(3)(C) of ERISA (which is a parallel provision to section 402A(e) (5)(C) of the Code). See Q&A‑18 of “FAQs: Pension‑Linked Emergency Savings Accounts,” available at www. dol.gov/agencies/ebsa/about‑ebsa/ our‑activities/resource‑center/faqs/pen- sion‑linked‑emergency‑savings‑accounts .

Section 341 of the SECURE 2.0 Act permits a plan (as defined in section 3 of ERISA) to consolidate two or more of the notices required under sections 404(c) (5)(B) and 514(e)(3) of ERISA and sections 401(k)(12)(D), 401(k)(13)(E), and 414(w)(4) of the Code into a single notice, provided that the combined notice satisfies certain requirements. Section 341 of the SECURE 2.0 Act does not prevent the consolidation of any other notices required under ERISA or the Code to the extent otherwise permitted by the Secretary of Labor or the Secretary of the Treasury (or their delegates), as applicable.

On October 24, 2007, the Department of Labor published in the Federal Regis- ter (72 FR 60452) a final regulation, 29 CFR 2550.404c-5, providing relief from certain fiduciary responsibilities under

ERISA for investments made on behalf of participants or beneficiaries who fail to direct the investment of assets in their individual accounts. The preamble to that final regulation indicates that the Department of Labor anticipates that the notice requirements of sections 404(c)(5)(B) and 514(e)(3) of ERISA and sections 401(k) (13)(E) and 414(w)(4) of the Code could be satisfied in a single disclosure document. See 72 FR 60455 (regarding the notice requirements under section 404(c) (5)(B) of ERISA and sections 401(k)(13) (E) and 414(w)(4) of the Code) and 72 FR 60466 (regarding the notice requirements under sections 404(c)(5)(B) and 514(e)(3) of ERISA).

To aid plan sponsors for the 2008 plan year (the first plan year that a plan could have included a QACA or EACA), the IRS coordinated with the Department of Labor to post a sample “Automatic Enrollment Notice,” available at www.irs.gov/pub/ irs-tege/sample_notice.pdf . This sample notice is intended to satisfy the notice requirements of sections 404(c)(5)(B) and 514(e)(3) of ERISA and sections 401(k) (13)(E) and 414(w)(4) of the Code.

On April 29, 2008, the Department of Labor issued Field Assistance Bulletin 2008‑03. Q&A‑10 of Field Assistance Bulletin 2008‑03 explains that the notice required under section 401(k)(12)(D) also may be combined with the notice required under section 404(c)(5)(B) of ERISA.

Q&A‑18 of “FAQs: Pension‑Linked Emergency Savings Accounts” explains that, with respect to section 341 of the SECURE 2.0 Act, the Department of Labor retains its position regarding the consolidation of notices required under sections 404(c)(5)(B) and 514(e)(3) of ERISA and sections 401(k)(12)(D), 401(k)(13)(E), and 414(w)(4) of the Code. Q&A‑18 also explains that, under section 801(d)(3)(C) of ERISA, the initial and annual notices that must be furnished to PLESA participants may be included with any other notice under ERISA, including under section 404(c)(5)(B) or 514(e)(3) of ERISA, or under section 401(k)(13) (E) or 414(w)(4) of the Code, if such other notice is provided to the participant at the time required for such notice.

8 On January 12, 2024, the Treasury Department and the IRS released Notice 2024‑22, 2024‑6 IRB 662, which provides initial guidance regarding anti‑abuse rules under section 402A(e) (12) of the Code, as added by section 127 of the SECURE 2.0 Act, and also addresses whether Rev. Rul. 74‑55, 1974‑1 CB 89, and Rev. Rul. 74‑56, 1974‑1 CB 90, are applicable to PLESAs.

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Explanation of Provisions

I. Proposed §1.414A‑1

A. General rule

In accordance with section 414A(a)(1), the proposed regulation generally would provide that a CODA will not be treated as a qualified CODA unless the plan that includes the CODA provides that any cash or deferred election under the CODA must satisfy the automatic enrollment requirements of section 414A. The proposed regulation would clarify that the determination of whether a CODA fails to satisfy these automatic enrollment requirements (and, therefore, fails to be a qualified CODA) is made on a plan‑year basis.

Similarly, in accordance with section 414A(a)(2), the proposed regulation generally would provide that an annuity contract described in section 403(b) that is purchased pursuant to a salary reduction agreement will not be treated as purchased under a section 403(b) plan for a plan year unless the plan provides that any salary reduction agreement under the plan must satisfy the automatic enrollment requirements of section 414A.

B. Automatic enrollment requirements

In general

As described in section II.A of the Background portion of this preamble, section 414A(a) generally requires a qualified CODA, or an annuity contract described in section 403(b) that is purchased under a salary reduction agreement, to satisfy the automatic enrollment requirements of section 414A(b), which require the CODA or salary reduction agreement to be an EACA, as described in section 414(w)(3), that meets the requirements of section 414A(b)(2) through (4). Section 414A(c) sets forth exceptions to the requirements of section 414A(a) for certain plans.

The Treasury Department and the IRS received comments in response to Notice 2024‑2 requesting that the guidance provide that certain categories of employees need not be covered by an EACA for section 414A(b) to be satisfied. However, although section 414A(c) provides several exceptions to the requirements of sec

tion 414A(a) for certain types of plans, there is no provision in section 414A (or in section 101(c) of the SECURE 2.0 Act) that excludes any category of employee from the automatic enrollment requirements of section 414A(b) of the Code if the plan is subject to section 414A(a). Accordingly, the proposed regulation would clarify that a CODA or salary reduction agreement under a plan satisfies the automatic enrollment requirements of section 414A only if the plan provides for an EACA that covers all employees in the plan who are eligible to elect to have contributions made on their behalf under the CODA or pursuant to the salary reduction agreement (including long‑term, part‑time employees described in section 401(k)(15) of the Code or section 202(c) of ERISA).

Commenters also requested guidance on whether an employee must be automatically enrolled if the employee was eligible to participate in a CODA or salary reduction agreement included in a plan before the CODA or salary reduction agreement became subject to the automatic enrollment requirements of section 414A(b). In response to these comments, the proposed regulation would provide an exception to automatic enrollment for certain employees who are eligible to make a cash or deferred election under a CODA or to enter into a salary reduction agreement that is comparable to the exception for certain current employees under a QACA, as set forth in §1.401(k)‑3(j)(1)(iii). Specifically, the proposed regulation would clarify that an EACA will not fail to satisfy section 414A merely because the default election under the EACA does not apply to an employee who, on the date the plan is first required to satisfy the automatic enrollment requirements of the proposed regulation, had an affirmative election in effect (that remains in effect) to have contributions made on the employee’s behalf under a cash or deferred election or a salary reduction agreement (in a specified amount or percentage of compensation) or not have contributions made on the employee’s behalf under a cash or deferred election or a salary reduction agreement.

Permissive withdrawals

In accordance with section 414A(b)(2), the proposed regulation would provide that

an EACA satisfies the automatic enrollment requirements of section 414A only if the plan that includes the EACA provides that any employee who has default elective contributions made under the EACA may elect to make a permissible withdrawal, as defined in section 414(w)(2) and described in §1.414(w)‑1(c) (that is, a withdrawal of default elective contributions and earnings that satisfies certain timing and amount requirements).

Contribution requirements

To reflect the minimum contribution percentage requirements of section 414A(b)(3), the proposed regulation would provide that an EACA satisfies the automatic enrollment requirements of section 414A only if the default election made on behalf of an employee under the EACA is equal to a uniform percentage of the employee’s compensation that is subject to a cash or deferred election or salary reduction arrangement under the plan. The default election would not apply if the employee affirmatively elects to have contributions made in a different amount on the employee’s behalf (in a specified amount or percentage of compensation) or not have any contributions made on the employee’s behalf, under a cash or deferred election or a salary reduction agreement.

In accordance with section 414A(b) (3)(A)(i), the proposed regulation would provide that the contribution percentage under the default election for each employee’s initial period must be a uniform percentage that is not less than 3 percent and not more than 10 percent. The proposed regulation would clarify that an employee’s initial period (that is, the employee’s “first year of participation” under section 414A(b)(3)(A)(i)) would begin when the employee is first eligible to elect to have contributions made on the employee’s behalf under the plan (or if later, when the plan is first required to satisfy the automatic enrollment requirements of section 414A), and the employee’s initial period would end on the last day of the following plan year.

As described in section II.A of the Background portion of this preamble, section 414A(b)(3)(A)(ii) generally requires automatic increases of one percentage

February 18, 2025 824 Bulletin No. 2025–8

point to an employee’s minimum default contribution percentage for each plan year beginning after each completed year of participation under the EACA, up to a maximum default contribution percentage of at least 10 percent (but not more than 15 percent). The proposed regulation would provide that, for each plan year beginning after an employee’s initial period, the percentage contribution under the default election must be increased by one percentage point until the percentage is at least 10 percent. The proposed regulation also would provide that the percentage may not exceed 15 percent (or the lower percentage specified in section 414A(b)(3)(B), if applicable).

For purposes of satisfying the uniform percentage requirement of section 414A(b)(3)(A), the proposed regulation would adopt the exceptions from the uniform percentage requirement of section 414(w)(3)(B), which are based on the similar exceptions from the uniform percentage requirement for a QACA under §1.401(k)‑3(j)(2)(iii). Specifically, the proposed regulation would clarify that an EACA does not fail to satisfy the uniform percentage requirement merely because: (1) the percentage used for the default election varies based on the number of years (or portions of years) since the beginning of the initial period for an employee, (2) the rate of contributions under a cash or deferred election or salary reduction agreement that is in effect for an employee immediately prior to the date that the default election under the proposed regulation first applies to the employee is not reduced, (3) the rate of contributions under a cash or deferred election or salary reduction agreement is limited so as not to exceed certain applicable limits under the Code, or (4) the default election is not applied during the period an employee is not permitted to have contributions made on the employee’s behalf under a cash or deferred election or salary reduction agreement under section 414(u)(12)(B)(ii), which provides for a six‑month suspension of elective deferrals (and employee contributions) if an individual elects to receive a distribution by reason of the individual being treated as having been severed from employment while performing military service.

The proposed regulation would provide rules, based on the rules for a QACA under §1.401(k)‑3(j)(2)(iv), that would address the default percentage that would apply for an employee who did not have default elective contributions made for an entire plan year. The proposed regulation would provide different rules that could be used depending on whether the employee was not eligible to have contributions made on the employee’s behalf under a CODA or salary reduction agreement or had made an affirmative election to have contributions made in a different amount (including an election not to have contributions made).

Specifically, the proposed regulation would permit a plan to provide that if, after an employee’s initial period began, the employee did not have default elective contributions made for an entire plan year, then the employee’s initial period is redetermined. If no default elective contributions were made solely because the employee was not eligible to elect to have contributions made on the employee’s behalf under a cash or deferred election or salary reduction agreement for that entire plan year, then a plan would be permitted to provide that the employee’s initial period would be redetermined so that it begins on the date the employee is again eligible to elect to have contributions made on the employee’s behalf under the plan. An employer would likely adopt this provision to determine the default contribution rate that applies to an employee who was rehired more than one plan year after the employee terminated employment.

However, if no default elective contributions were made solely because the employee made an affirmative election to have contributions made on the employee’s behalf under a cash or deferred election or salary reduction agreement in a different amount (including an election not to have contributions made), then a plan would be permitted to provide that the employee’s initial period would be redetermined so that it begins on any date specified under the plan that is later than the date the employee’s original initial period ended. For example, a plan is permitted to be amended to provide that, as of a specific date, the default election will apply to all employees who previously

made an affirmative election that has been in effect for a period of at least one plan year to have contributions made on behalf of the employees under the plan at a rate that is below the uniform percentage that applies during an initial period (so that the uniform percentage that applies during the initial period will apply unless the employee makes a new affirmative election). An employer might adopt such an amendment to facilitate an increase in the rate of contributions made on behalf of its employees.

Investment requirements

In accordance with the investment requirements of section 414A(b)(4), the proposed regulation would provide that an EACA satisfies the automatic enrollment requirements of section 414A only if amounts contributed pursuant to the EACA, and for which no investment is elected by the employee, are invested in accordance with the requirements of 29 CFR 2550.404c‑5 (or any successor regulations).

C. Exceptions for certain types of plans and businesses

1. SIMPLE 401(k) plans

In accordance with section 414A(c)(1), the proposed regulation would provide that the automatic enrollment requirements of section 414A do not apply to any SIMPLE 401(k) plan (as described in section 401(k)(11) and §1.401(k)‑4).

2. Governmental and church plans

In accordance with section 414A(c)(3), the proposed regulation would provide that the automatic enrollment requirements of section 414A do not apply to any governmental plan (within the meaning of section 414(d)) or any church plan (within the meaning of section 414(e)).

3. New and small businesses

Section 414A(c)(4)(A) provides that the automatic enrollment requirements of section 414A(a) do not apply to any qualified CODA, or any annuity contract purchased under a plan, while the employer

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maintaining the plan (and any predecessor employer) has been in existence for less than 3 years. However, section 414A does not specify the date as of which a plan must satisfy the automatic enrollment requirements of section 414A(b) if the exception for new businesses under section 414A(c)(4)(A) ceases to apply to the plan.

In response to Notice 2024‑2, the Treasury Department and the IRS received a comment requesting clarification that a plan will not fail to satisfy the automatic enrollment requirements of section 414A(b) if the plan includes an EACA no later than the first plan year that begins on or after the third anniversary of the employer’s existence. The Treasury Department and the IRS agree that a plan should not be required to implement an EACA in the middle of a plan year. Therefore, the proposed regulation would clarify that the automatic enrollment requirements of section 414A do not apply to a plan for a plan year if, as of the beginning of the plan year, the employer maintaining the plan (aggregated with any predecessor employer) has been in existence for less than 3 years.

Section 414A(c)(4)(B) provides that the automatic enrollment requirements of section 414A(a) do not apply to any qualified CODA, or any annuity contract purchased under a plan, earlier than the date that is 1 year after the close of the first taxable year of the employer maintaining the plan with respect to which that employer normally employed more than 10 employees. However, section 414A(c)(4)(B) does not specify any method for counting the number of employees for this purpose.

In response to Notice 2024‑2, the Treasury Department and the IRS received comments requesting clarification regarding the method for counting employees for purposes of the small business exception under section 414A(c)(4)(B). One commenter raised the issue of how to count employees for this purpose but did not suggest a specific method. Another commenter recommended that the Treasury Department and the IRS adopt a monthly averaging approach, which the commenter explained would be similar

to the approach used for purposes of section 4980H. However, section 4980H does not use the phrase “normally employed”; instead, that phrase is used in section 4980B(d)(1). Therefore, the proposed regulation would clarify that the number of employees that the employer normally employs for a taxable year is determined using the rules of Q&A‑5 of §54.4980B‑2.

Similar to the clarification provided in the proposed regulation for new businesses, the proposed regulation would clarify that the automatic enrollment requirements of section 414A do not apply to any qualified CODA, or any annuity contract purchased under a section 403(b) plan, before the first plan year that begins at least 12 months after the close of the first taxable year of the employer maintaining the plan with respect to which that employer normally employed more than 10 employees. As described in section II.A of the Background portion of this preamble, section 414A(c)(4)(C) provides special rules for the new and small business exceptions in the case of “a plan maintained by more than 1 employer.” The proposed regulation would clarify that the phrase “a plan maintained by more than 1 employer” means a multiple employer plan. ⁹ Accordingly, the proposed regulation would reflect the provisions of section 414A(c) (4)(C) by providing that, in the case of a multiple employer plan, the exceptions for new and small businesses apply on an employer‑by‑employer basis. Thus, if an employer participating in a multiple employer plan is a new or small business, it would be exempt from the automatic enrollment requirements of section 414A, but that exemption would have no impact on whether section 414A applies to the employees of the other participating employers.

D. Exceptions for plans established before the enactment of section 414A

In general

As described in section II.A of the Background portion of this preamble, section 414A(c)(2)(A) provides an exception

from the requirements of section 414A(a) in the case of a qualified CODA, or section 403(b) plan, that is established before December 29, 2022, and Q&A A‑1 and Q&A A‑5 of Notice 2024‑2 provide guidance with respect to the date that a qualified CODA or section 403(b) plan is established for purposes of section 414A(c)(2) (A). Notice 2024-2 refers to a qualified CODA or section 403(b) plan that is eligible for the exception under section 414A(c)(2)(A) as a pre‑enactment qualified CODA or pre‑enactment section 403(b) plan, and this Explanation of Provisions uses the term pre‑enactment plan to encompass both pre-enactment qualified CODAs and pre‑enactment section 403(b) plans. The proposed regulation would reflect the provisions of section 414A(c)(2)(A)(i) and incorporate the guidance provided in Q&A A‑1 of Notice 2024‑2 by generally providing that the automatic enrollment requirements of section 414A do not apply to any plan that includes a qualified CODA if the plan terms providing for the qualified CODA were adopted initially before December 29, 2022, even if the plan terms providing for the CODA are effective after that date. The proposed regulation also would reflect the provisions of section 414A(c)(2)(A)(ii) and incorporate the guidance provided in Q&A A‑5 of Notice 2024‑2 by providing that the automatic enrollment requirements of section 414A do not apply to any section 403(b) plan adopted initially before December 29, 2022, without regard to the date of adoption of plan terms providing for salary reduction agreements.

Merger of plans established before the enactment of section 414A

With respect to the merger of two pre‑enactment plans (neither of which is a multiple employer plan) or the merger of a pre‑enactment plan that is not a multiple employer plan with a pre‑enactment multiple employer plan, the proposed regulation would incorporate the guidance provided in Q&A A‑2 of Notice 2024‑2 (which, under Q&A A‑5 of Notice 2024‑2, also applies to section 403(b) plans). Thus,

9 This interpretation is consistent with the heading of section 414A(c)(4)(C) (“Treatment of multiple employer plans”) and the interpretation in §1.413-2(a)(2) and (3) of the substantially identical language in section 413(c) (“a plan maintained by more than one employer”).

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the plan after the merger will be treated as a pre‑enactment plan.

The proposed regulation generally would extend the guidance provided in Q&A A‑2 of Notice 2024‑2 to the merger of two pre‑enactment multiple employer plans. However, the proposed regulation would clarify that a merger involving a multiple employer plan will not affect whether the merged plan is treated as a pre‑enactment plan with respect to any employer that maintained the multiple employer plan prior to the merger.

Merger of plan established on or after the enactment of section 414A with a plan established before the enactment of section 414A

With respect to the merger of a plan that is not a pre‑enactment plan and a pre‑enactment plan (neither of which is a multiple employer plan), the proposed regulation generally would incorporate the guidance provided in Q&A A‑3 of Notice 2024‑2 (which, under Q&A A‑5 of Notice 2024‑2, also applies to section 403(b) plans). With respect to the guidance provided in Q&A A‑3 of Notice 2024‑2 regarding a plan merger in connection with a transaction described in section 410(b)(6)(C), the proposed regulation generally would incorporate that guidance by providing that a pre‑enactment plan will continue to be treated as a pre‑enactment plan after a merger with a plan that is not a pre‑enactment plan if there is a transaction described in §1.410(b)‑2(f), the pre‑merger pre‑enactment plan is designated as the ongoing plan, and the plan merger occurs within the transition period described in section 410(b)(6)(C)(ii). In addition, the proposed regulation would expand the rule in Q&A A‑3 of Notice 2024‑2 to address certain situations in which a plan maintained by a single employer that is not a pre‑enactment plan is merged into a multiple employer plan. Under this expansion, the multiple employer plan would be treated as a pre‑enactment plan with respect to the employer that sponsored the merged-in plan if, with respect to the participating employer that engaged in the transaction, the multiple employer plan was treated as a pre‑enactment plan before the transaction. As is the case of any merger involving a

multiple employer plan, the merger would not affect whether the multiple employer plan is treated as a pre‑enactment plan with respect to any other employer.

Under section 410(b)(6)(C)(ii), the transition period begins on the date of the change in members of a controlled group (as described in section 414(b), (c), (m), or (o)) and ends on the last day of the first plan year beginning after the date of that change. In response to Notice 2024‑2, one commenter requested that the guidance provided in Q&A A‑3 be modified to extend the time period for a plan merger until the end of the first plan year that begins after the end of the section 410(b) (6)(C) transition period. The proposed regulation would not extend the time period set forth in Q&A A‑3 of Notice 2024‑2 because that is the time period specified in the Code for an employer to implement changes to its plans that may be needed following a transaction described in section 410(b)(6)(C).

With respect to a merger of a multiple employer plan that is a pre‑enactment plan with a multiple employer plan that is not a pre‑enactment plan, the proposed regulation would clarify the guidance provided in Q&A A‑3 of Notice 2024‑2 by providing that the merger will not affect whether the merged plan is treated as a pre‑enactment plan with respect to any employer that maintained either multiple employer plan prior to the merger.

Treatment of adoption of, or merger with, a multiple employer plan

As described in section II.A of the Background portion of this preamble, section 414A(c)(2)(B) provides special rules that apply in the case of an employer that adopts, after December 29, 2022, a plan maintained by more than one employer. Consistent with the interpretation of the statutory phrase “a plan maintained by more than 1 employer” in section 414A(c) (4)(C), as described in section I.C.3 of this Explanation of Provisions, the proposed regulation would clarify that the phrase “a plan maintained by more than one employer” in section 414A(c)(2)(B) means a multiple employer plan. Thus, the proposed regulation would provide that if an employer adopts a multiple employer plan after December 29, 2022,

then, with respect to that employer, the multiple employer plan will not be treated as a pre‑enactment plan. However, this treatment would not affect employers who adopted the multiple employer plan on or before December 29, 2022.

With respect to the merger of a plan (other than a multiple employer plan) with a multiple employer plan after December 29, 2022, the proposed regulation generally would incorporate the guidance provided in Q&A A‑2 and Q&A A‑3 of Notice 2024‑2 (which, under Q&A A‑5 of Notice 2024‑2, also applies to section 403(b) plans). Thus, for example, if an employer merged a plan that was not a pre‑enactment plan into a pre‑enactment multiple employer plan after December 29, 2022, the multiple employer plan generally would not be treated as a pre‑enactment plan with respect to that employer after the merger.

In response to Notice 2024‑2, the Treasury Department and the IRS received a number of comments expressing concern that, in the case of an employer maintaining a pre‑enactment plan that is merged into a multiple employer plan that was established after December 29, 2022, the multiple employer plan would not be treated as a pre‑enactment plan with respect to that employer after the merger. The comments requested guidance providing that if a pre‑enactment plan is merged into a multiple employer plan, then the merged‑in plan does not lose its pre‑enactment status with respect to the employer that maintained the merged-in plan regardless of whether the multiple employer plan was established before or after December 29, 2022. In response to these comments, the proposed regulation would provide that, if an employer maintains a pre‑enactment plan that is merged into a multiple employer plan after December 29, 2022, then the post‑merger multiple employer plan will be treated as a pre‑enactment plan with respect to that employer. This rule would apply regardless of the date of establishment of the multiple employer plan.

The proposed regulation also would clarify that the special rule set forth in section 414A(c)(2)(B) regarding the adoption of a multiple employer plan after December 29, 2022, applies on an employer‑by‑employer basis. Thus, under the

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proposed regulation, neither an employer’s adoption of a multiple employer plan nor a merger of an employer’s plan into a multiple employer plan after December 29, 2022, would affect whether the multiple employer plan is treated as a pre‑enactment plan with respect to any other employer maintaining the plan.

Plan spin‑off

The proposed regulation would incorporate the guidance provided in Q&A A‑4 of Notice 2024‑2 by providing that if a portion of a pre‑enactment plan is spun off from that plan, the resulting spun‑off plan will be treated as a pre‑enactment plan if either the plan from which the spin‑off occurred was not a multiple employer plan, or the plan from which the spin‑off occurred was a multiple employer plan that was treated as a pre‑enactment plan with respect to the employer maintaining the spun‑off plan.

Other plan amendments

In response to Notice 2024‑2, the Treasury Department and the IRS received comments requesting guidance on whether changes to a plan’s design or other plan amendments would affect the date the plan was established for purposes of section 414A(c)(2)(A). In response to these comments, the proposed regulation would clarify that a plan will not fail to be a pre‑enactment plan merely because the plan is amended, provided that the amendment is not an amendment relating to an adoption of a multiple employer plan or a plan merger. This rule would apply even if the plan amendment expands eligibility to participate in the CODA (or to enter into a salary reduction agreement) to other employees of the employer that maintains the plan or to employees of another employer in the employer’s controlled group. The proposed regulation also would clarify that if a pre‑enactment plan is merged with a plan that does not include a CODA or permit any salary reduction agreements, then the merged plan will continue to be a pre‑enactment plan after the merger.

In response to Notice 2024‑2, the Treasury Department and the IRS also received comments requesting guidance on whether a change in a plan’s service

provider would affect the date the plan was established for purposes of section 414A(c)(2)(A). Generally, a mere change in a plan’s recordkeeper would not necessitate an amendment to the plan. However, if a plan’s change of recordkeeper or any similar change required a plan amendment that does not relate to the adoption of a multiple employer plan or a plan merger, then, under the proposed regulation, the amendment would not cause the plan to fail to be a pre‑enactment plan.

E. Applicability date

1. Statutory applicability date

In accordance with section 101(c) of the SECURE 2.0 Act, the proposed regulation would provide that section 414A applies to plan years beginning after December 31, 2024.

2. Regulatory applicability date

The proposed regulation would apply to plan years that begin more than 6 months after the date that final regulations under section 414A are issued. For earlier plan years, a plan would be treated as having complied with section 414A if the plan complies with a reasonable, good faith interpretation of section 414A.

As explained in section I.B.1 of this Explanation of Provisions, the proposed regulation would require an EACA to cover all employees in the plan who are eligible to elect to have contributions made on their behalf for the automatic enrollment requirements of the proposed regulation to be satisfied. If a CODA or section 403(b) plan that provides for salary reduction agreements becomes subject to the requirements of section 414A(a) as of the first day of the plan year beginning after December 31, 2024 (2025 plan year), but employees who became eligible to participate in the CODA or to enter into a salary reduction agreement before the first day of the 2025 plan year (and who do not have affirmative elections in effect on that date) are not covered under the EACA, then those employees would have to be covered under the EACA on the first day of the first plan year that the final regulations apply to the CODA or to the section 403(b) plan that provides for sal

ary reduction agreements (first applicable plan year).

As a result, under the proposed regulation, unless employees who became eligible to participate in the CODA or to enter into a salary reduction agreement before the first day of the 2025 plan year have affirmative elections in effect on the first day of the first applicable plan year, those employees would need to be automatically enrolled as of that date in order for the requirements of the regulation to be satisfied. In that case, the default contribution percentage would be the percentage that would apply under the EACA for the first applicable plan year had those employees been automatically enrolled starting on the first day of the 2025 plan year. As an alternative, the plan terms could reflect the provision in the proposed regulation permitting the redetermination of the initial period in the case of an employee who did not have default elective contributions made for an entire plan year (so that the plan would be permitted to provide that the initial contribution percentage that applies to those employees is the percentage that would apply under the EACA had the initial period for those employees started on the first day of the first applicable plan year).

F. Other matters

Multiemployer plans

As described in section I.D.4 of this Explanation of provisions, the proposed regulation would clarify that, for purposes of section 414A(c)(2)(B), the phrase “a plan maintained by more than one employer” means “a multiple employer plan.” Thus, the phrase “a plan maintained by more than one employer” would not be interpreted to include a multiemployer plan or a plan maintained by members of a controlled group. As a result, under the proposed regulation, a pre‑enactment multiemployer plan would continue to be treated as a pre‑enactment plan with respect to an employer that adopts the plan after December 29, 2022, or with respect to an employer that maintains a plan that is merged into the multiemployer plan after December 29, 2022 (regardless of the date the merged‑in plan was established). Similarly, a pre‑enactment plan would continue to be treated as a pre‑enactment plan

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with respect to additional members of an employer’s controlled group if eligibility to participate in the plan is expanded to include employees of those employers after December 29, 2022.

PLESAs

The Department of Labor published a request for information soliciting public feedback on several sections of the SECURE 2.0 Act in the Federal Register (88 FR 54511). In response to comments received, this preamble addresses the interaction of the rules for a PLESA and the automatic enrollment requirements of section 414A.

If a plan with a qualified CODA includes a PLESA, then the PLESA is part of the CODA. Thus, an affirmative election to contribute to a PLESA is an affirmative election to contribute to the CODA. If the plan is subject to the automatic enrollment requirements of section 414A, then an affirmative election to contribute to a PLESA would be an affirmative election under the CODA for purposes of the proposed regulation.

If an employee is automatically enrolled to contribute to a PLESA, the investment requirements of section 414A(b)(4) and proposed §1.414A‑1(c)(4) (which reference the Department of Labor’s rules for qualified default investment alternatives under 29 CFR 2550.404c‑5) generally would not be satisfied with respect to the automatic contributions to the PLESA. ¹⁰ Thus, automatic contributions to the PLESA would not be able to be used to satisfy the automatic enrollment requirements under section 414A.

II. Section 1.414(w)‑1

A. Employees covered by the EACA

As explained in section I.B.1 of this Explanation of Provisions, proposed §1.414A‑1 would clarify that, in order for a CODA or salary reduction agreement

under section 403(b) to satisfy the automatic enrollment requirements of section 414A, all employees in the plan who are eligible to elect to have contributions made on their behalf under the CODA or pursuant to a salary reduction agreement must be covered by the EACA. Section 1.414(w)‑1(b)(1) currently provides that an EACA need not cover all employees who are eligible to elect to have contributions made on their behalf under the applicable employer plan. For consistency with proposed §1.414A‑1, this notice of proposed rulemaking would amend §1.414(w)‑1(b)(1) to clarify that the section 414A requirement to be covered by an EACA overrides the existing rule in the EACA regulations.

B. Special rules relating to notices

Unenrolled participants

As described in section II.B of the Background portion of this preamble, section 320 of the SECURE 2.0 Act adds new section 414(bb) to the Code. This notice of proposed rulemaking would reflect section 414(bb) by amending §1.414(w)‑1 to add a new paragraph under which, if the requirements of section 414(bb)(1) are satisfied with respect to an unenrolled participant (as defined in section 414(bb)(2)), ¹¹ then the requirement to give the section 414(w) (4) notice of an employee’s rights and obligations does not apply to the participant. Thus, an unenrolled participant does not need to be given the annual EACA notice, provided that the participant is furnished (1) annual reminder notices under section 414(bb)(1)(A), and (2) any document requested by the participant (if the participant would be entitled to receive the document in the absence of section 414(bb) and section 111 of ERISA).

Consolidation of notices

As described in section II.B of the Background portion of this preamble,

section 402A(e)(5)(C) of the Code (as added by section 127 of the SECURE 2.0 Act) permits the initial and annual notices required under section 402A(e)(5)(A) of the Code to be included with any other notice under ERISA, including under section 404(c)(5)(B) or 514(e)(3) of ERISA, or under section 401(k)(13)(E) or 414(w)(4) of the Code, if the other notice is provided to the participant at the time required for that notice. In addition, section 341 of the SECURE 2.0 Act permits a plan to consolidate two or more of the notices required under sections 404(c)(5)(B) and 514(e)(3) of ERISA and sections 401(k)(12)(D), 401(k)(13)(E), and 414(w)(4) of the Code into a single notice, provided that the combined notice satisfies certain requirements.

The proposed amendment to §1.414(w)‑1 would address section 402A(e)(5)(C) of the Code and section 341 of the SECURE 2.0 Act by adding a new paragraph that provides that the EACA notice required under §1.414(w)‑1(b)(3) generally may be combined with one or more of the notices required under section 404(c)(5)(B), 514(e)(3), or 801(d)(3)(A) of ERISA and section 401(k)(12)(D) or 401(k)(13)(E) of the Code. Consistent with section 341 of the SECURE 2.0 Act, the proposed regulation would require that the combined notice include the required content, clearly identify the issues addressed therein, be furnished at the time and with the frequency required for each notice, be presented in a manner that is reasonably calculated to be understood by the average plan participant, and not obscure or fail to highlight the primary information required for each notice.

Proposed Applicability Date

Section 1.414A‑1 and the amendments to §1.414(w)‑1 are proposed to apply to plan years that begin more than 6 months after the date that final regulations under section 414A are issued. For a plan year

10 The Department of Labor published frequently asked questions online providing general compliance information under ERISA regarding PLESAs providing that, generally, the investment option designated for PLESAs cannot be the same as a plan’s qualified default investment alternative under 29 CFR 2550.404c‑5(e)(4)(i). However, Q&A‑15 does indicate that a PLESA’s investment option could meet the requirements for a qualified default investment alternative for a short period of time.

11 Section 414(bb)(2) defines an unenrolled participant as an employee who: (1) is eligible to participate in a defined contribution plan, (2) has been furnished the summary plan description pursuant to section 104(b) of ERISA for the plan and any other notices related to eligibility under the plan and required to be furnished under the Code or ERISA in connection with the par- ticipant’s initial eligibility to participate in the plan, (3) is not participating in the defined contribution plan, and (4) satisfies any other criteria as the Secretary of the Treasury may determine appropriate, as prescribed in guidance issued in consultation with the Secretary of Labor.

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beginning after December 31, 2024, but before the applicability date of those final regulations, a plan is treated as having complied with section 414A if the plan complies with a reasonable, good faith interpretation of section 414A.

Special Analyses

I. Regulatory Planning and Review

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501 - 3520) (PRA) requires that a Federal agency obtain the approval of the Office of Management and Budget (OMB) before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. A Federal agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

The collections of information in these proposed regulations contain third‑party disclosure requirements that are necessary to comply with the statutory requirement under section 414A of the Code (which requires certain CODAs or salary reduction agreements to be EACAs) and that are necessary if a plan applies section 414(bb) (which eliminates certain disclosure and notice requirements for unenrolled participants if an annual notice is provided to the unenrolled participants). These collections of information generally would be provided by businesses or other for-profit institutions, nonprofit institutions, organizations, and state or local governments that sponsor retirement plans that include EACAs to individuals in order to meet the statutory notice requirements for EACAs under section 414(w)(4).

The collection of information under proposed §1.414(w)-1(b)(4) related to

unenrolled participants is required in order for a plan to apply section 414(bb). Section 414(bb) provides that no disclosure, notice, or other plan document is required to be furnished under the Code to an unenrolled participant if the unenrolled participant is furnished an annual reminder notice of the unenrolled participant’s eligibility to participate in the plan and any applicable election deadlines under the plan. In accordance with section 414(bb), the proposed regulation would allow unenrolled participants to be furnished an annual reminder notice instead of the annual notice required for EACAs under section 414(w)(4) and §1.414(w)‑1(b)(3). The burden is as follows:

Estimated number of respondents: 90,000 – 140,000 plans. Estimated frequency of responses: Varies*.

The notice would only need to be fur- nished to unenrolled participants once per year, however, plans have multiple unenrolled participants within a given year. For calculation purposes, IRS is estimating that each employer plan has 35 unenrolled participants that could receive the annual notice.

Estimated average annual burden per respondent: 1 hour*, to draft the notice and provide it to unenrolled participants.

*The IRS estimates that the reporting burden per response would not be bur- densome because the notice does not need to be customized per participant.

Estimated total annual reporting burden: 90,000 – 140,000 hours.

The collections of information in these proposed regulations also contain third‑party disclosure requirements that are necessary to comply with the statutory rule under section 414A, which requires certain CODAs and salary reduction agreements to be EACAs (as defined in section 414(w)(3)). Under §1.414(w)‑1(b)(3), initial and annual written notices must be given to each employee to whom the EACA applies of the employee’s rights and obligations under the EACA. Proposed §1.414A‑1 would not change the notice requirements for an EACA under §1.414(w)‑1 but would subject certain

CODAs and salary reduction agreements to the notice requirements for an EACA by requiring those CODAs and salary reduction agreements to be EACAs (as required by section 414A). This requirement to be an EACA would not affect pre‑enactment plans. IRS anticipates about 16,000 new plans could be established within a given year that would not otherwise be EACAs except for the requirements of section 414A.

Estimated number of respondents: 16,000. Estimated frequency of responses: Varies*.

Notice would need to be given to eli- gible employees once per year. For calculation purposes, IRS is estimating that each employer plan has 60 eligi- ble employees that would receive the annual notice.

Estimated average annual burden per respondent: 1 hour*, to draft the notice and provide it to eligible employees.

*The IRS estimates that the reporting burden per response would not be bur- densome because the notice does not need to be customized per participant.

Estimated total annual reporting burden: 16,000 hours.

IRS is soliciting feedback on these third‑party disclosure requirements and their associated burden. The third‑party disclosure requirements contained in this notice of proposed rulemaking have been submitted to OMB for review in accordance with the Paperwork Reduction Act under OMB Control Number 1545-2135. Commenters are strongly encouraged to submit public comments electronically. Written comments and recommendations for the proposed information collection should be sent to www.reginfo.gov/public/ do/PRAMain, with copies to the Internal Revenue Service. Find this particular information collection by using the search function at www.reginfo.gov/public/do/ PRAMain . Submit electronic submissions for the proposed information collection to the IRS via email at pra.comments@irs. gov (indicate REG‑100669‑24 on the Subject line). Comments on the collection of information should be received by March

February 18, 2025 830 Bulletin No. 2025–8

17, 2025. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information;

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

III. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities. Although section 414A provides an exception from the automatic enrollment requirements for some small entities, other small entities that sponsor section 401(k) or 403(b) plans that are established on or after December 29, 2022, may need to provide for automatic enrollment in the plans and default cash or deferred or salary reduction elections for employees who are otherwise eligible to participate in the plans. Automatic enrollment and default elections, and the resulting additional contributions to a plan, apply to compensation that employees would have otherwise received and do not require additional amounts to be paid. Section 414A does not require plans to provide for nonelective contributions or matching contributions. Before the enactment of section 101 of the SECURE 2.0 Act, plans were permitted, but not required, to provide for automatic enrollment. Accordingly, any additional recordkeeping or administrative costs resulting from the automatic enrollment requirements that apply to certain section 401(k) and 403(b) plans sponsored by small entities are not expected to be sig

nificant. Therefore, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required.

The Treasury Department and the IRS invite comments on the impacts these proposed regulations may have on small entities. Pursuant to section 7805(f) of the Code, these proposed regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

IV. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. The proposed regulations do not propose any rule that would include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector, in excess of that threshold.

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. The proposed regulations do not propose rules that would have federalism implications, impose substantial direct compliance costs on State and local governments that are not required by statute, or preempt State law within the meaning of the Executive order. This is because section 414A, by its terms, does not apply to governmental plans.

Comments and Public Hearing

Before final regulations are adopted to implement section 414A of the Code, or to

revise the regulations under section 414(w) to reflect changes made by sections 101, 320, and 341 of the SECURE 2.0 Act, consideration will be given to comments regarding the notice of proposed rulemaking that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Comments specifically are requested on whether guidance is needed to define the term “predecessor employer” as used in section 414A(c)(4)(A) of the Code and on the criteria that should apply for an individual to be an unenrolled participant under section 414(bb)(2). All comments will be made available at www.regulations.gov . Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.

A public hearing has been scheduled for April 8, 2025, beginning at 10 a.m. ET in the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. Participants may alternatively attend the public hearing by telephone.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments must submit an outline of the topics to be addressed and the time to be devoted to each topic by March 17, 2025, as prescribed in the preamble under the DATES section. A period of 10 minutes will be allocated to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. If no outline of the topics to be discussed at the hearing is received by March 17, 2025, the public hearing will be cancelled. If the public hearing is cancelled, a notice of cancellation of the public hearing will be published in the Federal Register .

Individuals who want to testify in person at the public hearing must send an email to publichearings@irs.gov to

Bulletin No. 2025–8 831 February 18, 2025

have their names added to the building access list. The subject line of the email must contain the regulation number REG‑100669‑24 and the language TESTIFY In Person. For example, the subject line may say: Request to TESTIFY In Person at Hearing for REG‑100669‑24.

Individuals who want to testify by telephone at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG‑100669‑24 and the language TESTIFY Telephonically. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG‑100669‑24.

Individuals who want to attend the public hearing in person without testifying must also send an email to publichear- ings@irs.gov to have their names added to the building access list. The subject line of the email must contain the regulation number REG‑100669‑24 and the language ATTEND In Person. For example, the subject line may say: Request to ATTEND Hearing In Person for REG‑100669‑24. Requests to attend the public hearing must be received by 5 p.m. ET on April 4, 2025.

Individuals who want to attend the public hearing by telephone without testifying must also send an email to publichear- ings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG‑100669‑24 and the language ATTEND Hearing Telephonically. For example, the subject line may say: Request to ATTEND Hearing Telephonically for REG‑100669‑24. Requests to attend the public hearing must be received by 5 p.m. ET on April 4, 2025.

Hearings will be made accessible to people with disabilities. To request special assistance during the hearing, please contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 317‑6901 (not a toll‑free number) by April 3, 2025.

Statement of Availability of IRS Documents

IRS Revenue Procedures, Revenue Rulings notices, and other guidance cited

in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at www.irs.gov .

Drafting Information

The principal authors of these proposed regulations are Christina M. Cerasale and Kara M. Soderstrom, of the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes (EEE)). However, other personnel from the Treasury Department and the IRS participated in the development of the proposed regulations.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.414(w)‑1 is amended by:

a. Revising the second sentence of paragraph (b)(1); and

b. Adding paragraph (b)(4). The revision and addition read as follows:

§1.414(w)‑1 Permissible withdrawals from eligible automatic contribution arrangements.

(b) Eligible automatic contribution arrangement —(1) In general . * * * Except to the extent required under section 414A (which applies to plan years beginning after December 31, 2024), an

eligible automatic contribution arrangement need not cover all employees who are eligible to elect to have contributions made on their behalf under the applicable employer plan.

(4) Special rules —(i) No require- ment to provide notice to unenrolled participant. If the requirements of section 414(bb)(1) are satisfied with respect to an unenrolled participant described in section 414(bb)(2), then the requirement to give the notice of an employee’s rights and obligations set forth in paragraph (b)(3) of this section does not apply to the participant.

(ii) Consolidation of notices . The notice described in paragraph (b)(3) of this section may be combined with one or more of the notices required under section 404(c)(5)(B), 514(e)(3), or 801(d) (3)(A) of the Employee Retirement Income Security Act of 1974 (Public Law 93‑406, 88 Stat. 829), as amended, and any notice required under section 401(k) (12)(D) or (13)(E), provided that the combined notice—

(A) Includes the required content, (B) Clearly identifies the issues addressed therein,

(D) Is presented in a manner that is reasonably calculated to be understood by the average plan participant, and

(E) Does not obscure or fail to highlight the primary information required for each notice.

Par. 3. Section 1.414A‑1 is added to read as follows:

§1.414A‑1 Automatic enrollment requirements under section 414A.

(a) Overview . This section provides rules regarding the automatic enrollment requirements under section 414A. Paragraph (b) of this section provides that a plan that includes a qualified cash or deferred arrangement under section 401(k) or a salary reduction agreement under section 403(b) is required to satisfy the automatic enrollment requirements of paragraph (c) of this section unless an exception described in paragraph (d) of this section (for certain types

February 18, 2025 832 Bulletin No. 2025–8

of plans and businesses) or paragraph (e) of this section (for a cash or deferred arrangement or section 403(b) plan established before December 29, 2022) applies to the plan. The applicability date of section 414A and the applicability date of this section are set forth in paragraph (f) of this section.

(b) General rule —(1) Qualified cash or deferred arrangements . Except as provided in paragraph (d) or (e) of this section, a cash or deferred arrangement will not be treated as a qualified cash or deferred arrangement described in §1.401(k)‑1(a) (4)(i) for a plan year unless the plan that includes the arrangement provides that any cash or deferred election under the arrangement must satisfy the automatic enrollment requirements of paragraph (c) of this section.

(2) Section 403(b) plans with salary reduction agreements . Except as provided in paragraph (d) or (e) of this section, an annuity contract described in section 403(b) that is purchased pursuant to a salary reduction agreement described in §31.3121(a)(5)‑2(a)(1) (that is, an election to reduce compensation pursuant to a cash or deferred election as defined in §1.401(k)‑1(a)(3)) will not be treated as purchased under a section 403(b) plan for a plan year unless the plan provides that any salary reduction agreement under the plan must satisfy the automatic enrollment requirements of paragraph (c) of this section.

(c) Automatic enrollment require- ments —(1) In general —(i) Arrangement must be an eligible automatic contribution arrangement . A cash or deferred arrangement or salary reduction agreement under a plan satisfies the automatic enrollment requirements of this paragraph (c) only if the plan provides for an eligible automatic contribution arrangement (as defined in section 414(w)(3)) that—

(A) Covers the employees described in paragraph (c)(1)(ii) of this section, and

(B) Satisfies the additional requirements of paragraphs (c)(2) through (4) of this section.

(ii) Employees covered under the eligi- ble automatic contribution arrangement . The employees who must be covered by the eligible automatic contribution arrangement are all employees in the plan who are eligible to elect to have contribu

tions made on their behalf under a cash or deferred arrangement or pursuant to a salary reduction agreement.

(iii) Exception to default election for employees with an affirmative elec- tion. An eligible automatic contribution arrangement will not fail to satisfy the requirements of this paragraph (c) merely because the default election under the arrangement does not apply to an employee who, on the date paragraph (b) of this section first applies to the plan that includes the cash or deferred arrangement or salary reduction agreement, had an affirmative election in effect (that remains in effect) to—

(A) Have contributions made on the employee’s behalf under a cash or deferred election or a salary reduction agreement (in a specified amount or percentage of compensation); or

(B) Not have contributions made on the employee’s behalf under a cash or deferred election or a salary reduction agreement.

(2) Arrangement must permit permis- sive withdrawals . An eligible automatic contribution arrangement satisfies the requirements of this paragraph (c)(2) only if the plan that includes the arrangement provides that any employee who has default elective contributions made under the arrangement may elect to make a permissible withdrawal (as defined in section 414(w)(2) and described in §1.414(w)‑1(c)).

(3) Contribution requirements —(i) Default election . An eligible automatic contribution arrangement under a plan satisfies the requirements of this paragraph (c)(3) only if, under the arrangement, the default election made on behalf of an employee is equal to a uniform percentage, as described in paragraph (c)(3)(ii) of this section, of the employee’s compensation that is subject to a cash or deferred election or salary reduction arrangement under the plan, unless the employee affirmatively elects to—

(A) Have contributions made in a different amount on the employee’s behalf under a cash or deferred election or a salary reduction agreement (in a specified amount or percentage of compensation); or

(B) Not have contributions made on the employee’s behalf under a cash or deferred election or a salary reduction agreement.

(ii) Uniform percentage —(A) Initial period —( 1 ) Initial percentage . The contribution percentage under the default election for each employee’s initial period must be a uniform percentage that is not less than 3 percent and not more than 10 percent.

( 2 ) Beginning of initial period . An employee’s initial period begins when the employee is first eligible to elect to have contributions made on the employee’s behalf under the plan (or if later, when section 414A first applies to the plan).

( 3 ) End of initial period . The employee’s initial period ends on the last day of the plan year that follows the plan year that includes the date the initial period begins.

(B) Subsequent plan years . For each plan year beginning after an employee’s initial period under the arrangement, the percentage contribution under the default election must be increased by 1 percentage point until the percentage is at least 10 percent. However, the percentage may not exceed 15 percent (or the lower percentage specified in section 414A(b)(3)(B), if applicable).

(iii) Exception to uniform percentage requirement . An eligible automatic contribution arrangement does not fail to satisfy the uniform percentage requirement of paragraph (c)(3)(ii) of this section merely because—

(A) The percentage used for the default election varies based on the number of years (or portions of years) since the beginning of the initial period for an employee;

(B) The rate of contributions under a cash or deferred election or salary reduction agreement that is in effect for an employee immediately prior to the date that the default election under paragraph (c) of this section first applies to the employee is not reduced;

(C) The rate of contributions under a cash or deferred election or salary reduction agreement is limited so as not to exceed the applicable limits of sections 401(a)(17), 401(k)(16), 402(g) (determined with or without catch‑up contributions), 403(b)(16), and 415; or

(D) The default election provided under paragraph (c)(3)(i) of this section is not applied during the period an employee is not permitted to have contributions

Bulletin No. 2025–8 833 February 18, 2025

made on the employee’s behalf under a cash or deferred election or salary reduction agreement in order for the plan to satisfy the requirements of section 414(u) (12)(B)(ii).

(iv) Treatment of periods without default contributions —(A) Permis- sive redetermination of initial period in certain situations . The uniform percentages described in paragraph (c) (3)(ii) of this section are based on the date an employee’s initial period begins. However, if, after the employee’s initial period began, the employee did not have default elective contributions made for an entire plan year, then the plan is permitted to provide that the employee’s initial period is redetermined as described in paragraph (c)(3)(iv)(B) or (C) of this section.

(B) Redetermination for employee who became ineligible . If, for an entire plan year, no default elective contributions were made solely because the employee was not eligible to elect to have contributions made on the employee’s behalf under a cash or deferred election or salary reduction agreement for that plan year, then the plan is permitted to provide that the employee’s initial period is redetermined so that it begins on the date the employee is again eligible to elect to have contributions made on the employee’s behalf under the plan.

(C) Redetermination for employee who remained eligible and made an affirma- tive election. If, for an entire plan year, no default elective contributions were made solely because the employee made an affirmative election to have contributions made on the employee’s behalf under a cash or deferred election or salary reduction agreement in a different amount (including an election not to have contributions made), then the plan is permitted to provide that the initial period is redetermined so that it begins on any date specified under the plan that is later than the date specified in paragraph (c)(3)(ii)(A)( 3 ) of this section.

(4) Investment requirements . An eligible automatic contribution arrangement satisfies the requirements of this paragraph (c)(4) only if amounts contributed pursuant to the arrangement, and for which no investment is elected by the employee, are invested in accordance with the require

ments of 29 CFR 2550.404c‑5 (or any successor regulations).

(d) Exceptions for certain types of plans and businesses —(1) SIMPLE 401(k) plans . Paragraph (b) of this section does not apply to any SIMPLE 401(k) plan (as described in section 401(k)(11) and §1.401(k)‑4).

(2) Governmental plans . Paragraph (b) of this section does not apply to any governmental plan (within the meaning of section 414(d)).

(3) Church plans . Paragraph (b) of this section does not apply to any church plan (within the meaning of section 414(e)).

(4) New and small businesses —(i) New businesses . Paragraph (b) of this section does not apply to any qualified cash or deferred arrangement, or any annuity contract purchased under a section 403(b) plan, for a plan year if, as of the beginning of the plan year, the employer maintaining the plan (aggregated with any predecessor employer) has been in existence for less than 3 years.

(ii) Small businesses. Paragraph (b) of this section does not apply to any qualified cash or deferred arrangement, or any annuity contract purchased under a section 403(b) plan, before the first plan year that begins at least 12 months after the close of the first taxable year of the employer maintaining the plan with respect to which that employer normally employed more than 10 employees. For this purpose, the number of employees that the employer normally employs for a taxable year is determined using the rules of Q&A‑5 of §54.4980B‑2 of this chapter.

(iii) Applicability to multiple employer plans . In the case of a multiple employer plan, the exceptions provided in paragraphs (d)(4)(i) and (ii) of this section apply on an employer‑by‑employer basis.

(iv) Example —(A) Facts . Employer Q has been in existence since July 1, 2026, and does not have a predecessor employer. Employer Q maintains Plan X, which has a plan year that is the calendar year and includes a cash or deferred arrangement. Plan X was effective on January 1, 2027, and provides that a cash or deferred election must be an affirmative election. Employee M, who became eligible to elect to have contributions made on Employee M’s behalf under Plan X on January 1, 2027, made an affirmative election not to have elective contributions made on Employee M’s behalf and that affirmative election is in effect on January 1, 2030. Employee N, who also became eligible to elect to have contributions made on Employee N’s behalf under Plan X on January 1, 2027, has not made any election to have (or not

have) contributions made on Employee N’s behalf under Plan X. Effective January 1, 2030, Plan X is amended to include an eligible automatic contribution arrangement that satisfies the requirements of paragraphs (c)(2) through (4) of this section. The amendment provides that an employee who has a cash or deferred election that is an affirmative election and is in effect on January 1, 2030, is not subject to the default election under the eligible automatic contribution arrangement that is included in Plan X.

(B) Analysis and Conclusion . Because the exception for new businesses set forth in paragraph (d)(4)(i) of this section ceases to apply to Plan X for plan years beginning on or after January 1, 2030, paragraph (b) of this section first applies to Plan X as of that date. Pursuant to paragraph (c)(1)(iii) of this section, the eligible automatic contribution arrangement required to be included in Plan X for plan years beginning on January 1, 2030, does not fail to satisfy the requirements of paragraph (c) of this section merely because the default election under the arrangement does not apply to Employee M as a result of Employee M’s affirmative election. However, Plan X does not satisfy the requirements of section 414A unless the default election in paragraph (c)(3) of this section applies to Employee N because of the absence of an affirmative election made by Employee N to have elective contributions made on Employee N’s behalf in a different amount (or to not have elective contributions made on Employee N’s behalf).

(e) Exception for plans established before the enactment of section 414A— (1) In general . Subject to the rules of application in paragraphs (e)(2) through (6) of this section, paragraph (b) of this section does not apply to—

(i) Any plan that includes a qualified cash or deferred arrangement if the plan terms providing for the qualified cash or deferred arrangement were adopted initially before December 29, 2022 (the date of the enactment of section 414A), even if the plan terms providing for the cash or deferred arrangement are effective after that date, or

(ii) Any section 403(b) plan adopted initially before December 29, 2022, without regard to the date of adoption of plan terms providing for salary reduction agreements.

(2) Merger of plans established before the enactment of section 414A —(i) Gen- eral rule . If two plans described in paragraph (e)(1)(i) of this section are merged, then the merged plan will be treated as a plan described in paragraph (e)(1)(i) of this section. Similarly, if two section 403(b) plans described in paragraph (e)(1)(ii) of this section are merged, then the merged plan will be treated as a section 403(b) plan described in paragraph (e)(1)(ii) of this section.

February 18, 2025 834 Bulletin No. 2025–8

(ii) Effect of merger of multiple employer plans on participating employ- ers . If either of the plans described in paragraph (e)(2)(i) of this section are multiple employer plans, then the merger will not affect whether the merged plan is treated as a plan described in paragraph (e)(1) of this section with respect to any employer that maintained the multiple employer plan prior to the merger.

(3) Merger of a plan established on or after the enactment of section 414A with a plan established before the enactment of section 414A —(i) General rule —(A) Section 401(k) plans . Except as provided in paragraphs (e)(3)(ii), (iii), and (4)(ii) of this section, if a plan that includes a cash or deferred arrangement and that is not described in paragraph (e)(1)(i) of this section is merged with a plan described in paragraph (e)(1)(i) of this section, then the merged plan will not be treated as a plan described in paragraph (e)(1)(i) of this section.

(B) Section 403(b) plans . Except as provided in paragraphs (e)(3)(ii), (iii), and (4)(ii) of this section, if a section 403(b) plan that is not described in paragraph (e) (1)(ii) of this section is merged with a plan described in paragraph (e)(1)(ii) of this section, then the merged plan will not be treated as a plan described in paragraph (e)(1)(ii) of this section.

(ii) Exception for certain transac- tions . A plan that is maintained by a single employer and described in paragraph (e)(1) of this section will continue to be treated as described in paragraph (e)(1) of this section after a merger described in paragraph (e)(3)(i) of this section, if—

(A) There is a transaction described in §1.410(b)‑2(f),

(B) The plan described in paragraph (e)(1) of this section is designated as the ongoing plan, and

(iii) Applicability to multiple employer plans— (A) Applicability of exception for certain transactions involving a merger into a multiple employer plan . In the case of a merger of a plan that is not a multiple employer plan and not described in paragraph (e)(1) of this section into a multiple employer plan that is designated as the ongoing plan, paragraph (e)(3)(ii) of this section

applies even though the ongoing plan is a multiple employer plan and without regard to whether that plan is a plan described in paragraph (e)(1) of this section, provided that prior to the transaction described in paragraph (e)(3)(ii)(A) of this section, the multiple employer plan was treated as a plan described in paragraph (e)(1) of this section with respect to the employer that maintained the multiple employer plan and engaged in the transaction.

(B) Merger of multiple employer plans . If both of the plans described in paragraph (e)(3)(i) of this section are multiple employer plans, then the exception in paragraph (e)(3)(ii) of this section does not apply. In such a case, the merger will not affect whether the merged plan is treated as a plan described in paragraph (e)(1) of this section with respect to any employer that maintained either multiple employer plan prior to the merger.

(4) Treatment of adoption of, or merger with, a multiple employer plan —(i) In general . If, after December 29, 2022, an employer adopts a multiple employer plan, then, with respect to that employer, the multiple employer plan will not be treated as a plan described in paragraph (e)(1) of this section. The same treatment will apply if the employer maintains a plan other than a multiple employer plan that is merged with a multiple employer plan after December 29, 2022, unless the merger is described in paragraph (e)(3)(iii) of this section.

(ii) Exception for mergers involving plans established before the enactment of section 414A . Paragraph (e)(4)(i) of this section does not apply if the plan that is merged into the multiple employer plan is a plan described in paragraph (e)(1) of this section. Thus, if the employer maintains a plan described in paragraph (e)(1) of this section that is merged into the multiple employer plan after December 29, 2022, then the multiple employer plan will be treated as a plan described in paragraph (e)(1) of this section with respect to that employer.

(iii) Effect on other participating employers . Neither an adoption nor a merger described in paragraph (e)(4)(i) or (ii) of this section affects whether the multiple employer plan is treated as a plan described in paragraph (e)(1) of this section with respect to any other employer maintaining the plan.

(5) Plan spin‑off . If a portion of a plan described in paragraph (e)(1) of this section is spun off from that plan, the resulting spun‑off plan will be treated as a plan described in paragraph (e)(1) of this section if either—

(i) The plan from which the spin‑off occurred was not a multiple employer plan, or

(ii) The plan from which the spin‑off occurred was a multiple employer plan that was treated as described in paragraph (e)(1) of this section with respect to the employer maintaining the spun‑off plan.

(6) Other plan amendments— (i) Treat- ment of amendments to a plan established before the enactment of section 414A . A plan described in paragraph (e)(1) of this section will not fail to be described in paragraph (e)(1) of this section merely because the plan is amended, provided that the amendment is not an amendment relating to an action described in paragraph (e)(2), (3), or (4) of this section. The preceding sentence applies even if the amendment expands eligibility to participate in the cash or deferred arrangement, or to enter into a salary reduction agreement, to other employees of the employer that maintains the plan or to employees of another employer that is aggregated with the employer that maintains the plan under section 414(b), (c), or (m).

(ii) Mergers with plans that do not include cash or deferred arrangements or salary reduction agreements. If an employer maintains a plan that is described in paragraph (e)(1) of this section and that plan is merged with a plan that does not include a cash or deferred arrangement or permit a salary reduction agreement, then the merged plan will continue to be a plan described in paragraph (e)(1) of this section after the merger.

(7) Examples . The following examples illustrate the application of this paragraph (e). For purposes of the examples, each plan is maintained on a calendar‑year basis, includes a cash or deferred arrangement that was adopted on the same date that the plan was adopted, and is not a SIMPLE 401(k) plan, governmental plan, or church plan. These examples assume that this section applies for plan years beginning on or after January 1, 2026, and, unless otherwise specifically provided, any plan merger does not occur in connection with a transaction described in §1.410(b)‑2(f).

Bulletin No. 2025–8 835 February 18, 2025

(i) Example 1— (A) Facts . Plan A, which is maintained by a single employer, Employer R, was adopted on January 1, 2021. Plan B, which is maintained by a single employer, Employer S, was adopted on January 1, 2025. On July 1, 2026, Plan A is merged with Plan B, and Plan A is the surviving plan in the merger.

(B) Analysis and Conclusion . The merger is a merger of a plan described in paragraph (e)(1)(i) of this section with a plan that is not described in paragraph (e)(1)(i) of this section and is not a merger described in paragraph (e)(3)(ii) or (4) of this section. Under paragraph (e)(3)(i)(A) of this section, Plan A will no longer be a plan described in paragraph (e)(1)(i) of this section and will be subject to paragraph (b) of this section after the merger (unless an exception described in paragraph (d)(4) of this section, relating to new or small businesses, applies to Employer R).

(ii) Example 2 —(A) Facts . The facts are the same as in paragraph (e)(7)(i) of this section ( Exam- ple 1 ), except that there is an acquisition described in §1.410(b)‑2(f), and the plan merger occurs within the transition period described in section 410(b)(6) (C)(ii).

(B) Analysis and Conclusion . The merger satisfies the requirements of paragraph (e)(3)(ii) of this section. Accordingly, Plan A will continue to be excepted from paragraph (b) of this section as a plan described in paragraph (e)(1)(i) of this section after the merger.

(iii) Example 3 —(A) Facts . Plan C, a multiple employer plan, was established on January 1, 2021. Plan D, a plan maintained by Employer T that is not a multiple employer plan, was adopted on January 1, 2024. Plan D merges with Plan C on December 31, 2024.

(B) Analysis and Conclusion . The merger is described in paragraph (e)(4)(i) of this section and because Plan D is not a plan described in paragraph (e)(1)(i) of this section, the merger is not excepted under paragraph (e)(4)(ii) of this section. Similarly, because there was no transaction described in §1.410(b)‑2(f), the merger is not described in paragraph (e)(3)(iii) of this section. Accordingly, with respect to Employer T, Plan C will not be a plan described in paragraph (e)(1)(i) of this section and will be subject to paragraph (b) of this section after the merger (unless an exception described in paragraph (d)(4) of this section, relating to new or small businesses, continues to apply to Employer T). However, under paragraph (e)(4)(iii) of this section, the merger does not affect whether Plan C is treated as a plan described in paragraph (e)(1)(i) of this section with respect to any other employers.

(iv) Example 4 —(A) Facts . Plan E, a plan maintained by Employer U that is not a multiple employer plan, was adopted on January 1, 2021. Plan F, a multiple employer plan, was established on January 1, 2024. Plan E merges with Plan F on December 31, 2024. (B) Analysis and Conclusion . Under paragraph (e)(4)(ii) of this section, the portion of Plan F that applies with respect to Employer U will continue to be excepted from paragraph (b) of this section as a plan described in paragraph (e)(1)(i) of this section after the merger. However, under paragraph (e)

(Filed by the Office of the Federal Register January 10, 2025, 8:45 a.m., and published in the issue of the Federal Register for January 14, 2025, 90 FR 3092)

Notice of Proposed Rulemaking

Catch-Up Contributions

REG-101268-24

AGENCY: Internal Revenue Service (IRS), Treasury.

(4)(iii) of this section, the merger does not affect whether Plan F is treated as a plan described in paragraph (e)(1)(i) of this section with respect to any other employers.

(v) Example 5 —(A) Facts . Plan G, a plan maintained by Employer V that is not a multiple employer plan, was adopted on January 1, 2021. Plan G is amended, effective January 1, 2026, to add an additional participating employer, a subsidiary that is 100 percent owned by Employer V.

(B) Analysis and Conclusion . Because the expansion of eligibility is not an amendment relating to an action described in paragraph (e)(2), (3), or (4) of this section, Plan G will continue to be excepted from paragraph (b) of this section as a plan described in paragraph (e)(1)(i) of this section after the amendment pursuant to paragraph (e)(6)(i) of this section.

(vi) Example 6 —(A) Facts . Plan J, a multiple employer plan, was established on January 1, 2021. Employer W adopts Plan J on January 1, 2022. Effective January 1, 2026, the assets and account balances attributable to the employees of Employer W are spun off to form a new plan, Plan K, maintained solely by Employer W.

(B) Analysis and Conclusion . Under paragraph (e)(5)(ii) of this section, Plan K will be excepted from paragraph (b) of this section as a plan described in paragraph (e)(1)(i) of this section.

(f) Applicability dates— (1) Statutory applicability date . Section 414A applies to plan years beginning after December 31, 2024. (2) Regulatory applicability date . This section applies to plan years beginning after [ DATE SIX MONTHS AFTER DATE OF PUBLICATION OF FINAL RULE ]. For earlier plan years, a plan is treated as having complied with section 414A if the plan complies with a reasonable, good faith interpretation of section 414A.

Douglas W. O’Donnell,

Deputy Commissioner .

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document sets forth proposed regulations that would provide guidance for retirement plans that permit participants who have attained age 50 to make additional elective deferrals that are catch-up contributions. The proposed regulations reflect statutory changes made by the SECURE 2.0 Act of 2022, including the requirement that catch-up contributions made by certain catch-up eligible participants must be designated Roth contributions. The proposed regulations would affect participants in, beneficiaries of, employers maintaining, and administrators of certain retirement plans. This document also provides notice of a public hearing.

DATES: Written or electronic comments must be received by March 14, 2025. A public hearing on this proposed regulation has been scheduled for April 7, 2025, at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by March 14, 2025. If no outlines are received by March 14, 2025, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. on April 3, 2025.

ADDRESSES: Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG‑101268-24) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically or on paper to its public docket on www.regu- lations.gov . Send paper submissions to: CC:PA:01:PR (REG‑101268-24), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed

February 18, 2025 836 Bulletin No. 2025–8

regulations, call Jessica S. Weinberger at (202) 317-6349 or Jason E. Levine at (202) 317-4117; concerning submission of comments, the hearing, and the access code to attend the hearing by telephone, call the Publications and Regulations Section at (202) 317‑6901 (not toll‑free numbers) or email publichearings@irs.gov (preferred).

SUPPLEMENTARY INFORMATION:

Authority

This notice of proposed rulemaking sets forth proposed amendments to the Income Tax Regulations (26 CFR part 1) under sections 401(k), 403(b), and 414(v) of the Internal Revenue Code (Code) relating to catch-up contributions. These proposed regulations are issued by the Secretary of the Treasury or the Secretary’s delegate (Secretary) under the express delegations of authority in sections 401(m)(9), 414(v) (7)(D), and 7805(a) of the Code.

Section 401(m)(9) provides, in part, that “[t]he Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection and subsection (k).” Section 414(v)(7)(D) provides a specific delegation of authority with respect to the requirements of section 414(v)(7)(A), stating, “[t]he Secretary may provide by regulations that an eligible participant may elect to change the participant’s election to make additional elective deferrals if the participant’s compensation is determined to exceed the limitation under subparagraph (A) after the election is made.” Section 7805(a) provides that “the Secretary shall prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.”

Background

This notice of proposed rulemaking sets forth proposed amendments to the Income Tax Regulations under section 414(v) of the Code. Section 414(v) per

mits a plan to allow catch-up eligible participants to make additional elective deferrals that are catch-up contributions and sets forth requirements relating to those contributions. These proposed regulations would amend the regulations under section 414(v) to reflect changes to the catch-up contribution requirements for certain catch-up eligible participants pursuant to sections 109, 117, and 603 of Division T of the Consolidated Appropriations Act, 2023, Public Law 117‑328, 136 Stat. 4459 (2022), known as the SECURE 2.0 Act of 2022 (SECURE 2.0 Act). This document also proposes conforming amendments to the regulations under sections 401(k) and 403(b) of the Code that reflect section 603 of the SECURE 2.0 Act.

I. Statutory and Regulatory Framework

Section 414(v)(1) of the Code provides that an applicable employer plan will not be treated as failing to meet any requirement of the Code solely because it permits an eligible participant to make additional elective deferrals (as defined in section 414(v)(6)(B)) in any plan year. “Applicable employer plan” is defined in section 414(v)(6)(A) to mean a qualified plan under section 401(a) (qualified plan), a plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b) (section 403(b) plan), an eligible deferred compensation plan under section 457 of an eligible employer described in section 457(e)(1)(A) (eligible governmental 457(b) plan), ¹ an arrangement meeting the requirements of section 408(k) (SEP arrangement), or an arrangement meeting the requirements of section 408(p) (SIMPLE IRA plan). Under section 414(v) (5), an eligible participant is a participant who is generally eligible to make elective deferrals under an applicable employer plan and who would attain age 50 by the end of the taxable year, with respect to whom no further elective deferrals may (without regard to section 414(v)) be made to the plan for the plan year (or other applicable year) by reason of a limitation

or restriction listed in section 414(v)(3) or a comparable limitation or restriction included in the terms of the plan.

Under section 414(v)(2)(A), the amount of additional elective deferrals that a plan may permit a participant to make pursuant to section 414(v)(1) for a taxable year is limited to the lesser of: (1) the applicable dollar amount under section 414(v)(2)(B) (referred to as the applicable dollar catch-up limit), and (2) the excess (if any) of the participant’s compensation (as defined in section 415(c)(3)) for the year over any other elective deferrals of the participant for such year that are made without regard to section 414(v). Section 414(v)(2)(B)(i) provides the applicable dollar catch-up limit for an applicable employer plan other than a plan described in section 401(k)(11) (SIMPLE 401(k) plan) or a SIMPLE IRA plan. Section 414(v)(2)(B)(ii) provides the applicable dollar catch-up limit for a SIMPLE 401(k) plan or a SIMPLE IRA plan (collectively referred to as SIMPLE plans). Section 414(v)(2)(C) provides that the applicable dollar catch-up limits under section 414(v)(2)(B)(i) and (ii) are subject to annual adjustment based on changes in the cost of living. Section 414(v)(2)(D) provides that, for purposes of section 414(v) (2), all applicable employer plans, other than eligible governmental 457(b) plans, that are maintained by the same employer (as determined under section 414(b), (c), (m), or (o)) are treated as a single plan, and all eligible governmental 457(b) plans that are maintained by the same employer are treated as a single plan.

Under section 414(v)(3)(A)(i), a catch-up contribution is not, with respect to the year in which the contribution is made, subject to certain otherwise applicable limitations, including those contained in section 401(a)(30) (limiting a participant’s elective deferrals during a calendar year to the amount permitted under section 402(g)), section 403(b) (including the requirement under section 403(b)(1) (E) that a contract purchased under a salary reduction agreement must meet the requirements of section 401(a)(30)), and section 457(b)(2) (limiting a participant’s

1 Section 414(v)(6)(C) provides that section 414(v) does not apply to a participant in an eligible governmental 457(b) plan for any year for which a higher limitation applies to the participant under section 457(b)(3).

Bulletin No. 2025–8 837 February 18, 2025

elective deferrals for a taxable year, determined without regard to any increase to the limitation under section 457(b)(3), to the applicable dollar amount in section 457(e)(15)). Under section 414(v)(3)(B), catch-up contributions are excluded from consideration for purposes of certain nondiscrimination tests.

Section 414(v)(4) provides that an applicable employer plan is treated as failing to meet the nondiscrimination requirements under section 401(a)(4) with respect to benefits, rights, and features unless the plan allows all catch-up eligible participants to make the same election with respect to catch-up contributions. For purposes of section 414(v)(4), all plans maintained by employers who are treated as a single employer under section 414(b), (c), (m), or (o) are treated as one plan (with the exception of a plan described in section 410(b)(6)(C)(i) for the duration of the transition period described in section 410(b)(6)(C)(ii) with respect to that plan). Section 414(v) was added to the Code by section 631 of the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16, 115 Stat. 38, and the Treasury Department and the IRS issued comprehensive regulations under section 414(v) in 2003 (TD 9072, 68 FR 40510). Subsequently, provisions relating to catch-up contributions under section 414(v) were incorporated into regulations under sections 401(k), 403(b), and 457(b).

II. SECURE 2.0 Act Changes to Section 414(v)

A. Section 109 of the SECURE 2.0 Act

For a taxable year beginning after December 31, 2024, section 109 of the SECURE 2.0 Act amends section 414(v) (2) of the Code to increase the applicable dollar catch-up limit under section 414(v) (2)(B)(i) and (ii) in the case of a catch-up eligible participant who attains age 60, 61, 62, or 63 during the taxable year. For such a participant in an applicable employer plan other than a SIMPLE plan, the

increased applicable dollar catch-up limit is 150 percent of the otherwise applicable dollar catch-up limit under section 414(v) (2)(B)(i) in effect for 2024. For such a participant in a SIMPLE plan, the increased applicable dollar catch-up limit is 150 percent of the otherwise applicable dollar catch-up limit under section 414(v)(2)(B) (ii) in effect for 2025. In either case, for a year beginning after December 31, 2025, the increased applicable dollar catch-up limit is subject to adjustment to reflect changes in the cost of living, in accordance with the last sentence of section 414(v)(2)(C).

B. Section 117 of the SECURE 2.0 Act

A SIMPLE plan is an alternative plan design under which employees of an eligible employer as defined in section 408(p) (2)(C)(i) (that is, generally, an employer that had no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding calendar year) are permitted to elect to have salary reduction contributions (or elective contributions, in the case of a SIMPLE 401(k) plan) made on their behalf. ² Among other things, section 117 of the SECURE 2.0 Act amends section 414(v)(2) of the Code to increase the applicable dollar catch-up limit under section 414(v)(2)(B) (ii) for SIMPLE plans sponsored by certain eligible employers who are described in section 408(p)(2)(E)(iv). ³ The increased applicable dollar catch-up limit is available automatically to a SIMPLE plan sponsored by an eligible employer described in section 408(p)(2)(E)(iv) that had no more than 25 employees who received at least $5,000 of compensation from the employer for the preceding calendar year. Other eligible employers described in section 408(p) (2)(E)(iv) may make an election for the increased applicable dollar catch-up limit to apply and, if the election is made, the employer must make additional matching or nonelective contributions.

The increased applicable dollar catch-up limit, which applies to taxable

years beginning after December 31, 2023, is 110 percent of the otherwise applicable dollar catch-up limit under section 414(v) (2)(B)(ii) for calendar year 2024. For a year beginning after December 31, 2024, the increased applicable dollar catch-up limit is subject to adjustment to reflect changes in the cost of living, in accordance with section 414(v)(2)(C)(ii).

C. Section 603 of the SECURE 2.0 Act

Section 603(a) of the SECURE 2.0 Act amends section 414(v) of the Code to add section 414(v)(7). Section 414(v)(7)(A) sets forth the requirement that catch-up contributions made by certain catch-up eligible participants must be designated Roth contributions (the Roth catch-up requirement). Specifically, under section 414(v)(7)(A), in the case of a catch-up eligible participant whose wages as defined in section 3121(a) (that is, wages for purposes of the Federal Insurance Contributions Act (FICA), codified at subtitle C, chapter 21 of the Code, or FICA wages) for the preceding calendar year from the employer sponsoring the plan exceeded $145,000, section 414(v)(1) applies only if any catch-up contributions made by the participant are designated Roth contributions (as defined in section 402A(c)(1)).

Section 414(v)(7)(C) provides that section 414(v)(7)(A) does not apply to SEP arrangements or SIMPLE IRA plans. Under section 414(v)(7)(D), regulations may provide that a catch-up eligible participant may elect to change the participant’s election to make catch-up contributions if the participant’s compensation is determined to exceed the wage limitation under section 414(v)(7)(A) (Roth catch-up

2 The annual limit on salary reduction contributions or elective contributions is lower for SIMPLE plans than for other types of plans. However, SIMPLE plans are not subject to nondiscrimination testing, and the employer must make certain contributions.

3 An eligible employer is described in section 408(p)(2)(E)(iv) if, during the three-taxable-year period preceding the first year that the employer maintained the SIMPLE plan, the employer (including any member of the employer’s controlled group or any predecessor of the employer or member of its controlled group) has not established or maintained a qualified plan, a section 403(a) annuity plan, or a section 403(b) plan under which contributions were made or benefits were accrued for substantially the same employees as are eligible to participate in the SIMPLE plan. See Q&A E-1 in Notice 2024-2, 2024-2 IRB 316.

February 18, 2025 838 Bulletin No. 2025–8

wage threshold) after the election is made. Under section 414(v)(7)(E), for taxable years beginning after December 31, 2024, the Roth catch-up wage threshold is adjusted for changes in the cost of living.

Section 603(b) of the SECURE 2.0 Act includes conforming amendments with respect to section 603(a). Section 603(b) (1) of the SECURE 2.0 Act strikes section 402(g)(1)(C) of the Code. Prior to its elimination, section 402(g)(1)(C) provided that a catch-up eligible participant’s gross income did not include elective deferrals in excess of the applicable dollar amount under section 402(g)(1)(B) to the extent that the amount of those elective deferrals did not exceed the applicable dollar catch-up limit under section 414(v)(2)(B)(i) for the taxable year (without regard to the treatment of the elective deferrals by an applicable employer plan under section 414(v)).

Section 603(b)(2) of the SECURE 2.0 Act amends section 457(e)(18)(A)(ii) of the Code and, pursuant to this amendment, a portion of the catch-up contributions made to an eligible governmental 457(b) plan in accordance with section 457(b) (3) and (e)(18) by a catch-up eligible individual for the last three taxable years ending before the individual attains normal retirement age must be designated Roth contributions. The portion that is subject to this Roth requirement is the amount by which the applicable dollar catch-up limit under section 414(v)(2)(B)(i) exceeds the maximum permitted contribution set forth in section 457(b)(3) (determined without regard to section 457(e)(18)).

Under section 603(c) of the SECURE 2.0 Act, the amendments made by section 603 of the SECURE 2.0 Act apply to taxable years beginning after December 31, 2023.

III. Notice 2023-62

In August 2023, the Treasury Department and the IRS issued Notice 2023-62, 2023-37 IRB 817. Notice 2023-62 clarifies that, despite the elimination of section 402(g)(1)(C) of the Code under section 603(b)(1) of the SECURE 2.0 Act, applicable employer plans may, for taxable years beginning after December 31,

2023, continue to permit catch-up eligible participants to make elective deferrals that exceed the applicable dollar amount under section 402(g)(1)(B) of the Code (or deferrals that exceed the applicable dollar amount under section 457(e)(15)) if those contributions in excess of the applicable dollar amount satisfy the requirements for catch-up contributions under section 414(v). In addition, pursuant to Notice 2023-62, the first two taxable years beginning after December 31, 2023, are regarded as an administrative transition period with respect to the Roth catch-up requirement. During the administrative transition period, catch-up contributions made by a participant who is subject to the Roth catch-up requirement will be treated as satisfying the requirements of section 414(v)(7)(A), even if the contributions are not designated Roth contributions.

Notice 2023-62 also summarizes anticipated guidance from the Treasury Department and the IRS with respect to the implementation of section 603 of the SECURE 2.0 Act as follows: (1) the Roth catch-up requirement would not apply in the case of a catch-up eligible participant who did not have FICA wages for the preceding calendar year from the employer sponsoring the plan; (2) in the case of a catch-up eligible participant who is subject to the Roth catch-up requirement, a plan administrator and an employer would be permitted to treat an election by the participant to make catch-up contributions on a pre-tax basis as an election by the participant to make catch-up contributions that are designated Roth contributions; and (3) a catch-up eligible participant’s FICA wages for the preceding calendar year from one participating employer in an applicable employer plan that is maintained by more than one employer (including a multiemployer plan) would not be aggregated with the participant’s FICA wages for the preceding calendar year from another participating employer in the plan for purposes of determining whether the participant’s FICA wages for that year exceeded the Roth catch-up wage threshold. The notice requested comments with respect to the anticipated guidance summarized in the notice, additional matters under consid

eration relating to a plan without a qualified Roth contribution program, and, more generally, the provisions of section 603 of the SECURE 2.0 Act.

Explanation of Provisions

I. Amendments to Regulations Under Sections 401(k) and 403(b) – Deemed Roth Catch-up Election

Section 414(v)(7)(A) of the Code provides that in the case of a participant who is subject to the Roth catch-up requirement, section 414(v)(1) applies only if any catch-up contributions made by the participant are designated Roth contributions made pursuant to the participant’s election. Notice 2023-62 requested comments on anticipated future guidance expected to permit plan administrators and employers to treat an election by a participant to make catch-up contributions on a pretax basis as an election to make catch-up contributions as designated Roth contributions if the participant is subject to the Roth catch-up requirement. All comments received were in favor of this approach.

Accordingly, proposed §1.401(k)-1(f) (5)(iii) would permit a plan to provide, for taxable years beginning after December 31, 2023, that a participant who is subject to the Roth catch-up requirement is deemed to have irrevocably designated any catch-up contributions as designated Roth contributions in accordance with the requirements of §1.401(k)-1(f)(1)(i). Under the proposed regulation, a plan that provides for such a deemed Roth catch-up election would be required, as is the case for any other designated Roth contribution, to: (1) treat catch-up contributions subject to the deemed Roth catch-up election as not excludible from the participant’s gross income, and (2) maintain the catch-up contributions in a designated Roth account. A plan would be permitted to provide for a deemed Roth catch-up election without regard to whether it requires separate elections for elective deferrals that are not catch-up contributions and for additional elective deferrals that are catch-up contributions or uses a spillover design. ⁴ However, in accordance

4 Under a spillover design, a participant who would attain age 50 by the end of the taxable year makes one election with respect to elective deferrals for a plan year and, after the participant’s elective deferrals reach a Code or plan limitation on elective deferrals that are not catch-up contributions, additional elective deferrals automatically begin counting toward the applicable dollar catch-up limit under section 414(v)(2).

Bulletin No. 2025–8 839 February 18, 2025

with section 414(v)(7)(D), the application of a deemed Roth catch-up election to a participant would be conditioned, under proposed §1.401(k)-1(f)(5)(iv), on the participant having an effective opportunity (determined based on all of the relevant facts and circumstances, in accordance with §1.401(k)-1(e)(2)(ii)) to make a new election that is different than the deemed election. For example, under the proposed regulation, a plan would need to permit a participant subject to a deemed Roth catch-up election to elect to cease making additional elective deferrals.

The proposed amendments to §1.403(b)-3(c)(1) would incorporate proposed §1.401(k)-1(f)(5)(iii) and (iv), so that a section 403(b) plan would be permitted to include a deemed Roth catch-up election, subject to the requirement to provide a participant subject to a deemed catch-up election with the effective opportunity to make a different election. This amendment would be part of a broader incorporation of all of §1.401(k)-1(f)(3) and (5) into the rules relating to designated Roth contributions under section 403(b) plans; the incorporation of §1.401(k)-1(f) (3), (f)(5)(i), and (f)(5)(ii) is not a substantive legal change, as these provisions were previously applicable with respect to section 403(b) plans. ⁵

II. Proposed Revisions to §1.414(v)-1

A. Overview

The proposed revisions and additions to §1.414(v)-1 would mainly reflect changes made by sections 109 and 117 of the SECURE 2.0 Act. In particular, the revisions to §1.414(v)-1 would: (1) reflect the increased applicable dollar catch-up limits permitted under sections 109 and 117 of the SECURE 2.0 Act (along with updated cost-of-living adjustments), and (2) clarify the application of the universal availability requirement under Code section 414(v)(4) to an applicable employer plan that permits certain catch-up eligible participants to make catch-up contributions

in an amount equal to the increased applicable dollar catch-up limit for participants attaining age 60 through 63. In addition, a provision would be added to the general rules under §1.414(v)-1(a) indicating that the rules relating to the Roth catch-up requirement under section 414(v)(7) can be found in proposed §1.414(v)-2.

B. Increased applicable dollar catch-up limit during the year of attainment of age 60 through 63 under section 109 of the SECURE 2.0 Act

Current §1.414(v)-1(c)(2)(i) sets forth the applicable dollar catch-up limit that applies to all catch-up eligible participants in an applicable employer plan that is not a SIMPLE plan. The proposed regulations would retain that rule (other than the provisions applicable to taxable years beginning in calendar years before 2006) and would note the existence of a higher limit for individuals attaining age 60 through 63 set forth in proposed §1.414(v)-1(c)(2)(i) (B). Specifically, proposed §1.414(v)-1(c) (2)(i)(B) sets forth the increased applicable dollar catch-up limit that would apply for a taxable year beginning after 2024 with respect to a catch-up eligible participant in an applicable employer plan other than a SIMPLE plan who would attain age 60, 61, 62, or 63 on the participant’s birthday occurring during the taxable year. The increased applicable dollar catch-up limit under proposed §1.414(v)-1(c)(2)(i) (B) is 150 percent of the applicable dollar catch-up limit that applies during a taxable year beginning in 2024 (that is, $11,250, which is 150 percent of $7,500), adjusted for changes in the cost of living.

Similarly, current §1.414(v)-1(c)(2)(ii) sets forth the applicable dollar catch-up limit that applies to all catch-up eligible participants in a SIMPLE plan. The proposed regulations would retain those provisions (other than the provisions applicable to taxable years beginning in calendar years before 2006) and would note the existence of a higher limit for individuals attaining age 60 through 63

set forth in proposed §1.414(v)-1(c)(2) (ii)(B) (and a higher limit for participants in certain SIMPLE plans set forth in proposed §1.414(v)-1(c)(2)(ii)(C)). Specifically, proposed §1.414(v)‑1(c)(2) (ii)(B) sets forth the increased applicable dollar catch-up limit that would apply for a taxable year beginning after 2024, with respect to a catch-up eligible participant in a SIMPLE plan who would attain age 60, 61, 62, or 63 on the participant’s birthday occurring during the taxable year. The increased applicable dollar catch-up limit under proposed §1.414(v)-1(c)(2) (ii)(B) is 150 percent of the applicable dollar catch-up limit that applies during a taxable year beginning in 2025 (that is, $5,250, which is 150 percent of $3,500), adjusted for changes in the cost of living.

Current §1.414(v)-1(c)(2)(iii) provides for cost-of-living adjustments to the applicable dollar catch-up limits that apply under current §1.414(v)-1(c)(2)(i) and (ii). The proposed regulations would retain that provision and would also set forth the cost-of-living adjustments to the increased applicable dollar catch-up limits for individuals attaining age 60 through 63.

C. Increased applicable dollar catch-up limit for certain SIMPLE plans under section 117 of the SECURE 2.0 Act

In accordance with section 117 of the SECURE 2.0 Act, proposed §1.414(v)-1(c)(2)(ii)(C) would set forth an increased applicable dollar catch-up limit that would apply for a taxable year beginning in 2024 under a SIMPLE plan that is sponsored by an eligible employer described in Code section 408(p)(2)(E) (iv) and for which the increased applicable dollar catch-up limit under section 414(v)(2)(B)(iii) applies automatically or by election. The increased applicable dollar catch-up limit is 110 percent of the applicable dollar catch-up limit that applies during a taxable year beginning in 2024 (that is, $3,850, which is 110 percent of $3,500), adjusted for changes in the cost of living. For taxable years beginning

5 This Notice of Proposed Rulemaking (NPRM) does not propose to incorporate proposed §1.401(k)-1(f)(5)(iii) and (iv) into the regulations relating to eligible governmental 457(b) plans because those regulations do not currently provide for the inclusion of a qualified Roth contribution program in an eligible governmental 457(b) plan. On June 22, 2016, proposed regulations relating to the inclusion of a qualified Roth contribution program in an eligible governmental 457(b) plan were published in the Federal Register (81 FR 40548) and those proposed regulations have not been finalized.

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after 2024, proposed §1.414(v)‑1(c)(2) (iii)(C) would set forth the cost-of-living adjustments to this increased applicable dollar catch-up limit.

D. Different applicable dollar catch-up limits and universal availability

In accordance with the universal availability requirement in section 414(v)(4), existing §1.414(v)-1(e)(1)(i) sets forth a general rule that an applicable employer plan that offers catch-up contributions and that is otherwise subject to section 401(a) (4) (including a plan that is subject to section 401(a)(4) pursuant to section 403(b) (12)) will not satisfy the requirements of section 401(a)(4) unless all catch-up eligible participants who participate under any applicable employer plan maintained by the employer are provided with an effective opportunity to make the same dollar amount of catch-up contributions.

The Treasury Department and the IRS do not believe that a plan should fail to satisfy the universal availability requirement merely because the plan utilizes the increased limit for catch-up eligible participants attaining age 60 through 63 that is permitted under the Code pursuant to section 414(v)(2)(E). Thus, a new provision would be added to §1.414(v)-1(e)(1) setting forth an exception to the general rule in §1.414(v)-1(e)(1)(i) for a plan that permits each catch-up eligible participant to make elective deferrals up to the statutory maximum dollar amount of catch-up contributions permitted with respect to the participant. Under this new exception, an applicable employer plan would not fail to satisfy the requirements of section 401(a)(4) merely because the plan allows catch-up eligible participants who are subject to the increased applicable dollar catch-up limit for participants attaining age 60 through 63 under section 414(v) (2)(E) to make catch-up contributions up to that increased limit, while permitting other catch-up eligible participants to make catch-up contributions only up to the applicable dollar catch-up limit that

applies generally under section 414(v)(2) (B)(i) or (ii), as applicable. ⁶

Similarly, an applicable employer plan that covers employees in both the United States and Puerto Rico would not fail to satisfy the requirements of section 401(a)(4) merely because the plan allows catch-up eligible participants whose catch-up contributions are subject to the limit set forth in section 1081.01(d)(7) of the Puerto Rico Internal Revenue Code of 2011 (13 L.P.R.A. section 30391(d) (7)), as amended (Puerto Rico Code), to make catch-up contributions only up to the amount of that limit. ⁷ The Treasury Department and the IRS request comments on the application of the limits in the case of an employee who performs service for an employer both in Puerto Rico and the United States in the same year.

III. Proposed §1.414(v)-2

A. General rules relating to the requirements of section 414(v)(7)

Roth catch-up requirement under section 414(v)(7)(A)

Proposed §1.414(v)-2(a) would set forth general rules relating to the Roth catch-up requirement under section 414(v) (7)(A). Under proposed §1.414(v)-2(a) (2), if a catch-up eligible participant in an applicable employer plan had FICA wages for the preceding calendar year from the employer sponsoring the plan (as defined in proposed §1.414(v)-2(b) (3)) that exceeded $145,000, then section 414(v)(1) would apply with respect to the participant’s elective deferrals that are catch-up contributions only if they are designated Roth contributions (as defined in section 402A(c)(1)). Under proposed §1.414(v)-2(a)(3), the $145,000 Roth catch-up wage threshold would be subject to cost-of-living adjustments, in accordance with section 414(v)(7)(E). ⁸ Under proposed §1.414(v)-2(a)(4), the Roth catch-up requirement would not apply to a participant in a SEP arrangement or

a SIMPLE IRA plan, in accordance with section 414(v)(7)(C).

Consistent with section 414(v)(7) (A) and the description of anticipated guidance in Notice 2023-62, proposed §1.414(v)-2(a)(2) would provide that a participant who did not have FICA wages exceeding $145,000 (as adjusted) from the employer sponsoring the plan for the preceding calendar year would not be subject to the Roth catch-up requirement under the plan for the current year. Proposed §1.414(v)-2(a)(2) would define FICA wages by reference to the FICA taxes imposed by sections 3101(a) and 3111(a), not sections 3101(b) and 3111(b), and notes that the wages are taken into account for this purpose in the same year that they are taken into account for FICA tax purposes. Accordingly, an individual who did not have any FICA wages from the employer sponsoring the plan for the preceding calendar year (for example, a partner who had only self-employment income; an individual who had wages under section 3231(e) that are subject to taxation under the Railroad Retirement Tax Act, codified at title 45, chapter 9 of the United States Code, rather than FICA; or a State or local government employee whose services were excluded from the definition of employment under section 3121(b)(7) without regard to section 3121(u)) would not be subject to the Roth catch-up requirement under the plan in the current year. Similarly, an individual who received cash compensation from the employer sponsoring the plan in the preceding calendar year but nevertheless did not have any FICA wages from the employer for that year (for example, because the compensation was taxed in an earlier year pursuant to section 3121(v) (2)) would not be subject to the Roth catch-up requirement under the plan in the current year.

Further, proposed §1.414(v)-2 would not require that the Roth catch-up wage threshold be prorated for the first year of hire. Thus, a participant who worked for the employer sponsoring the plan for

6 The higher applicable dollar catch-up limit for participants attaining age 60 through 63 may, but is not required to be, included in an applicable employer plan. Thus, an applicable employer plan may also be designed to limit the catch-up contributions for those participants to the same applicable dollar catch-up limit that applies for all other catch-up eligible participants.

7 For taxable years beginning in 2024, the limit on catch-up contributions that can be made by a participant who is eligible to make catch-up contributions under the Puerto Rico Code is $1,500.

8 The Roth catch-up wage threshold of $145,000 would be applied to a catch-up eligible participant’s 2023 FICA wages to determine whether the Roth catch-up requirement applies to the participant’s catch-up contributions made for 2024. In accordance with Notice 2024-80, 2024-47 IRB 1120, the Roth catch-up wage threshold that would be applied to a catch-up eligible participant’s 2024 FICA wages to determine whether the Roth catch-up requirement applies to the participant’s catch-up contributions made for 2025 remains $145,000.

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only part of the preceding calendar year would be subject to the Roth catch-up requirement in the current year only if the participant had wages exceeding the full Roth catch-up wage threshold from the employer for the preceding calendar year.

Availability of Roth catch-up contributions under section 414(v)(7)(B)

Section 414(v)(7)(B) provides that, in the case of an applicable employer plan with respect to which section 414(v)(7) (A) applies to any participant for a plan year, section 414(v)(1) shall not apply to the plan unless the plan provides that any catch-up eligible participant may make catch-up contributions as designated Roth contributions. In accordance with section 414(v)(7)(B), proposed §1.414(v)‑2(a) (5)(i) would provide that if any catch-up eligible participant who is subject to the Roth catch-up requirement is permitted to make catch-up contributions as designated Roth contributions under an applicable employer plan for a plan year, then the plan would be required to allow all other catch-up eligible participants to also make catch-up contributions as designated Roth contributions for the plan year. ⁹

Proposed §1.414(v)-2(a)(5)(ii) sets forth a rule that would address the application of section 414(v)(7)(B) to a plan that is subject to the qualification requirements of both section 401(a) and section 1081.01 of the Puerto Rico Code (dual-qualified plan). ¹⁰ If a dual-qualified plan that covers both employees in the United States and employees in Puerto Rico permits any catch-up eligible participant who is subject to the Roth catch-up requirement to make catch-up contributions as designated Roth contributions for a plan year, then, in accordance with section 414(v) (7)(B), the plan is generally required to permit all catch-up eligible participants to make catch-up contributions as designated Roth contributions for the plan year. The Puerto Rico Code does not provide for designated Roth contributions, but it does allow plans to offer the opportunity

to make after-tax contributions. Accordingly, in the case of a dual-qualified plan that permits Roth catch-up contributions for participants in the United States, proposed §1.414(v)-2(a)(5)(ii) would treat the requirements of section 414(v)(7) (B) as satisfied with respect to a catch-up eligible participant who is subject to section 1081.01 of the Puerto Rico Code if the plan permits the participant to make catch-up contributions as after-tax contributions within the meaning of section 1081.01(a)(15) of the Puerto Rico Code.

B. Rules of operation for implementing the Roth catch-up requirement

Designated Roth contributions that are treated as catch-up contributions for purposes of the Roth catch-up requirement

The Treasury Department and the IRS received comments in response to Notice 2023-62 requesting clarification that designated Roth contributions made at any point within a year may be counted towards satisfaction of the Roth catch-up requirement, even if the designated Roth contributions are made earlier than the contributions that are determined to be catch-up contributions (that is, before the participant is considered to have reached an applicable limit on elective deferrals for the year).

In general, under existing §1.414(v)-1(b)(2)(i)(A) and (c)(3), the amount of a participant’s elective deferrals in excess of an applicable limit is determined as of the end of a plan year (or limitation year, in the case of the section 415(c) limit) by comparing the participant’s total elective deferrals for the plan year (or total annual additions for the limitation year) with the applicable limit for the plan year (or limitation year). However, under §1.414(v)-1(c)(3), in the case of an applicable limit that is applied on the basis of a year other than the plan year or limitation year (for example, the calendar-year limit on elective deferrals under

section 401(a)(30)), the determination of whether elective deferrals are treated as catch-up contributions is made at the time they are deferred. Thus, if the timing rule in §1.414(v)-1(c)(3) that applies for purposes of determining whether an elective deferral is a catch-up contribution also applies for purposes of determining whether a designated Roth contribution is a catch-up contribution that satisfies the Roth catch-up requirement, then, in the case of elective deferrals that are catch-up contributions because they exceed a calendar-year limit (such as the section 401(a) (30) limit), only elective deferrals that are made after reaching that limit would be taken into account in satisfying the Roth catch-up requirement.

Commenters suggested that limiting the designated Roth contributions that may be taken into account in satisfying the Roth catch-up requirement in this manner is not an appropriate approach. For example, a commenter noted that if this approach is used, then a catch-up eligible participant who would like to make elective deferrals for a calendar year in an amount equal to the sum of the section 401(a)(30) limit on elective deferrals and the applicable dollar catch-up limit would be required to make the elective deferrals as designated Roth contributions during the latter part of the year (or after the section 401(a)(30) limit is reached). This would be required even if the participant would prefer to have designated Roth contributions made throughout the year or even if the participant had already frontloaded the designated Roth contributions by making elective deferrals in an amount equal to the applicable dollar catch-up limit as designated Roth contributions during the earlier part of the year.

To address commenters’ concerns, provide maximum flexibility for participants, and alleviate administrative burdens, proposed §1.414(v)-2(b)(1) would take into account designated Roth contributions that are made prior to an applicable limit being reached for purposes of determining whether the Roth catch-up requirement is satisfied. Under proposed §1.414(v)-2(b)

9 By contrast, if none of the participants who are subject to the Roth catch-up requirement are permitted to make catch-up contributions under a plan for a plan year (for example, if a plan does not include a qualified Roth contribution program), then section 414(v)(7)(A) would not be considered to apply to any catch-up eligible participant in the plan for the plan year (and the requirement of section 414(v)(7)(B) would not apply to the plan). This interpretation of section 414(v)(7)(B) is consistent with the Joint Committee on Taxation general explanation of the provision. See JCS-1-23 (December 2023).

10 For purposes of this NPRM, a dual-qualified plan includes a plan for which an election under section 1022(i)(2) of the Employee Retirement Income Security Act of 1974 (Public Law 93-406, 88 Stat. 829), as amended (ERISA), has been made.

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(1), an elective deferral that is determined to be a catch-up contribution at the time of contribution under the timing rules in §1.414(v)-1(c)(3) (for example, on account of exceeding the section 401(a) (30) limit) would be required to be made as a designated Roth contribution by a participant who is subject to the Roth catch-up requirement only to the extent the participant has not previously made elective deferrals as designated Roth contributions during the calendar year or taxable year equal to the applicable dollar catch-up limit. Thus, if a catch-up eligible participant’s total elective deferrals that are designated Roth contributions over the course of a calendar year or taxable year equal or exceed the total elective deferrals that are determined to be catch-up contributions, then the participant would satisfy the Roth catch-up requirement. ¹¹

Plans that do not include a qualified Roth contribution program

In accordance with section 402A(a), an applicable employer plan may, but is not required to, include a qualified Roth contribution program within the meaning of section 402A(b). However, in the case of a catch-up eligible participant who is subject to the Roth catch-up requirement, section 414(v)(1) applies only if any catch‑up contributions made by the participant are designated Roth contributions. Therefore, if an applicable employer plan does not include a qualified Roth contribution program, then a participant who is subject to the Roth catch-up requirement would be prohibited from making catch‑up contributions under the plan.

The proposed regulations would not require an applicable employer plan to include a qualified Roth contribution program. Thus, under the proposed regulations, an applicable employer plan that does not have a qualified Roth contribution program would be allowed to permit catch-up eligible participants who are not subject to the Roth catch-up requirement to make catch-up contributions even though catch-up eligible participants who

are subject to the Roth catch-up requirement would not be permitted to make catch-up contributions.

However, the universal availability requirement under existing §1.414(v)-1(e) provides that an applicable employer plan will be treated as failing to meet the nondiscrimination requirements under section 401(a)(4) with respect to benefits, rights, and features unless all catch-up eligible participants under the plan are provided with an effective opportunity to make the same dollar amount of catch-up contributions. Proposed §1.414(v)-1(e) (1)(iii) would add a rule providing that an applicable employer plan would not violate the universal availability requirement merely because the plan permits each catch-up eligible participant to make elective deferrals up to the maximum dollar amount of catch-up contributions permitted under applicable law with respect to that participant. If a plan does not include a qualified Roth contribution program, then the maximum dollar amount of catch-up contributions permitted based on applicable law with respect to a catch-up eligible participant in the plan who is subject to the Roth catch-up requirement is $0. Proposed §1.414(v)-2(b)(2) would address this situation by providing that an applicable employer plan that does not include a qualified Roth contribution program does not fail to satisfy the universal availability requirement merely because the plan (or another applicable employer plan maintained by the employer that does not include a qualified Roth contribution program) does not permit catch-up eligible participants who are subject to the Roth catch-up requirement to make catch-up contributions.

Generally, under §1.414(v)-1(d)(4), an applicable employer plan does not violate §1.401(a)(4)-4 merely because the group of employees for whom catch-up contributions are currently available is not a group of employees that would satisfy the minimum coverage requirements of section 410(b). Under the proposed regulations, §1.414(v)-1(d)(4) would not apply to an applicable employer plan that does

not include a qualified Roth contribution program and permits only catch-up eligible participants who are not subject to the Roth catch-up requirement to make catch-up contributions. The reason the proposed regulations would provide that §1.414(v)-1(d)(4) does not apply to such a plan is that not all catch-up eligible employees under the plan will be able to make catch-up contributions.

Because the Roth catch-up wage threshold is slightly lower than the wage threshold used in the definition of highly compensated employee (HCE) under section 414(q)(1)(B), some non-HCEs may be subject to the Roth catch-up requirement. ¹² Thus, if a plan that does not include a qualified Roth contribution program prohibits catch-up eligible participants who are subject to the Roth catch-up requirement from making catch-up contributions, while permitting other catch-up eligible participants to make catch-up contributions, then the outcome of the nondiscrimination test with respect to the availability of catch-up contributions performed under §1.401(a)(4)-4 may be affected. Accordingly, proposed §1.414(v)-2(b) (2) would permit such a plan to also preclude one or more catch-up eligible participants who are HCEs and who are not subject to the Roth catch-up requirement (for example, because they did not receive FICA wages for the preceding year) from making catch-up contributions if doing so facilitates satisfaction of §1.401(a)(4)-4 with respect to the availability of catch-up contributions.

Determination of employer sponsoring the plan

The determination as to whether the Roth catch-up requirement applies to a catch-up eligible participant is based on the amount of the participant’s FICA wages for the preceding year “from the employer sponsoring the plan,” but that phrase is not defined in section 414(v)(7). For purposes of determining an individual’s FICA wages, the term “employer” generally means the person for whom the indi

11 This is also the case with respect to elective deferrals that are determined to be catch-up contributions because the plan would fail the actual deferral percentage (ADP) test under section 401(k)(3) if it did not correct under section 401(k)(8). The determination of elective deferrals that are catch-up contributions because they are in excess of this ADP limit in §1.414(v)-1(b)(1) (iii) occurs in the plan year following the plan year for which the elective deferrals are made.

12 This is particularly true if an employer makes the top-paid group election under section 414(q)(1)(B)(ii).

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vidual performs service as an employee under the common law standards that apply under §31.3121(d)-1(c). Thus, for purposes of determining the individual’s FICA wages, the term “employer” generally refers solely to an individual’s common law employer. ¹³ Because the phrase “from the employer sponsoring the plan” modifies the reference to FICA wages in section 414(v)(7)(A), the determination of whether the Roth catch-up requirement applies to a participant would generally follow the FICA rules and be based on the FICA wages from the participant’s common law employer.

Thus, proposed §1.414(v)-2(b)(3) would provide that, with respect to each catch-up eligible participant who is subject to the Roth catch-up requirement, the term “employer sponsoring the plan” only refers to the participant’s common law employer contributing to the plan. ¹⁴ Under the proposed regulation, the “employer sponsoring the plan” would not include other entities that are treated as a single employer with a catch-up eligible participant’s common law employer under section 414(b), (c), (m), or (o). For example, if there are multiple employers participating in a plan that are treated as a single employer under the controlled group rules, each of the participating employers that is a common law employer would be a separate employer sponsoring the plan.

Similarly, in the context of catch-up contributions made to a multiple employer plan or multiemployer plan by a catch-up eligible participant subject to the Roth catch-up requirement, the “employer sponsoring the plan” means the participant’s common law employer that is the source of the participant’s FICA wages and contributions to the plan. Some commenters have suggested that the Roth catch-up requirement does not apply to a multiemployer plan because section 3(16)(B) of ERISA defines the “plan sponsor” of a multiemployer plan as the

joint board of trustees rather than the contributing employers. Under the interpretation of section 414(v)(7)(A) suggested by the commenters, the employer that is the source of the employee’s FICA wages would be a signatory of the collective bargaining agreement pursuant to which the employer’s employees participate in the multiemployer plan and a contributor to that plan, but would not be the “employer sponsoring the plan” for purposes of section 414(v)(7)(A). ¹⁵ The Treasury Department and the IRS do not agree that this is a reasonable interpretation of section 414(v)(7)(A) because ERISA is a separate statute from the Code and does not include any provisions that directly apply, or are even parallel, to the Code’s catch-up contribution rules. Rather, in the context of the Roth catch-up requirement, the “employer sponsoring the plan” is the common law employer that is the source of the participant’s FICA wages and contributions to the multiemployer plan.

The Treasury Department and the IRS understand from comments received that multiemployer plans and other plans maintained pursuant to a collective bargaining agreement would benefit from an extended applicability date for the Roth catch-up requirement so that the terms of any applicable collective bargaining agreement can be conformed to that requirement. In response to these comments, proposed §1.414(v)-2(e)(2)(ii) would provide that proposed §1.414(v)-2 does not apply to a plan maintained pursuant to one or more collective bargaining agreements until the first taxable year beginning more than 6 months after the date that final regulations adding §1.414(v)-2 to the Code of Federal Regulations are issued, or, if later, the first taxable year beginning after the date on which the last collective bargaining agreement related to the plan that is in effect on December 31, 2025, terminates (determined without regard to any extension of those collective bargaining agreements).

Plans with more than one employer sponsoring the plan

Consistent with the treatment of the term “employer sponsoring the plan” as referring to a catch-up eligible participant’s common law employer without aggregation with other employers under section 414(b), (c), (m), or (o), proposed §1.414(v)-2(b)(4) would apply the Roth catch-up requirement on the basis of FICA wages (if any) for the preceding calendar year solely from a participant’s common law employer without aggregating those wages with the FICA wages from other employers, including employers that participate in the same plan or employers that are treated as a single employer together with the common law employer under section 414(b), (c), (m), or (o). Thus, a catch-up eligible participant who had FICA wages exceeding $145,000 (as adjusted) in the preceding calendar year from any employer other than the employer sponsoring the plan (as defined with respect to the participant in accordance with proposed §1.414(v)-2(b)(3)) would not be subject to the Roth catch-up requirement under the plan in the current year if the participant did not also have more than $145,000 (as adjusted) of FICA wages for the preceding year from the employer sponsoring the plan. This is consistent with the description of anticipated guidance that was included in Notice 2023-62.

C. Treatment of pre-tax catch-up contributions that are required to be designated Roth contributions under section 414(v)(7)

Correcting a violation of the section 414(v)(7) Roth catch-up requirement

Section 414(v)(7)(A) provides that section 414(v)(1) applies to catch-up contributions made by a participant who is subject to the Roth catch-up require

13 In general, FICA wages are determined separately by related employers. See §31.3121(a)(1)-1(a)(3) (“If during a calendar year the employee receives remuneration from more than one employer, the annual wage limitation does not apply to the aggregate remuneration received from all of such employers, but instead applies to the remuneration received during such calendar year from each employer.”). See also §31.3121(s)-1(a) (“For purposes of section…3121(a)(1), except as otherwise provided…, when two or more related corporations concurrently employ the same individual and compensate that individual…, each of the corporations is considered to have paid only the remuneration it actually disburses to that individual.”).

14 This rule applies even if responsibilities under chapter 21 of the Code are imposed on a third party, such as a section 3401(d) statutory employer, a section 3504 agent, a section 3121(s) common paymaster, a section 3511 certified PEO, or a section 3512 motion picture project employer.

15 This would not be the case with respect to an employee of the joint board of trustees who participates in the plan. In that case, the joint board of trustees would be both the “sponsor” within the meaning of section 3(16)(B) of ERISA and the common law employer.

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ment only if the catch-up contributions are designated Roth contributions. If a participant who is subject to the Roth catch-up requirement makes a pre-tax elective deferral in excess of an applicable limit, then section 414(v)(1) will not apply to that elective deferral and the plan will fail to be qualified unless the plan corrects the failure. A plan is permitted to correct this type of error by distributing the additional elective deferrals that are not catch-up contributions under section 414(v)(1) from the plan in accordance with a permitted correction method specific to the limit on elective deferrals that the additional elective deferrals exceeded (for example, the correction method in §1.402(g)‑1(e) for elective deferrals that exceeded the section 401(a)(30) limit, the correction method in section 6.06(1) and (2) of Revenue Procedure 2021-30, 2021-31 IRB 172, for elective deferrals that resulted in the participant’s annual additions exceeding the section 415(c) limit, or the correction method in §1.401(k)-2(b)(2) or Appendix B, section 2.01, of Revenue Procedure 2021-30 for elective deferrals that exceeded the ADP limit).

In response to Notice 2023-62, the Treasury Department and the IRS received several comments requesting guidance that would permit a pre-tax elective deferral that exceeds an applicable limit to be treated as a designated Roth contribution in order to satisfy the Roth catch-up requirement (as an alternative to distribution of these elective deferrals from the plan). Commenters requested this guidance with respect to elective deferrals that were intended to be catch-up contributions at the time amounts were contributed (because the contributions exceeded plan or statutory limits) but which were not made as Roth contributions because of an error. Commenters also raised specific concerns relating to elective deferrals that are catch-up contributions because they

exceed the ADP limit. This concern arises because the determination of whether an elective deferral exceeds the ADP limit (and, therefore, could be a catch-up contribution) cannot be made until after the close of the plan year (that is, after the elective deferral is made).

The Treasury Department and the IRS agree that a correction procedure by which a plan can correct a section 414(v)(7) failure (that is, a failure to satisfy the Roth catch-up requirement), other than through distribution from the plan of elective deferrals in excess of an applicable limit which fail to comply with section 414(v)(7)(A), is warranted. Thus, proposed §1.414(v)-2(c) would set forth additional permissible methods and related rules for correcting a pre-tax elective deferral that exceeds an applicable limit in order to comply with the Roth catch-up requirement, which are discussed in the next section of this Explanation of Provisions. ¹⁶

Additional permissible correction methods for elective deferrals that exceed an applicable limit

Proposed §1.414(v)-2(c)(2) sets forth two new methods that a plan would be permitted to use to correct a failure of the Roth catch-up requirement as it applies to elective deferrals that exceed an applicable limit. Under proposed §1.414(v)-2(c) (2)(i), a plan would be permitted to provide for either correction method but, with respect to a plan year, the plan would be required to apply the same correction method for all participants with elective deferrals in excess of the same applicable limit.

a. Form W-2 correction method

Under the correction method set forth in proposed §1.414(v)-2(c)(2)(ii), a plan would be permitted to correct a participant’s pre-tax catch-up contribution that

was required to be a designated Roth contribution by transferring the elective deferral (adjusted for allocable gain or loss) from the participant’s pre-tax account to the participant’s designated Roth account and reporting the contribution (not adjusted for allocable gain or loss) as a designated Roth contribution on the participant’s Form W-2 (Wage and Tax Statement) for the year of the deferral (that is, reporting the contribution as if it had been correctly made as a designated Roth contribution). Under this correction method, the contribution (not adjusted for allocable gain or loss) would be includible in the participant’s gross income for the year of the deferral as if the contribution had been correctly made as a designated Roth contribution. However, this method would not be permitted to be used if the participant’s Form W-2 for that year has already been filed or furnished to the participant. ¹⁷

b. In-plan Roth rollover correction method

Under proposed §1.414(v)-2(c)(2) (iii), a plan would be permitted to correct a participant’s pre-tax catch-up contribution that was required to be a designated Roth contribution through an in-plan Roth rollover in accordance with section 402A(c)(4)(E). Under this method, a plan would directly roll over the elective deferral (adjusted for allocable gain or loss) from the participant’s pre-tax account to the participant’s designated Roth account and report the amount of the in‑plan Roth rollover on Form 1099‑R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) for the year of rollover. The provisions of Notice 2010-84, 2010-51 IRB 872, and Notice 2013-74, 2013-52 IRB 819, would generally apply to an in-plan Roth rollover used to correct a section 414(v) (7) failure. Thus, the amount directly

16 Commenters also suggested that a plan be permitted to avoid having to correct section 414(v)(7) failures by requiring that all catch-up contributions be made as designated Roth contributions. The Treasury Department and the IRS have considered that suggestion and concluded that, for a participant who is not subject to the Roth catch-up requirement, allowing a plan design that requires all participants’ catch-up contributions to be designated Roth contributions would be inconsistent with the language of section 402A(b)(1), which provides that a designated Roth contribution must be elected by an employee “in lieu of all or a portion of elective deferrals the employee is otherwise eligible to make.”

17 This method would generally not be available with respect to an elective deferral that is a catch-up contribution because it exceeds the ADP limit under a plan with a calendar year plan year. This is because a participant’s Form W-2 for a year is generally filed and furnished to the participant prior to determination of any catch-up contributions made by the participant because the elective deferrals exceed the ADP limit for such a plan year.

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rolled over to the participant’s designated Roth account would be the same as the amount reported on Form 1099-R, and the contribution (adjusted for allocable gain or loss) would be includible in the participant’s gross income for the year of the rollover.

General correction requirements and deadlines to correct

a. Prerequisite to correct certain section 414(v)(7) failures under the new correction methods

Under proposed §1.414(v)-2(c)(3)(i), a plan would be eligible to use a new correction method with respect to pretax elective deferrals that exceed a statutory limit described in §1.414(v)-1(b) (1)(i) (such as contributions that exceed the section 401(a)(30) limit or that result in the participant’s annual additions exceeding the section 415(c) limit) only if the plan sponsor or plan administrator has in place practices and procedures designed to result in compliance with section 414(v)(7) at the time an elective deferral is made. ¹⁸ A plan would not meet this requirement unless the plan provides for a deemed Roth catch-up election in accordance with proposed §1.401(k)-1(f) (5)(iii) and (iv). Under the deemed Roth catch-up election approach, if a participant who is subject to the Roth catch-up requirement has made pre-tax elective deferrals for a calendar year that equal the section 401(a)(30) limit for the taxable year that begins in the calendar year, then subsequent elective deferrals made by the participant in the calendar year would automatically be made as designated Roth contributions, even if the participant has not made an affirmative election to make catch-up contributions as designated Roth contributions.

Similarly, if such a participant has made pre-tax elective deferrals for a limitation year that result in the participant’s annual additions for the limitation year exceeding the section 415(c) limit, then subsequent elective deferrals made by the participant in the limitation year would automatically be made as designated Roth contributions.

If a plan does not provide for a deemed Roth catch-up election and the plan accepts a pre-tax elective deferral that would be a catch-up contribution on account of exceeding a statutory limit described in §1.414(v)-1(b)(1)(i) and the elective deferral is required to be a designated Roth contribution in accordance with the Roth catch-up requirement, then the plan would not be eligible to use a correction method described in §1.414(v)-2(c)(2) and, therefore, would have to use an otherwise-applicable correction method to distribute the elective deferral (for example, the correction method in §1.402(g)‑1(e) relating to an elective deferral that exceeds the section 401(a)(30) limit). ¹⁹ A plan would not fail to meet the requirement to have in place practices and procedures that are designed to result in compliance with the Roth catch-up requirement at the time an elective deferral is made merely because the plan determines the applicability of the Roth catch-up requirement to a participant solely on the basis of the participant’s FICA wages from the employer sponsoring the plan for the preceding calendar year as reported on a timely-filed Form W-2 with respect to the participant. However, if the amount of a participant’s FICA wages for the preceding calendar year that is timely reported on a Form W-2 is later determined to be incorrect, a plan would have to correct any pre-tax catch-up contributions that should have

been designated Roth contributions on the basis of the adjusted FICA wages for the preceding calendar year. ²⁰

b. Deadline to correct section 414(v)(7) failures

Proposed §1.414(v)-2(c)(3)(iii) provides the deadlines that would apply for correction of a pre-tax catch-up contribution under the new correction methods for a section 414(v)(7) failure. Under the proposed regulation, the deadline to correct a section 414(v)(7) failure would depend on which limit is the basis for the pre-tax elective deferral being designated a catch-up contribution. ²¹

If the elective deferral is a catch-up contribution because it exceeds the section 401(a)(30) limit on elective deferrals, then §1.414(v)-2(c)(3)(iii)(A) would provide that the deadline to complete the corrective steps under proposed §1.414(v)-2(c) (2) is April 15 of the calendar year following the calendar year for which the elective deferral was made. This is consistent with the deadline that applies for correcting excess deferrals above the section 401(a)(30) limit by distribution under §1.402(g)-1(e).

If the elective deferral is a catch-up contribution because it results in the participant’s annual additions for a limitation year exceeding the section 415(c) limit, then §1.414(v)-2(c)(3)(iii)(B) would provide that the deadline to complete the corrective steps under proposed §1.414(v)-2(c)(2) is the deadline that applies under §1.415(c)-1(b)(6) for allocating amounts to the limitation year for which the elective deferral was made.

Under proposed §1.414(v)-2(c)(3) (iii)(C), the deadline to correct a pretax catch-up contribution that exceeds the ADP limit under the new correction methods would be the date that is 2½

18 A plan would not be required under proposed §1.414(v)-2(c)(3)(i) to have such practices and procedures in place in order to correct a pre-tax catch-up contribution that is a catch-up contribution because it exceeds an employer-provided limit as described in §1.414(v)-1(b)(1)(ii). A plan would also not be required to have such practices and procedures in place in order to correct a pre-tax elective deferral that is a catch-up contribution because it exceeds the ADP limit as described in §1.414(v)-1(b)(1)(iii). This is because these elective deferrals are not determined to be catch-up contributions under §1.414(v)-1(c)(3) until the last day of the plan year of deferral or in the following plan year.

19 In the case of a plan that does not provide for a deemed Roth catch-up election, if the plan provides that it will not accept an elective deferral that exceeds an applicable limit on elective deferrals unless the elective deferral is a catch-up contribution, then the plan may be designed to automatically stop elective deferrals for a catch-up eligible participant who is subject to the Roth catch-up requirement after the participant’s elective deferrals reach an applicable limit (unless the participant has designated the additional elective deferrals as Roth contributions).

20 The Treasury Department and the IRS invite comments on whether there are scenarios in which it would not be appropriate to require correction of pre-tax catch-up contributions that are required to be designated Roth contributions on the basis of a subsequent determination that the amount of FICA wages reported on the Form W-2 was incorrect.

21 If the applicable deadline for a new correction method under the proposed regulations is not satisfied, then a section 414(v)(7) failure would need to be corrected by a distribution from the plan in accordance with the correction principles set forth in section 6 of Revenue Procedure 2021-30.

February 18, 2025 846 Bulletin No. 2025–8

months (6 months, in the case of plans that include an eligible automatic contribution arrangement within the meaning of section 414(w)) after the close of the plan year for which the excess contribution was made. This is consistent with the deadline under §1.401(k)-2(b) (5) for distributing excess contributions above the ADP limit in order to avoid a 10 percent excise tax on the excess contributions. Under the proposed regulations, this would also be the deadline to correct a pre-tax catch-up contribution that is a catch-up contribution because it exceeds an employer-provided limit (because the determination of catch-up contributions, which are disregarded for purposes of the ADP test, needs to be made before the performance of the ADP test).

Proposed Applicability Date

The amendments to §1.414(v)-1 are proposed to apply with respect to contributions in taxable years that begin more than 6 months after the date that final regulations amending §1.414(v)-1 are issued. However, the proposed regulations would permit a taxpayer to elect to apply: (1) proposed §1.414(v)-1(c) (2)(ii)(C) and (c)(2)(iii)(C) (relating to the higher catch-up limit for certain newly-established SIMPLE plans) with respect to taxable years beginning after December 31, 2023, and (2) proposed §1.414(v)-1(c)(2)(i)(B), (c)(2)(ii)(B), and (c)(2)(iii)(B) (relating to the higher catch-up limit applicable during the taxable year of attainment of age 60 through 63) with respect to taxable years beginning after December 31, 2024.

For a plan that is not maintained pursuant to a collective bargaining agreement, proposed §1.414(v)-2 and the proposed amendments to §§1.401(k)-1 and 1.403(b)-3 are proposed to apply with respect to contributions in taxable years beginning more than 6 months after the date that final regulations adding §1.414(v)-2 to the Code of Federal Regulations are issued. For a plan that is maintained pursuant to one or more collective bargaining agreements, proposed §1.414(v)-2 and the proposed amendments to §§1.401(k)-1 and 1.403(b)-3 are proposed to apply

with respect to contributions in taxable years beginning after the later of the first taxable year described in the preceding sentence, or the first taxable year that begins after the date on which the last collective bargaining agreement related to the plan that is in effect on December 31, 2025, terminates (determined without regard to any extension of those agreements). However, under the proposed regulations, a plan would be permitted to apply §1.414(v)-2 and the amendments to §§1.401(k)-1 and 1.403(b)-3 with respect to contributions in taxable years beginning after December 31, 2023.

Special Analyses

I. Regulatory Planning and Review

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501 - 3520) requires that a Federal agency obtain the approval of the Office of Management and Budget (OMB) before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. A Federal agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

These proposed regulations contain reporting requirements, contained in §1.414(v)-2(c), that relate to corrections of pre-tax elective deferrals that are catch-up contributions subject to the requirement under section 414(v)(7)(A) of the Code to be designated Roth contributions. These collections of information generally would be used by the IRS for tax compliance purposes and may involve submission of a Form 1099-R to the IRS. This form and its associated burden are

approved by the OMB under 1545-0119. The proposed regulation is not changing the reporting procedures already established for this form.

The proposed regulations also contain a recordkeeping requirement that plan administrators maintain written practices and procedures designed to result in realtime compliance with certain requirements of section 414(v)(7)(A). These recordkeeping requirements are expected to be usual and customary business practices that would impose no additional burden on respondents. Therefore, the recordkeeping requirement would not require OMB approval under 5 CFR 1320.3(b)(2).

III. Regulatory Flexibility Act

Even if a substantial number of small entities would be affected, the economic impact of these proposed regulations is not expected to be significant. As discussed in the Paperwork Reduction Act section of this preamble, these proposed regulations may involve reporting and ordinary recordkeeping but are not expected to result in an increase in estimated burden. Any additional recordkeeping or administrative costs resulting from the changes relating to catch-up contributions that apply to certain section 401(k) plans, 403(b) plans, and eligible governmental 457(b) plans sponsored by small entities are consistent with existing procedures and are not expected to be significant. Therefore, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required.

Bulletin No. 2025–8 847 February 18, 2025

IV. Unfunded Mandates Reform Act

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. The proposed regulations do not propose rules that would have federalism implications, impose substantial direct compliance costs on State and local governments, or preempt State law within the meaning of the Executive order.

Comments and Public Hearing

Before these proposed regulations and proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments regarding the notice of proposed rulemaking that are submitted timely to the IRS as prescribed in the preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments will be made available at www.regulations.gov. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.

A public hearing has been scheduled for April 7, 2025, beginning at 10 a.m.

EST in the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. Participants may alternatively attend the public hearing by telephone.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments must submit an outline of the topics to be addressed and the time to be devoted to each topic by March 14, 2025, as prescribed in the preamble under the DATES section. A period of 10 minutes will be allocated to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. If no outline of the topics to be discussed at the hearing is received by March 14, 2025, the public hearing will be cancelled. If the public hearing is cancelled, a notice of cancellation of the public hearing will be published in the Federal Register .

Individuals who want to testify in person at the public hearing must send an email to publichearings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number REG‑10126824 and the language TESTIFY In Person. For example, the subject line may say: Request to TESTIFY In Person at Hearing for REG‑101268‑24.

Individuals who want to testify by telephone at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG‑101268‑24 and the language TESTIFY Telephonically. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG‑101268‑24.

Individuals who want to attend the public hearing in person without testify

ing must also send an email to publichear- ings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number REG‑101268‑24 and the language ATTEND In Person. For example, the subject line may say: Request to ATTEND Hearing In Person for REG‑101268‑24. Requests to attend the public hearing must be received by 5 p.m. EST on April 3, 2025. Individuals who want to attend the public hearing by telephone without testifying must also send an email to publichear- ings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG‑101268‑24 and the language ATTEND Hearing Telephonically. For example, the subject line may say: Request to ATTEND Hearing Telephonically for REG‑101268‑24. Requests to attend the public hearing must be received by 5 p.m. EST on April 3, 2025. Hearings will be made accessible to people with disabilities. To request special assistance during the hearing, please contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@ irs.gov (preferred) or by telephone at (202) 317‑6901 (not a toll‑free number) by April 2, 2025.

Statement of Availability of IRS Documents

IRS Revenue Procedures, Revenue Rulings notices, and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

Drafting Information

The principal authors of these proposed regulations are Jessica S. Weinberger and Jason E. Levine, of the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes (EEE)). However, other personnel

February 18, 2025 848 Bulletin No. 2025–8

from the Treasury Department and the IRS participated in the development of the proposed regulations.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

PART 1―INCOME TAXES

Paragraph 1 . The authority citation for part 1 is amended by adding entries, in numerical order, for §§1.401(k)-1 and 1.414(v)-2 to read in part, as follows: Authority: 26 U.S.C. 7805 * * *

Section 1.401(k)-1 also issued under 26 U.S.C. 401(m)(9).

Section 1.414(v)-2 also issued under 26 U.S.C. 414(v)(7)(D).

Par. 2. Section 1.401(k)-1 is amended by adding paragraphs (f)(5)(iii) and (iv) to read as follows:

§1.401(k)-1 Certain cash or deferred arrangements.

(f) * * * (5) * * * (iii) Deemed Roth catch-up contribu- tion elections . For taxable years beginning after December 31, 2023, a plan that satisfies the requirements of paragraph (f)(5)(iv) of this section may provide that an employee who is subject to the requirement under section 414(v)(7) to make any catch-up contributions as designated Roth contributions is deemed to have irrevocably designated any elective deferrals that are catch-up contributions as designated Roth contributions in accordance with paragraph (f)(1)(i) of this section. In such a case, the elective deferrals must be- (A) Treated by the employer as not excludible from the employee’s gross

income, in accordance with paragraph (f) (2) of this section; and

(B) Maintained by the plan in a separate account, in accordance with paragraph (f)(3) of this section.

(iv) Election for employees subject to section 414(v)(7)(A). A plan satisfies the requirements of this paragraph (f)(5)(iv) only if it provides to an employee who is described in paragraph (f)(5)(iii) of this section an effective opportunity (as determined under paragraph (e)(2)(ii) of this section) to make a new election that is different than the deemed election described in paragraph (f)(5)(iii) of this section.

§1.403(b)-3 [Amended]

Par. 3. Section 1.403(b)-3 is amended in paragraph (c)(1) by:

a. Removing the reference “§1.401(k)-1(f)(1) and (2)” and adding, in its place, the reference “§1.401(k)-1(f)(1), (2), (3), and (5)”;

b. Adding the language “(or is deemed to be so irrevocably designated in accordance with §1.401(k)-1(f)(5)(iii))” immediately following the language “otherwise eligible to make under the plan”; and

c. Removing the language “(within the meaning of §1.401(k)-1(f)(2))” and adding, in its place, the language “(within the meaning of §1.401(k)-1(f)(3))”.

Par. 4. Section 1.414(v)-1 is amended by:

a. In the last sentence of paragraph (a)(1), removing the language “this section and §1.402(g)-2” and adding, in its place, the language “this section, and §§1.414(v)-2 and 1.402(g)-2”;

b. Adding paragraph (a)(4); c. Revising and republishing paragraph (c)(2);

d. Adding paragraph (e)(1)(iii); and e. Revising and republishing paragraph (i).

The additions and revisions read as follows:

§1.414(v)-1 Catch-up contributions.

(a) * * * (4) Catch-up contributions must be designated Roth contributions for certain participants . For provisions relating to the

requirement under section 414(v)(7) that catch-up contributions made by certain catch-up eligible participants must be designated Roth contributions, see §1.414(v)2.

(c) * * * (2) Applicable dollar catch-up limit (i) Plans other than SIMPLE Plans —(A) In general . Except as provided in paragraph (c)(2)(i)(B) of this section, the applicable dollar catch-up limit that applies under an applicable employer plan, other than a SIMPLE 401(k) plan described in section 401(k)(11) or a SIMPLE IRA plan described in section 408(p), for a taxable year is $5,000, as adjusted for changes in the cost of living under paragraph (c)(2) (iii)(A) of this section.

(B) Higher limit applicable during the taxable year of attainment of age 60 through 63 . For a taxable year beginning after 2024, with respect to a catch-up eligible participant who would attain age 60, 61, 62, or 63 during the taxable year, the applicable dollar catch-up limit for the taxable year under an applicable employer plan described in paragraph (c)(2)(i)(A) of this section is $11,250 (which is 150 percent of the applicable dollar catch-up limit described in paragraph (c)(2)(i)(A) of this section for a taxable year beginning in 2024), as adjusted for changes in the cost of living under paragraph (c)(2)(iii)(B) of this section.

(ii) SIMPLE plans —(A) In general . Except as provided in paragraph (c)(2)(ii) (B) or (C) of this section, the applicable dollar catch-up limit that applies under a SIMPLE 401(k) plan described in section 401(k)(11) or a SIMPLE IRA plan described in section 408(p) for a taxable year is $2,500, as adjusted for changes in the cost of living under paragraph (c)(2) (iii)(A) of this section.

(B) Higher limit applicable during the taxable year of attainment of age 60 through 63 . For a taxable year beginning after 2024, with respect to a catch-up eligible participant who would attain age 60, 61, 62, or 63 during the taxable year, the applicable dollar catch-up limit for the taxable year under an applicable employer plan described in paragraph (c)(2)(ii)(A) of this section is $5,250 (which is 150 percent of the applicable dollar catch-up limit under paragraph (c)(2)(ii)(A) of this

Bulletin No. 2025–8 849 February 18, 2025

section for a taxable year beginning in 2025), as adjusted for changes in the cost of living under paragraph (c)(2)(iii)(B) of this section.

(C) Higher limit for certain SIMPLE plans . For a taxable year beginning after 2023, the applicable dollar catch-up limit under an applicable employer plan described in paragraph (c)(2)(ii)(A) of this section that is maintained by an eligible employer meeting the requirements in section 408(p)(2)(E)(iv) is $3,850 (which is 110 percent of the applicable dollar catch-up limit in effect under paragraph (c)(2)(ii)(A) of this section for a taxable year beginning in 2024), as adjusted for changes in the cost of living under paragraph (c)(2)(iii)(C) of this section. The preceding sentence applies with respect to a taxable year only if the taxable year begins in a calendar year for which the eligible employer is described in section 408(p)(2)(E)(i)(I) or makes the election described in section 408(p)(2)(E)(i)(II).

(iii) Cost-of-living adjustments —(A) In general . For a taxable year beginning after 2006, the applicable dollar catch-up limit under paragraph (c)(2)(i)(A) or (c)(2) (ii)(A) of this section (whichever applies to the plan) is the initial amount ($5,000 or $2,500, respectively), increased for changes in the cost of living. The increase is made at the same time and in the same manner as adjustments under section 415(d), except that the base period is the calendar quarter beginning July 1, 2005, and any increase that is not a multiple of $500 is rounded to the next lower multiple of $500.

(B) Adjustments to higher limit appli- cable during the taxable year of attain- ment of age 60 through 63 . For a taxable year beginning after 2025, the applicable dollar catch-up limit under paragraph (c) (2)(i)(B) or (c)(2)(ii)(B) of this section (whichever applies to the plan) is the initial amount ($11,250 in the case of paragraph (c)(2)(i)(B) of this section and $5,250 in the case of paragraph (c)(2)(ii) (B) of this section), increased for changes in the cost of living. The increase is made at the same time and in the same manner as adjustments under section 415(d), except that the base period is the calendar quarter beginning July 1, 2024, and any increase that is not a multiple of $500 is rounded to the next lower multiple of $500.

(C) Adjustments to higher limit for certain SIMPLE plans . For a taxable year beginning after 2024, the applicable dollar catch-up limit under paragraph (c)(2)(ii)(C) of this section is the initial amount ($3,850), increased for changes in the cost of living. The increase is made at the same time and in the same manner as adjustments under section 415(d), except that the base period is the calendar quarter beginning July 1, 2023, and any increase that is not a multiple of $500 is rounded to the next lower multiple of $500.

(e) * * * (1) * * * (iii) Plans providing the statutory maximum catch-up contributions . An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) merely because of differences among catch-up eligible participants as to the dollar amount of catch-up contributions they are permitted to make, provided that each catch-up eligible participant who participates under any applicable employer plan maintained by the employer is provided with an effective opportunity to make the maximum amount of catch-up contributions permitted for that participant under section 414(v) or, if applicable, section 1081.01(d)(7) of the Puerto Rico Internal Revenue Code of 2011 (13 L.P.R.A. section 30391(d)(7)), as amended. For example, an applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) merely because the plan permits catch-up eligible participants who would attain age 60, 61, 62, or 63 during a taxable year to make catch-up contributions up to the increased applicable dollar catch-up limit in section 414(v)(2)(E) while only permitting other catch-up eligible participants to make catch-up contributions up to the applicable dollar catch-up limit in section 414(v)(2)(B) without regard to section 414(v)(2)(E).

(i) Applicability dates —(1) In general . Except as described in paragraph (i)(2) of this section or §1.414(v)-2(e), section 414(v) applies to contributions in taxable years beginning on or after January 1, 2002. Except as provided in paragraph (i)

(2) of this section, paragraphs (a) through (h) of this section apply to contributions in taxable years beginning on or after January 1, 2004.

(2) Increases in applicable dollar catch-up limit under section 414(v)(2)— (i) Higher limit during the taxable year of attainment of age 60 through 63 . The amendments to section 414(v)(2) made by section 109 of Division T of the Consolidated Appropriations Act, 2023, Public Law 117‑328, 136 Stat. 4459 (2022), known as the SECURE 2.0 Act of 2022 (SECURE 2.0 Act) to provide for a higher applicable dollar catch-up limit for individuals who attain age 60, 61, 62, or 63 during the taxable year apply to contributions in taxable years beginning after December 31, 2024. Paragraphs (c) (2)(i)(B), (c)(2)(ii)(B), and (c)(2)(iii)(B) of this section apply to contributions in taxable years beginning after [DATE SIX MONTHS AFTER DATE OF PUBLICATION OF FINAL RULE] (or, at the election of the taxpayer, taxable years beginning after December 31, 2024). Except as provided in paragraph (i)(2)(ii) of this section, for taxable years beginning on or before December 31, 2024, the applicable dollar catch-up limit is determined under §1.414(v)-1(c)(2) as it appeared in the April 1, 2024, edition of 26 CFR part 1. (ii) Higher limit for certain SIMPLE plans . The amendments to section 414(v) (2) made by section 117 of the SECURE 2.0 Act to provide for a higher applicable dollar catch-up limit for certain SIMPLE plans apply to contributions in taxable years beginning after December 31, 2023. Paragraphs (c)(2)(ii)(C) and (c)(2)(iii) (C) of this section apply to contributions in taxable years beginning after [DATE SIX MONTHS AFTER DATE OF PUBLICATION OF FINAL RULE] (or, at the election of the taxpayer, taxable years beginning after December 31, 2023). For taxable years beginning on or before December 31, 2023, the applicable dollar catch-up limit for a SIMPLE 401(k) plan described in section 401(k)(11) or a SIMPLE IRA plan described in section 408(p) is determined under §1.414(v)-1(c)(2)(ii) as it appeared in the April 1, 2024, edition of 26 CFR part 1.

Par. 5. Section 1.414(v)-2 is added to read as follows:

February 18, 2025 850 Bulletin No. 2025–8

§1.414(v)-2 Catch-up contributions required to be designated Roth contributions under section 414(v)(7).

(a) Section 414(v)(7) Roth catch-up contribution requirement —(1) Organi- zation of this section . Paragraphs (a)(2) through (5) of this section provide general rules relating to the requirements of section 414(v)(7). Paragraph (b) of this section provides certain rules of operation for implementing the requirements of section 414(v)(7) addressed in this paragraph (a). Paragraph (c) of this section provides rules relating to the treatment of pre-tax catch-up contributions that were required to be designated Roth contributions under section 414(v)(7). Paragraph (d) of this section provides examples illustrating the application of the rules of this section. Paragraph (e) of this section sets forth the statutory and regulatory effective dates relating to the section 414(v)(7) Roth catch-up requirement.

(2) Roth catch-up contribution requirement in general . For a taxable year beginning on or after January 1, 2024, if, for the calendar year preceding the calendar year in which the taxable year begins, a catch-up eligible participant in an applicable employer plan had wages (as defined in section 3121(a) for purposes of the taxes imposed by sections 3101(a) and 3111(a), for the year the wages are required to be taken into account for purposes of chapter 21 of the Code) from the employer sponsoring the plan (as determined under paragraph (b)(3) of this section) that exceeded the applicable Roth catch-up wage threshold, then §1.414(v)-1(a)(1) applies only if that participant’s catch-up contributions (as described in §1.414(v)-1(a)(1)) under the plan are designated Roth contributions (as defined in section 402A(c) (1)). The Roth catch-up wage threshold that applies for a calendar year is $145,000, as adjusted for changes in the cost of living under paragraph (a)(3) of this section.

(3) Cost-of-living adjustment . For a calendar year beginning after December 31, 2024, the applicable Roth catch-up wage threshold in paragraph (a)(2) of this section is the initial amount ($145,000), increased for changes in the cost of living. The increase is made at the same time and

in the same manner as adjustments under section 415(d), except that the base period is the calendar quarter beginning July 1, 2023, and any increase that is not a multiple of $5,000 is rounded to the next lower multiple of $5,000.

(4) Certain plans not subject to section 414(v)(7). Paragraph (a)(2) of this section does not apply to a plan described in section 408(k) or (p).

(5) Availability of designated Roth catch-up contributions —(i) In general . Except as provided in paragraph (a)(5) (ii) of this section, if, under an applicable employer plan, any catch-up eligible participant who is subject to the Roth catch-up requirement under paragraph (a) (2) of this section is permitted to make catch-up contributions as designated Roth contributions for a plan year, then all catch-up eligible participants in the plan must be permitted to make catch-up contributions as designated Roth contributions for the plan year.

(ii) Special rule for participants sub- ject to the Puerto Rico Code . In the case of a catch-up eligible participant who is subject to the Roth catch-up requirement under paragraph (a)(2) of this section and is subject to section 1081.01 of the Puerto Rico Internal Revenue Code of 2011 (13 L.P.R.A. section 30391), as amended (Puerto Rico Code), paragraph (a)(5)(i) of this section is treated as satisfied if, under the applicable employer plan, that participant is permitted to make catch-up contributions as after-tax contributions within the meaning of section 1081.01(a)(15) of the Puerto Rico Code.

(b) Rules of operation —(1) Determi- nation of catch-up contributions subject to section 414(v)(7) Roth requirement . For a participant who is subject to the Roth catch-up requirement under paragraph (a)(2) of this section for a plan year, an elective deferral that, in accordance with §1.414(v)‑1(c)(3), is treated as a catch-up contribution at the time of deferral (for example, an elective deferral that is a catch-up contribution because it exceeds the section 401(a)(30) limit on elective deferrals) is required to be a designated Roth contribution only to the extent the participant has not previously made elective deferrals that are designated Roth contributions during the calendar year or taxable year equal to the

applicable dollar catch-up limit under §1.414(v)-1(c)(2). Thus, for example, if a participant who is subject to the Roth catch-up requirement under paragraph (a)(2) of this section has already made elective deferrals that are designated Roth contributions during the calendar year that equal or exceed the applicable dollar catch-up limit at the time the participant’s elective deferrals reach the section 401(a)(30) limit on elective deferrals, section 414(v)(7) would not require the participant’s subsequent elective deferrals for the calendar year to be designated Roth contributions even though they are treated as catch-up contributions under §1.414(v)-1(c)(3).

(2) Treatment of plans without quali- fied Roth contribution programs —(i) In general . For purposes of §1.414(v)-1(e) (1)(iii), if an applicable employer plan does not include a qualified Roth contribution program (within the meaning of section 402A(b)), then, for a catch-up eligible participant who is subject to the Roth catch-up requirement under paragraph (a)(2) of this section, the maximum amount of catch-up contributions permitted under section 414(v) is $0. Such a plan does not fail to satisfy the universal availability requirement of §1.414(v)-1(e) merely because the plan (or another applicable employer plan maintained by the employer that does not include a qualified Roth contribution program) does not permit catch-up contributions for participants who are subject to the Roth catch-up requirement under paragraph (a)(2) of this section.

(ii) Application of nondiscrimination requirements . If an applicable employer plan is described in paragraph (b)(2)(i) of this section, then §1.414(v)-1(d)(4) does not apply to the plan. As a result, a plan that has one or more highly compensated employees (as defined in section 414(q)) who are not subject to the Roth catch-up requirement under paragraph (a)(2) may need to preclude one or more of those highly compensated employees from making catch-up contributions to facilitate satisfaction of §1.401(a)(4)-4 with respect to the availability of catch-up contributions. In such a case, the plan is not treated as failing to satisfy the universal availability requirement of §1.414(v)-1(e) merely because of that preclusion.

Bulletin No. 2025–8 851 February 18, 2025

(3) Determination of employer spon- soring the plan . For purposes of determining the employer sponsoring the plan with respect to a catch-up eligible participant, the employer is the participant’s common law employer. Thus, for purposes of this section, the employer sponsoring the plan does not include other entities that are treated as a single employer with a catch-up eligible participant’s common law employer under section 414(b), (c), (m), or (o).

(4) Plans with more than one employer sponsoring the plan. If an applicable employer plan has more than one employer sponsoring the plan (that is, the plan is sponsored by multiple employers that are aggregated under section 414(b), (c), (m), or (o), or is a multiple employer plan or a multiemployer plan), a catch-up eligible participant’s wages for the preceding calendar year from one employer sponsoring the plan are not aggregated with the wages from another employer sponsoring the plan for purposes of determining whether the participant’s wages for the preceding calendar year exceeded the applicable Roth catch-up wage threshold in paragraph (a)(2) of this section. Furthermore, even if a catch-up eligible participant’s wages for the preceding calendar year from one employer sponsoring the plan exceeded the applicable Roth catch-up wage threshold in paragraph (a)(2) of this section, elective deferrals made from the participant’s compensation from another employer sponsoring the plan that are catch‑up contributions would not be required to be designated Roth contributions unless the participant’s wages for the preceding calendar year from that other employer also exceeded that wage threshold.

(c) Treatment of pre-tax catch-up con- tributions that are required to be desig- nated Roth contributions —(1) General rule. Subject to paragraph (c)(3) of this section, a pre-tax elective deferral in excess of an applicable limit described in §1.414(v)-1(b)(1) that, in accordance with paragraph (a)(2) of this section, is a catch-up contribution only if it is a designated Roth contribution does not cause an applicable employer plan to fail to satisfy any requirement of the Internal Revenue Code if the failure to be a des

ignated Roth contribution is corrected in accordance with paragraph (c)(2) of this section.

(2) Correction of section 414(v)(7) fail- ures —(i) In general . For purposes of this paragraph (c), if an elective deferral that exceeds a statutory limit, employer-provided limit, or ADP limit (as such terms are defined in §1.414(v)-1(b)(1)) fails to be a catch-up contribution under section 414(v)(1) because the elective deferral is not a designated Roth contribution, then the failure to satisfy section 414(v)(7) is referred to as a “section 414(v)(7) failure” and may be corrected in accordance with this paragraph (c)(2). A plan may provide for either of the correction methods described in paragraphs (c)(2)(ii) and (iii) of this section, but with respect to a plan year, the plan must apply the same correction method for all participants with elective deferrals in excess of the same applicable limit.

(ii) Permitted correction on Form W-2 . A plan may correct a section 414(v) (7) failure by transferring the catch-up contribution (adjusted for earnings and losses) from the participant’s pre-tax account to the participant’s designated Roth account and reporting the contribution (not adjusted for earnings and losses) as an elective deferral that is a designated Roth contribution on the participant’s Form W-2 (Wage and Tax Statement) for the year in which the elective deferral was originally excluded from the participant’s gross income. However, this correction method may be used only if the participant’s Form W‑2 for that year has not been filed or furnished to the participant.

(iii) Permitted correction by in-plan Roth rollover . As an alternative to the correction method permitted under paragraph (c)(2)(ii) of this section, a plan may correct a section 414(v)(7) failure by directly rolling over the catch-up contribution (adjusted for earnings and losses) from the participant’s pre-tax account to the participant’s designated Roth account, in accordance with section 402A(c)(4)(E), and reporting the amount of the in-plan Roth rollover on Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) for the year of the rollover.

(3) General correction require- ments —(i) Practices and procedures . For a plan to be eligible to use either of the correction methods described under paragraph (c)(2) of this section with respect to an elective deferral that is a catch-up contribution because it exceeds a statutory limit described in §1.414(v)-1(b) (1)(i), the plan sponsor or plan administrator must have in place practices and procedures designed to result in compliance with section 414(v)(7) at the time the elective deferral is made. As part of these practices and procedures, the plan must provide that the elective deferrals of a participant who is subject to the Roth catch-up requirement under paragraph (a) (2) of this section, but who has not made an affirmative election to make catch-up contributions as designated Roth contributions nor made designated Roth contributions equal to the applicable dollar catch-up limit earlier in a calendar year, are automatically treated as designated Roth contributions after the participant’s pre-tax elective deferrals made during the calendar year equal the section 401(a) (30) limit on elective deferrals for the taxable year that begins in the calendar year. Similarly, the elective deferrals of such a participant who has not made an affirmative election to make catch-up contributions as designated Roth contributions nor made designated Roth contributions equal to the applicable dollar catch-up limit earlier in the limitation year must be automatically treated as designated Roth contributions after the participant’s pretax elective deferrals result in the participant’s annual additions for the limitation year exceeding the section 415(c) limit for the limitation year.

(ii) Reliance on Form W-2 . A plan sponsor or plan administrator does not fail to have in place practices and procedures in accordance with paragraph (c)(3)(i) of this section merely because a plan determines the applicability of the section 414(v)(7) (A) Roth catch-up requirement to a participant on the basis of a timely-filed Form W-2 with respect to the participant.

(iii) Deadlines for corrections of section 414(v)(7) failures under para- graph (c)(2) of this section —(A) Elec- tive deferrals in excess of a statutory limit . If the section 414(v)(7) failure arises with respect to an elective deferral

February 18, 2025 852 Bulletin No. 2025–8

that is a catch-up contribution because it exceeds the section 401(a)(30) limit on elective deferrals, the deadline to complete all corrective steps required under paragraph (c)(2) of this section in order to avoid a qualification failure is April 15 of the calendar year following the calendar year for which the elective deferral was made. If the section 414(v) (7) failure arises with respect to an elective deferral that is a catch-up contribution because it results in the participant’s annual additions for the limitation year exceeding the section 415(c) limit, the deadline to complete the corrective steps required under paragraph (c)(2) of this section in order to avoid a qualification failure is the deadline that applies under §1.415(c)-1(b)(6) for allocating amounts to the limitation year for which the elective deferral was made.

(B) Elective deferrals in excess of an employer-provided limit. If the section 414(v)(7) failure arises with respect to an elective deferral that is a catch-up contribution because it exceeds an employer-provided limit as described in §1.414(v)-1(b)(1)(ii), the deadline to complete the corrective steps required under paragraph (c)(2) of this section in order to avoid a qualification failure is the date that is 2½ months (6 months, in the case of an applicable employer plan that includes an eligible automatic contribution arrangement within the meaning of section 414(w)) after the close of the plan year for which the catch-up contribution was made.

(C) Elective deferrals in excess of the ADP limit . If the section 414(v)(7) failure arises with respect to an elective deferral that is a catch-up contribution because it exceeds the ADP limit, the deadline to complete the corrective steps required under paragraph (c)(2) of this section in order to avoid a qualification failure is the date that is 2½ months (6 months, in the case of an applicable employer plan that includes an eligible automatic contribution arrangement within the meaning of section 414(w)) after the close of the plan year for which the excess contribution was made.

(d) Examples . The following examples illustrate the application of this section. For purposes of these examples, assume that the participant’s elective deferrals under

all plans of the employer do not exceed the participant’s section 415(c)(3) compensation, the participant’s annual additions for a limitation year do not exceed the section 415(c) limit, the taxable year of the participant is the calendar year, the plan includes a qualified Roth contribution program, and the plan year is the calendar year (except as specifically provided). Assume further that this section applies to contributions in taxable years beginning in 2026, the section 401(a)(30) limit on elective deferrals for 2026 is $24,000, the applicable dollar catch-up limit for 2026 that is applicable to each participant in the examples is $8,000, and the Roth catch-up wage threshold to be applied to 2025 FICA wages for determining applicability of the Roth catch-up requirement under section 414(v)(7)(A) for a plan year beginning in 2026 is $150,000. (1) Example 1 : Application of Roth catch-up wage threshold —(A) Facts . In January 2025, Participant A became an employee of an accounting firm that is structured as a partnership. Through October 2025, A had $151,000 of FICA wages from the accounting firm. In November 2025, Participant A became a partner in the accounting firm, and, for 2025, Participant A had a $30,000 distributive share of partnership income from the accounting firm, all of which was self-employment income. Participant A is a partner with the accounting firm for all of 2026. (B) Analysis . Although Participant A is a partner with the accounting firm for the last two months of 2025 and for all of 2026 (and thus has self-employment income rather than FICA wages for that period), Participant A had more than $150,000 in FICA wages from the accounting firm for 2025. Thus, Participant A is subject to section 414(v)(7)(A) for 2026, and if Participant A makes elective deferrals in excess of an applicable limit for 2026 under a plan sponsored by the accounting firm, those elective deferrals must be designated Roth contributions.

(2) Example 2: Application of Roth catch-up wage threshold —(A) Facts . The facts are the same as in paragraph (d)(1) of this section ( Example 1 ), except that Participant A became a partner of the accounting firm in May 2025, and had FICA wages from the firm of $60,000 before becoming partner. In addition, for 2025, Participant A had a $150,000 distributive share of partnership income from the accounting firm, all of which was self-employment income.

(B) Analysis . Although Participant A had total compensation of $210,000 for the services Participant A performed for the accounting firm in 2025, only $60,000 of that amount were FICA wages. Because Participant A did not have more than $150,000 of FICA wages from the accounting firm for 2025, any elective deferrals in excess of an applicable limit that Participant A makes for 2026 under a plan sponsored by the accounting firm are not required to be designated Roth contributions.

(3) Example 3: Application of section 414(v)(7) (B) to a plan with a plan year other than the cal- endar year— (A) Facts . Participant B participates in an applicable employer plan sponsored by Employer E. The plan year begins on July 1 and ends on June 30. Participant B had $155,000 in wages within the meaning of section 3121(a) from Employer E for calendar year 2025, and is a catch-up eligible participant for calendar year 2026. For the plan year beginning July 1, 2026, and ending June 30, 2027, the plan allows all catch-up eligible participants to make catch-up contributions and requires that any elective deferrals in excess of an applicable limit made by catch-up eligible participants who are subject to the requirements of section 414(v)(7)(A) be designated Roth contributions.

(B) Analysis . Because Participant B’s FICA wages from Employer E for calendar year 2025 exceeded $150,000, Participant B is subject to the requirements of section 414(v)(7)(A) for the first half of the plan year beginning July 1, 2026, and any catch-up contributions that Participant B makes under the plan during that period must be designated Roth contributions. Because Participant B is permitted to make catch-up contributions that are designated Roth contributions under the plan for the plan year beginning July 1, 2026 (after Participant B reaches an applicable limit (as defined in §1.414(v)-1(b)(1)), all catch-up eligible participants under the plan must be permitted to make catch-up contributions that are designated Roth contributions for the plan year.

(4) Example 4: Plans with more than one employer sponsoring the plan —(A) Facts . Employer F and Employer G are members of a controlled group of corporations within the meaning of section 414(b). Participant C was hired by Employer F on January 1, 2025, and remained employed by Employer F through October 31, 2025. Effective November 1, 2025, Participant C transferred to Employer G and was employed by Employer G for the remainder of 2025. Participant C is employed by Employer G for all of 2026, the year in which Participant C attains age 55. Employer F reported $155,000 of FICA wages on a Form W-2 for Participant C for 2025. Employer G reported $35,000 of FICA wages on a Form W-2 for Participant C for 2025. Employers F and G are participating employers in a section 401(k) plan, Plan P. Participant C becomes eligible to participate in Plan P on January 1, 2026, and all of Participant C’s elective deferrals for 2026 are made from compensation paid by Employer G.

(B) Analysi s. Employers F and G are common law employers of Participant C during different portions of 2025, and, under paragraph (b)(3) of this section, they are both employers sponsoring the plan. Because Participant C’s FICA wages from Employer G in 2025 did not exceed $150,000, Participant C is not subject to the requirements of section 414(v) (7)(A) with respect to elective deferrals that are made from compensation paid by Employer G in 2026. Accordingly, Participant C is not required to designate any catch-up contributions made for 2026 under Plan P as designated Roth contributions. This is the case even though Participant C had wages from Employer F (an employer sponsoring the plan) that exceeded $150,000 for 2025.

Bulletin No. 2025–8 853 February 18, 2025

(5) Example 5: Correction of section 414(v)(7) failure —(A) Facts . Participant D, who attains age 55 in 2026, participates in a section 401(k) plan, Plan Q, sponsored by Employer H. Plan Q does not limit elective deferrals except as necessary to comply with sections 401(a)(30) and 415(c). Plan Q does not provide catch-up eligible participants with a separate election for elective deferrals that are in excess of the section 401(a)(30) limit and provides that such a participant is permitted to defer amounts in excess of the section 401(a)(30) limit on elective deferrals up to the applicable dollar catch-up limit for the year. For 2025, Participant D had $151,000 in wages (within the meaning of section 3121(a)) from Employer H. For 2026, Participant D elects to defer $1,250 into Participant D’s account in Plan Q for each of 24 pay periods. Employer H has in place practices and procedures that are designed to prevent section 414(v) (7) failures and to result in compliance with the section 414(v)(7) Roth catch-up requirement at the time an elective deferral is made, and Plan Q provides for a deemed Roth catch-up election as described in paragraph (c)(3)(i) of this section. Nonetheless, Employer H discovers that all of Participant D’s elective deferrals under Plan Q during 2026 (a total of $30,000) were pre-tax elective deferrals.

(B) Analysis . Because Participant D had over $150,000 in wages from Employer H for 2025, under section 414(v)(7)(A), Participant D’s catch-up contributions under Plan Q for 2026 (that is, the elective deferrals that exceed the section 401(a)(30) limit) are required to be designated Roth contributions. Thus, $6,000 of Participant D’s elective deferrals for 2026 (that is, the elective deferrals in excess of the section 401(a)(30) limit of $24,000) are required to be designated Roth contributions. To keep these contributions in the plan, Employer H must correct the section 414(v)(7) failure with respect to $6,000 of Participant D’s pre-tax elective deferrals for 2026, using one of the methods set forth under paragraph (c)(2) of this section, by April 15, 2027 (the deadline under paragraph (c)(3)(iii)(A) of this section).

(6) Example 6: Designated Roth contributions that can satisfy the section 414(v)(7) Roth catch-up requirement —(A) Facts . The facts are the same as in paragraph (d)(5) of this section ( Example 5 ), except that the first $5,000 of the $30,000 total elective deferrals Participant D makes for 2026 are designated Roth contributions. (Thus, during each of the first 4 pay periods in 2026, Participant D makes $1,250 of elective deferrals that are designated Roth contributions, and then subsequently makes $25,000 in pre-tax elective deferrals ratably over the remaining 20 pay periods.) Participant D reaches the section 401(a)(30) limit on elective deferrals during the twentieth pay period of 2026 and does not make any designated Roth contributions after reaching the section 401(a)(30) limit on elective deferrals in 2026.

(B) Analysis . In accordance with paragraph (b)(1) of this section, the $5,000 in elective deferrals that are designated Roth contributions that Participant D made at the beginning of 2026 can be taken into account for purposes of satisfying Participant D’s Roth catch-up requirement under section 414(v)(7). Thus, the portion of Participant D’s pre-tax elective deferrals that are required to be corrected is $1,000 ($6,000 of elective deferrals that are in excess of the section 401(a) (30) limit, minus $5,000 of elective deferrals that

(Filed by the Office of the Federal Register January 10, 2025, 8:45 a.m., and published in the issue of the Federal Register for January 13, 2025, 90 FR 2645)

Notice of Proposed Rulemaking

Source of Income from Cloud Transactions

REG-107420-24

AGENCY : Internal Revenue Service (IRS), Treasury.

were made as designated Roth contributions within the taxable year), and Employer H must correct the section 414(v)(7) failure with respect to only $1,000 of Participant D’s pre-tax elective deferrals. To keep the $1,000 in the plan, Employer H must correct the section 414(v)(7) failure using one of the methods set forth under paragraph (c)(2) of this section, by April 15, 2027 (the deadline under paragraph (c)(3)(iii)(A) of this section).

(e) Applicability dates —(1) Statu- tory applicability date . Section 414(v)(7) applies to contributions in taxable years beginning after December 31, 2023.

(2) Regulatory applicability dates —(i) General rule . Except as provided in paragraphs (e)(2)(ii) and (iii) of this section, this section applies to contributions in taxable years beginning after [DATE SIX MONTHS AFTER DATE OF PUBLICATION OF FINAL RULE].

(ii) Collectively bargained plans . In the case of an applicable employer plan maintained pursuant to one or more collective bargaining agreements, paragraphs (a) through (d) of this section shall not apply until the first taxable year described in paragraph (e)(2)(i) of this section, or, if later, the first taxable year beginning after the date on which the last collective bargaining agreement related to the plan that is in effect on December 31, 2025, terminates (determined without regard to any extension to those agreements).

(iii) Early implementation permitted . A plan is permitted to apply the rules of this section to contributions in any taxable year beginning after December 31, 2023.

Douglas W. O’Donnell,

Deputy Commissioner.

ACTION : Notice of proposed rulemaking.

SUMMARY : This document contains proposed rules for determining the source of income from cloud transactions for purposes of the international provisions of the Internal Revenue Code. These proposed rules would generally affect taxpayers who earn gross income from engaging in cloud transactions.

DATES : Written or electronic comments and requests for a public hearing must be received by April 14, 2025.

ADDRESSES : Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-107420-24) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:01:PR (REG-107420-24), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:01:PR (REG-10742024), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT : Concerning the proposed regulations, Christopher E. Fulle at (202) 317-5367 or Michelle L. Ng at (202) 317-6989 (not toll-free numbers); concerning submissions of comments and requests for a public hearing, contact the Publications and Regulations branch at (202) 317-6901 (not a toll-free number) or by email to publichearings@irs.gov (preferred).

February 18, 2025 854 Bulletin No. 2025–8

SUPPLEMENTARY INFORMATION:

Authority

The proposed regulations are issued under the express delegation of authority under section 7805 of the Internal Revenue Code (Code). Section 7805(a) directs the Secretary of the Treasury or her delegate to prescribe all needful rules and regulations for the enforcement of that section and others in the Code, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

Background

Proposed regulations published in the Federal Register (84 FR 40317) in 2019 (REG-130700-14) (the 2019 proposed regulations) set forth proposed rules for identifying and classifying cloud transactions, and the preamble to the 2019 proposed regulations requested comments on rules for sourcing income from cloud transactions. Comments received addressed the necessity of developing specific rules for sourcing gross income from cloud transactions and provided recommendations on the content of such rules. This notice of proposed rulemaking, which is being published with the final regulations for identifying and classifying cloud transactions (TD 10022) (the 2025 final regulations) that are being published in the Final Rules section of this same issue of the Federal Register (90 FR 2977), proposes rules for sourcing gross income from cloud transactions.

Explanation of Provisions

I. Source of Gross Income from Cloud Transactions

A. Overview of comments received

The Treasury Department and the IRS received more than a dozen comments in response to the request for comments on administrable rules for sourcing income from cloud transactions in a manner consistent with sections 861 through 865. Comments were split almost evenly with regard to whether specific sourcing rules are needed in this area, with a narrow

majority expressing support for such guidance. Of this majority, several comments recommended that services income from cloud transactions be sourced according to the location of the assets and personnel used in providing the service. A number of these comments explained that this approach would align with the result in Piedras Negras Broadcasting Co. v. Comm’r, 43 B.T.A. 297 (1941), nonacq., 1941-2 C.B. 22, aff’d, 127 F. 2d. 260 (5th Cir. 1942), in which the income of a radio broadcasting corporation was determined to be foreign source because its broadcasting facilities and employees were located in Mexico, even though the corporation broadcasted programs primarily to listeners located in the United States and received almost all of its income from advertisers located in the United States. Other comments voiced the need for specific rules for sourcing income from cloud transactions, but did not recommend a particular sourcing approach, with one comment suggesting that the location of the cloud service provider’s assets and personnel and the location of the end-user could be evaluated in developing the rules. Another comment proposed that given the challenges of sourcing cloud transactions when the operations, employees, and customers are dispersed, the sourcing rules could provide taxpayers with the option to source the income to the place where the contract is executed. While almost half of the comments received stated that regulations for sourcing income from cloud transactions are unnecessary because existing statutory, regulatory, and case law provides sufficient guidance, an overwhelming majority of those comments recommended that if issued, the regulations should take into account the location of the assets and people that contribute to the delivery of the cloud service.

Many of the comments discussed whether the sourcing determination should be made by taking into account solely the assets and personnel of the taxpayer that recognizes the income from the performance of the cloud service (the taxpayer-by-taxpayer approach), or whether taxpayers should be required to look through to the activities and personnel of other related legal entities that contribute to the provision of the service (the unitary approach). Nearly all comments

on this issue stated that income from cloud transactions should be sourced on a taxpayer-by-taxpayer basis. Comments explained that the taxpayer-by-taxpayer approach is administrable and supported by the principles of Miller v. Comm’r, 73 T.C.M. 2319 (1997), aff’d without pub- lished decision, 166 F.3d 1218 (9th Cir. 1998), in which income that a foreign corporation received for performing research and development services was held to be foreign source notwithstanding that the performance of those services was subcontracted to certain related and unrelated entities, including a wholly-owned U.S. subsidiary. One comment suggested that a taxpayer-by-taxpayer rule for sourcing services income from cloud transactions could be supplemented with anti-abuse provisions requiring the income to be sourced on a look-through or unitary basis in limited circumstances. However, another comment asserted that sourcing services income from cloud transactions on a look-through or unitary basis should be required, explaining that this approach more accurately reflects the economic realities of the transaction because it accounts for the contributions made by members of the multinational group to the provision of the service. That comment also expressed the concern that sourcing on a taxpayer-by-taxpayer basis could cause U.S. source income to be understated with respect to commonly-used structures in which the development, enhancement, maintenance, protection, and exploitation functions are performed primarily by U.S. entities but the services income is recorded by a foreign entity that contracts directly with the end-users to whom the cloud transaction is provided.

B. Need for proposed regulations

The development and advancement of cloud technologies has transformed both the value that businesses deliver to customers and the way that value is delivered, giving rise to cloud-based business models and cloud transactions. The 2025 final regulations classify a cloud transaction (within the definition of §1.86119(b)) as the provision of services. See §1.861-19(c)(1). Under the source rules of the Code, which were designed in the context of more traditional modes of com

Bulletin No. 2025–8 855 February 18, 2025

merce, gross income from the provision of services is sourced to the place where the service is performed. See sections 861(a) (3) and 862(a)(3). The Code does not provide guidance on how to determine the place of performance for specific types of service transactions, including cloud transactions. Further, while section 863(b) (1) specifies that income from services rendered partly within and partly without the United States is treated as derived partly from each source, there is no statutory guidance prescribing how to source the services income, including income from cloud transactions, in such circumstances. The distinctive attributes of cloud transactions, including the network-based and increasingly automated nature of the service delivery and the role of intangible property (such as proprietary software and other proprietary digital content) in ensuring the functionality, reliability, and performance of the service, raise questions regarding how to determine the place of performance of a cloud transaction.

The proposed regulations, which would establish specific sourcing rules that interpret the place of performance in the context of a cloud transaction, are therefore necessary to provide clarity and certainty to both taxpayers and the IRS. To determine the place of performance, the proposed sourcing rules would take into account the location of the employees and assets, including both tangible and intangible assets, that contribute to the provision of the cloud transaction. The Treasury Department and the IRS are of the view that, because of the technical nature of a cloud transaction, the place of performance for purposes of sourcing gross income is the place where the resources and personnel responsible for the development, management, and delivery of the service are located because this is where the key activities in the provision of the service occur, as opposed to ancillary activities such as marketing, sales, and contracting. This approach is consistent with case law on the sourcing of income involving analogous traditional business models where services are provided from a location that differs from the customers’ location, specifically, the Piedras Negras case. See 43 BTA at 297, aff’d, 127 F.2d at 260. In line with the approach in Piedras Negras, the proposed rules do not consider

the location of the customer or end-user, as it merely reflects the place where the service is consumed, not where the performance actually takes place as prescribed by sections 861(a)(3) and 862(a)(3). Similarly, the location where a contract for a cloud transaction is executed should not dictate the source of the resulting gross income because that location may not bear any connection to where the service is performed.

The proposed cloud transaction sourcing rules would apply on a taxpayer-by-taxpayer basis and therefore, in determining the gross income of an entity that recognizes the services income, would take into account solely the assets and personnel of the legal entity. The Treasury Department and the IRS agree that this approach is administrable and practical. By focusing on the economic contributions that the contracting entity makes to the performance of the cloud transaction, the taxpayer-by-taxpayer approach provides a clear, straightforward way of determining the source of gross income from the transaction, while allowing for appropriate deductions from that gross income in respect of amounts paid or accrued to affiliated or unaffiliated contributors to the provision of the cloud services, leading to reduced complexity in tax compliance and enforcement. This approach is also generally consistent with the current approach for sourcing other categories of income, including non-cloud services income such as gross income from certain sales of inventory that is sourced to the location of production activity under §1.863-3(c) (1)(ii). Further, this approach would not impede the IRS’s ability to assert common law principles, such as the economic substance doctrine, the step transaction doctrine, and the rules of agency, or existing statutory and regulatory provisions, such as the section 482 rules, to ensure that the Federal income tax consequences more properly reflect the economic realities of the transaction, including the contributions to a cloud transaction made by affiliates of the taxpayer. Notwithstanding the above, the Treasury Department and the IRS will continue to study the implications of applying the taxpayer-by-taxpayer approach in the context of sourcing gross income from services generally, and may refine or propose revisions to the approach

if they determine that this is necessary to adequately account for the interdependencies and collaboration across entities in a multinational group, and consequently, to ensure a fair and accurate representation of where services are performed.

C. Explanation of proposed rules for sourcing gross income from cloud transactions

The proposed regulations state that gross income from a cloud transaction is sourced as services income under section 861(a)(3) or 862(a)(3), as appropriate, according to where the service is performed. Proposed §1.861-19(d)(1). The place of performance of a cloud transaction is established through a formula composed of a fraction that relies on three factors: the intangible property factor, the personnel factor, and the tangible property factor (within the meaning of proposed §1.861-19(d)(2), (d)(3), and (d)(4), respectively). Id .

As discussed in detail in Parts I.C.1 through 3 of this Explanation of Provisions, the intangible property factor is intended to reflect the contribution of intangible property to the provision of the cloud transaction; the personnel factor is intended to reflect the contribution of certain employees to the provision of the cloud transaction; and the tangible property factor is intended to reflect the contribution of tangible property to the provision of the cloud transaction. Each factor is determined by taking into account certain worldwide expenses by the entity that, in the view of the Treasury Department and the IRS, properly represent the contributions made by or through the relevant personnel and assets to the performance of the cloud transaction. Together, these factors make up the denominator of the fraction. The numerator of the fraction is determined by summing up the portion of each factor that is from sources within the United States.

Under the proposed regulations, the gross income from a cloud transaction multiplied by the fraction yields the portion of the gross income that is from sources within the United States. Proposed §1.861-19(d)(1). The portion of the gross income that remains is gross income from sources without the United States. Id .

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Intangible Property Factor

a. Determination of the intangible property factor

The Treasury Department and the IRS consider intangible property to be a significant contributor to the performance of cloud transactions. Intangible property, such as software, algorithms, data processing applications, and other proprietary technologies, often plays a crucial role in the performance of a cloud transaction, including by shaping the unique features of the service and ensuring the service’s functionality, reliability, and delivery. This role of intangible property is becoming particularly important as cloud transactions are becoming increasingly automated, requiring less and less contribution from personnel and tangible property to deliver value to customers. In such cases, the intangible property itself may be the main force that is effectively performing the service. It would be difficult and burdensome, however, to ascertain the precise value or contribution of an item of intangible property to the performance of a cloud transaction given the challenges inherent in isolating the specific impact of various intangibles on the cloud transaction’s overall performance. The Treasury Department and the IRS are of the view that certain research and experimental expenses, amortization, and royalties incurred during the taxable year in which the cloud transaction is performed could serve as an administrable proxy for reflecting the contribution of intangible property to the performance of the cloud transaction. These expenses serve as the foundation for the intangible property factor.

Specifically, the intangible property factor is the sum of specified research or experimental expenditures (as defined under section 174(b)) incurred during the taxable year that are associated with the cloud transaction as well as royalty and certain amortization expenses incurred during the taxable year to the extent they are for intangible property directly used to provide the cloud transaction (collectively, “intangible property costs”). Proposed §1.861-19(d)(2)(i). Intangible property costs include payments to third-party and related-party research and experimenta

tion providers. Because specified research or experimental expenditures are used as a proxy for current use of existing self-developed intangible property, those expenditures are taken into account as they are incurred, regardless of whether and when they are deductible, in order to match the timing of when compensation is paid to employees performing research or experimentation activities. As discussed in Part I.C.1.b. of this Explanation of Provisions, the intangible property factor is sourced based on this compensation; therefore the Treasury Department and the IRS are of the view that taking the specified research or experimental expenditures in the year when incurred provides an administrable rule that recognizes the economic contribution of the intangible property and avoids taxpayers having to trace section 174(a)(2)(B) amortization deductions back to the year in which incurred. However, royalty and amortization expenses are taken into account for the intangible property factor when deductible because that is the most administrable proxy for measuring the economic contribution existing licensed or acquired intangible property makes to a cloud transaction.

In computing the intangible property factor, the Treasury Department and the IRS recognize that some specified research or experimental expenditures may not be directly traceable to a single transaction because intangible property developed through research and experimentation conducted in a taxable year may not be monetized in cloud transactions until a future year. In light of this, and consistent with the approach taken for allocating and apportioning deductions for such expenditures, the proposed regulations provide that the specified research or experimental expenditures to be taken into account with respect to a cloud transaction from which the gross income is being sourced are those associated with all cloud transactions provided in that taxable year that are in the same product line as the cloud transaction. Id .; cf. §1.861-17(b) (recognizing that research and experimentation is an inherently speculative activity, which when successful ultimately results in the creation of intangible income, and allocating expenditures for such activity to gross intangible income earned in the year of the expenditure). The Treasury

Department and the IRS are of the view that the current-year approach in the proposed rules serves as a workable, reliable, and appropriate proxy for existing intangible property in the same product line. Under the proposed regulations, cloud transactions are considered to be in the same product line if they are within the same Corresponding Index Entry under a North American Industry Classification System (NAICS) code number. Proposed §1.861-19(d)(8). The proposed regulations also include a consistency requirement to prevent taxpayers from changing Corresponding Index Entry and NAICS code numbers absent a change in facts. Id . The intangible property factor focuses on work done in the same product line as the cloud transaction to balance between specificity and practicality. The factor aims to capture the contribution of intangible property to the performance of a cloud transaction, so a factual relationship between the specified research or experimentation expenditures and the cloud transaction being tested needs to exist. At the same time, the Treasury Department and the IRS are aware that it is not necessarily possible to precisely determine the product or products that will benefit from a research and experimentation process at an early stage. To prevent duplication, the proposed regulations require expenses that would be included in the intangible property factor for multiple cloud transactions in a taxable year to be allocated among those transactions (taking into account the aggregation rule described in Part I.C.4 of this Explanation of Provisions) based on the relative gross income earned from each transaction. Proposed §1.861-19(d)(2)(i). Any intangible property costs that support cloud transactions in general but that do not relate to any specific cloud transaction should be allocated in the same manner.

b. Determination of the portion of the intangible property factor from U.S. sources

Once the intangible property factor is determined, the portion of this factor that is attributable to sources within the United States must be identified for inclusion in the numerator. Given the non-physical nature of intangible property, its location

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when used in providing a service may be challenging to ascertain. Under the proposed rules, the portion of the intangible property factor that is from sources within the United States is determined based on the extent to which certain of the taxpayer’s employees perform services in the United States, determined by leveraging the principles of §1.861-4(b)(2)(ii)(E) (relating to sourcing compensation from labor or personal services on a time basis). The employees considered for this purpose are those whose primary function is to perform research and experimentation activities associated with cloud transactions in the same product line as the cloud transaction the gross income of which is being sourced. Proposed §1.861-19(d) (2)(ii). The proposed regulations provide that the employee’s primary function is the set of tasks to which they are assigned to spend the majority of their working time. Proposed §1.861-19(d)(5). In order to account for amounts paid to third-party research and experimentation providers, amortization, and royalties, the fraction determined by the compensation that has been paid to the research and experimentation personnel is applied to the total research and experimental expense determined under §1.861-19(d)(2)(i). See proposed §1.861-19(d)(2)(ii).

The Treasury Department and the IRS are of the view that the location of research and experimentation personnel is a logical and accurate proxy for the location of intangible property that contributes to the performance of a cloud transaction for a number of reasons. First, the research and experimentation personnel contribute to the creation, design, and refinement of the intangible property either through their own efforts or by managing and facilitating research and experimentation work carried out by third parties. Therefore, the value of the intangible property used to provide the cloud transaction depends on their personal efforts and expertise. Additionally, while intangible property does not have a physical form that can be easily located, the place where research and experimentation personnel operate is tangible and verifiable. Relatedly, taxpayers generally know or should know the location of their research and experimentation personnel, and thus, relying on the location of these personnel would avoid

a burdensome compliance process that might otherwise be required to determine the location of intangible property used to provide cloud transactions. For similar reasons, in determining gross income of a taxpayer, the rule does not look to research and experimentation personnel other than those of the taxpayer, and uses the taxpayer’s own personnel as a proxy for all research and experimentation personnel working on the relevant intangible property.

The determination of which research and experimentation employees should be taken into account focuses on the employees whose primary function is the performance of research and experimentation activities, without limiting the analysis to nonmanagerial employees or first-line managers who undertake these activities. This is because research and experimentation typically involves contributions from personnel across various levels of the organization, including senior leadership and technical staff, as an idea for a product or service moves from concept to design, implementation, and testing. Accordingly, focusing solely on nonmanagerial employees or first-line managers could result in missing key contributors to the research and experimentation activities associated with a cloud transaction, including individuals within the organizational structure who oversee or engage in higher-level experimentation efforts.

Personnel Factor

a. Determination of the personnel factor and the portion from U.S. sources

The Treasury Department and the IRS are of the view that while the underlying technology and infrastructure are important in providing a cloud transaction to customers, the employees who manage, operate, and maintain these systems are also fundamental to the provision of the service. Accordingly, the efforts of personnel employed by the taxpayer who directly contribute to the provision of the cloud transaction must be taken into account in sourcing gross income from that cloud transaction. To properly reflect the contribution of these personnel to the provision of the cloud transaction, the personnel

factor is composed of the compensation paid to the taxpayer’s employees whose primary function is to directly contribute to the provision of the cloud transaction. See proposed §1.861-19(d)(3)(i). However, to avoid double counting income, compensation that is paid to research and experimentation personnel described in proposed §1.861-19(d)(2) is excluded. Id .

As explained in Part I.C.1.b of this Explanation of Provisions, an employee’s primary function is the set of tasks to which they are assigned to spend the majority of their working time. Proposed §1.861-19(d)(5). The proposed regulations provide a rule to account for situations in which an employee’s primary function is to directly contribute to more than one cloud transaction. In those cases, all of the employee’s compensation must be allocated among those cloud transactions based on the relative amount of time the employee spends contributing to each transaction. Proposed §1.861-19(d)(3) (i). To illustrate the application of these rules, if an employee spends 30 percent of their working time on Cloud Transaction 1, 30 percent of their working time on Cloud Transaction 2, and 40 percent of their working time not on cloud transactions, that employee’s primary function would be working on cloud transactions because a majority of their working time (60 percent) is spent on cloud transactions. Consequently, all of this employee’s compensation would be allocated among Cloud Transaction 1 and Cloud Transaction 2 based on the relative amount of time the employee spends contributing to each of the two cloud transactions. However, where an employee contributes to multiple cloud transactions simultaneously, their compensation must be allocated among those transactions based on the relative gross income earned from each transaction because it would be impossible to use a time-based allocation in such cases. Id .

Similar to the determination of the numerator of the intangible property factor, which is the portion of that factor from sources within the United States, the proposed regulations provide the numerator of the personnel factor, which is the portion of that factor from sources within the United States, is equal to the part of the personnel factor that is paid for services performed in the United States using the

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principles of §1.861-4(b)(2)(ii)(E). Proposed §1.861-19(d)(3)(ii).

b. Direct contribution to the provision of the cloud transaction

The proposed regulations set forth rules that define which employees are considered to directly contribute to the provision of the cloud transaction and which employees are not considered to do so. Under proposed §1.861-19(d)(3)(iii), personnel directly contribute to the provision of a cloud transaction to the extent they personally perform technical or operational activities for the provision of the cloud transaction, or to the extent they are managers who directly support or immediately supervise such technical or operational personnel. Proposed §1.861-19(d) (3)(iii) provides a non-exhaustive list of the functions that fall within the meaning of “technical and operational activities.” These functions are the conduct of scientific, engineering, or technical activities for the configuration, delivery, or maintenance of the cloud transaction; the provision of monitoring, diagnostics, or incident response with respect to the cloud transaction’s performance, reliability, efficiency, or security; the management of the cloud transaction’s infrastructure; the delivery of end-user support with respect to the cloud transaction; and the conduct of any similar functions. Id . Further, under proposed §1.861-19(d)(3)(iv), personnel are not considered to directly contribute to the provision of the cloud transaction to the extent they conduct business strategy, leadership, legal or compliance, marketing, communications, sales, business development, finance, accounting, clerical, human resources or administrative duties, or similar functions.

Proposed §1.861-19(d)(3)(iii) and (iv) are intended to identify the individuals that generally have the hands-on, day-to-day involvement in the software, infrastructure, and processes that enable the cloud transaction to be provided to the customer and to function as intended. The Treasury Department and the IRS are of the view that the individuals who personally perform the technical and operational work and the immediate managers who direct and supervise that work are essential to the performance of the ser

vice, and therefore, their contributions must be included. By contrast, employees in higher-level management or executive positions who are responsible for setting the strategic direction of the business and making high-level decisions are too far removed from the hands-on, day-to-day work that ensures the delivery of any particular cloud transaction to the customer. Therefore, while their roles are important to the overall business, they do not directly contribute to the provision of the transaction itself and are not accounted for as part of the personnel factor. The Treasury Department and the IRS are of the view that this distinction properly interprets the statutory requirement to source gross income from a service to the place where the service is performed.

Tangible Property Factor

a. Determination of the tangible property factor and the portion from U.S. sources

Cloud transactions depend on physical infrastructure and hardware, such as servers and networking equipment. For this reason, the Treasury Department and the IRS are of the view that tangible property that directly supports the provision of a cloud transaction must be taken into account in determining the source of gross income from a cloud transaction. Under the proposed regulations, the tangible property factor, which is intended to represent the contribution of the tangible property to the performance of the cloud transaction, is the sum of the depreciation and rental expense for the taxable year for tangible property owned or leased by the taxpayer, to the extent the property is directly used to provide the cloud transaction. See proposed §1.861-19(d)(4)(i). To eliminate double counting, the proposed regulations require any depreciation or rental expense that would be included in the tangible property factor for multiple cloud transactions in a taxable year to be allocated among those transactions based on the relative gross income earned from each transaction. The portion of the tangible property factor that is from sources within the United States and comprises the numerator is equal to the part of the tangible property factor attributable to property located within the United States.

b. Determination of the depreciation expense

For purposes of computing the tangible property factor, depreciation expense for a taxable year is determined by dividing the adjusted depreciable basis (as defined in §1.168(b)-1(a)(4)) of the tangible property by the applicable recovery period as though the alternative depreciation system in section 168(g)(2) applied for the entire period the property has been in service. Proposed §1.861-19(d)(4)(iii). The Treasury Department and the IRS are of the view that the determination must be made without taking into account tax incentives intended to accelerate the recovery of costs in order to provide an allocation of depreciation that more closely reflects the asset’s actual economic life. Thus, the proposed regulations explicitly state that the depreciation expense is computed without regard to the election to expense certain depreciable property under section 179 and without regard to any additional firstyear depreciation provision (for example, section 168(k)).

Aggregation Rule

The proposed regulations include an aggregation rule, set forth in proposed §1.861-19(d)(7), that is intended to enhance the administrability of these regulations and to alleviate the compliance burden on taxpayers associated with the regulations. The rule allows a taxpayer to aggregate substantially similar cloud transactions and source the gross income from those transactions as if they were one transaction. However, the rule also prohibits a taxpayer from aggregating substantially similar cloud transactions if the taxpayer knows, or has reason to know, that doing so would materially distort the source of gross income from any cloud transaction.

For example, assume a cloud provider offers two distinct but substantially similar cloud transactions, Service 1 and Service 2, that are not in the same product line (within the meaning of proposed §1.861-19(d)(8)). Further, assume the cloud provider incurs significantly more research and experimentation costs associated with Service 2 as compared to those incurred for Service 1, and all of the research and experimentation

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personnel of the cloud provider are located in the United States at all times. This leads a significantly larger percentage of the income from Service 2 to be sourced within the United States as compared to that of Service 1. Aggregating Service 1 and Service 2 would cause a materially larger amount of gross income from Service 1 to be sourced within the United States than if the income were sourced without aggregating Service 1 with Service 2. Therefore, under the proposed regulations, the cloud provider cannot aggregate Service 1 and Service 2 to source the gross income from these transactions.

Anti-Abuse Rule

In order to prevent taxpayers from circumventing the purpose of the proposed regulations – to attribute the source of gross income from a cloud transaction to the place where the transaction is performed – the proposed regulations would provide an anti-abuse rule. That anti-abuse rule, included in proposed §1.861-19(d) (9), would provide that if the taxpayer has entered into or structured one or more transactions with a principal purpose of reducing its U.S. tax liability in a manner inconsistent with the purpose of the proposed regulations, appropriate adjustments will be made so that the source of the taxpayer’s gross income reflects the location where the cloud transaction is performed.

II. Request for Comments

small businesses. It is hereby certified that these proposed regulations, if adopted, will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6).

These proposed regulations would set forth specific rules for sourcing income from cloud transactions. Specifically, the proposed regulations provide guidance on sourcing such income based on three factors that are broadly consistent with existing case law on sourcing income from analogous transactions. Although data are not readily available to estimate the economic impact of the proposed regulations, the Treasury Department and the IRS project that any economic impact of the proposed regulations would be minimal for businesses regardless of size. This is because the proposed regulations adopt an approach that is broadly consistent with the general principles of existing law and reflect current industry practice. Therefore, the proposed rules are not expected to materially alter taxpayer behavior and therefore the Treasury Department and the IRS expect no material economic impact.

For the reasons stated, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required. Notwithstanding the above, the Treasury Department and the IRS invite comments on the impact the proposed rules would have on small entities.

IV. Section 7805(f)

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

V. Unfunded Mandates Reform Act

Comments are requested on all aspects of the proposed regulations, including the following topics: (1) whether there are appropriate and

administrable ways to determine the portion of the intangible property factor from sources within and without the United States other than by relying on the location of research and experimental personnel; (2) whether and to what extent compa nies presently track specified research or experimental expenditures by product line; (3) whether there is a practicable and

verifiable way to precisely link the contribution of intangible property developed in one year to a cloud transaction provided in a later year;

(4) whether relative gross income is

an appropriate allocation method in cases in which the same cost or expense would be included in a factor for multiple cloud transactions during a taxable year; (5) whether additional operating costs

incurred with respect to tangible property directly used in the provision of the cloud transaction, such as electricity costs associated with cloud transactions, should be included in the tangible property factor, and if so, how to capture the costs that contribute to the performance of the cloud transaction in an administrable manner; and (6) whether a special rule is needed to

source the gross income of resellers of cloud transactions, for example, whether assets and employees other than those described in the proposed regulations better reflect the reseller’s role in the cloud transaction.

Proposed Applicability Date

The regulations are proposed to apply to taxable years beginning on or after the date of publication of the Treasury decision adopting these regulations as final regulations in the Federal Register .

Special Analyses

I. Regulatory Planning and Review— Economic Analysis

II. Paperwork Reduction Act

This proposed rulemaking does not impose or revise any information collections subject to 44 U.S.C. Chapter 35.

III. Regulatory Flexibility Act

The Regulatory Flexibility Act requires consideration of the regulatory impact on

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lars, updated annually for inflation. The proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

Executive Order 13132 (entitled Fed- eralism ) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. The proposed regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive Order.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consid

eration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. All comments will be available at www.regulations. gov.

A public hearing will be scheduled if requested in writing by any person that timely submits comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Reg- ister .

Drafting Information

The principal authors of these proposed regulations are Christopher E. Fulle and Michelle L. Ng of the Office of the Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and IRS propose to amend 26 CFR part 1 as follows:

PART 1--INCOME TAXES

Paragraph 1 . The authority citation for part 1 continues to read in part as follows:

Authority : 26 U.S.C. 7805 * * * Par. 2 . Section 1.861-19, as added in a final rule published elsewhere in this issue of the Federal Register, effective January 14, 2025, is amended as follows: a. Revise the section heading and paragraph (a);

b. Redesignate paragraphs (d), (e), and (f) as paragraphs (e), (f), and (g), respectively;

c. Add new paragraph (d); d. For each paragraph listed in the following table, remove the language in the “Remove” column and add in its place the language in the “Add” column.

Paragraph	Remove	Add
newly redesignated (e), frst sentence	paragraph (d)	paragraph (e)
newly redesignated (e)(2)(i), frst sentence	paragraph (d)(1)(i)	paragraph (e)(1)(i)
newly redesignated (e)(2)(ii), frst sentence	paragraph (d)(1)	paragraph (e)(1)
newly redesignated (e)(5)(i), frst sentence	paragraph (d)(4)	paragraph (e)(4)
newly redesignated (e)(6)(i), frst sentence	paragraph (d)(5)(i)	paragraph (e)(5)(i)
newly redesignated (e)(6)(ii)(A), frst sentence	paragraph (d)(5)(ii)	paragraph (e)(5)(ii)
newly redesignated (g), frst sentence	paragraph (e)	paragraph (f)

e. Add paragraphs (e)(12) and (13); and f. Revise newly redesignated paragraph (f).

The revisions and additions read as follows:

§1.861-19 Classification of, and source of gross income from, cloud transactions.

(a) In general . This section provides rules for classifying and sourcing gross income from cloud transactions (as

defined in paragraph (b) of this section). The rules of this section apply for purposes of Internal Revenue Code sections 59A, 245A, 250, 267A, 367, 404A, 482, 679, and 1059A; subchapter N of chapter 1; chapters 3 and 4; and sections 842 and 845 (to the extent involving a foreign person), and apply with respect to transfers to foreign trusts not covered by section 679.

(d) Source of income from a cloud transaction --(1) In general . Gross income from a cloud transaction is sourced as

services income under section 861(a)(3) or 862(a)(3), as appropriate, according to where the service is performed. The place of performance of the cloud transaction is based on the intangible property factor described in paragraph (d)(2) of this section, the personnel factor described in paragraph (d)(3) of this section, and the tangible property factor described in paragraph (d)(4) of this section. To determine gross income from a cloud transaction from sources within the United States, gross income from the cloud transaction is

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multiplied by a fraction, the numerator of which is the sum of the portion of each of the intangible property factor, personnel factor, and tangible property factor that is from sources within the United States as calculated in paragraphs (d)(2)(ii), (3)(ii), and (4)(ii) of this section, and the denominator of which is the sum of the intangible property factor, personnel factor, and tangible property factor as calculated in paragraphs (d)(2)(i), (3)(i), and (4)(i) of this section. See paragraph (e)(12) of this section ( Example 12 ). Any remaining gross income from a cloud transaction is gross income from sources without the United States.

(2) Intangible property factor --(i) Total . For purposes of paragraph (d)(1) of this section, the intangible property factor with respect to any cloud transaction performed by the taxpayer in a taxable year is equal to the sum of the taxpayer’s specified research or experimental expenditures (as defined in section 174(b) and regardless of whether and when the expenses are deductible) for that taxable year that are associated with cloud transactions in the same product line as the cloud transaction performed and the taxpayer’s amortization (other than amounts capitalized under section 174(a)(2)(A) and amortized under section 174(a)(2)(B)) and royalty expense for intangible property for the taxable year to the extent directly used to provide the cloud transaction. If the same cost or expense would be included by a taxpayer in the intangible property factor for more than one cloud transaction during a taxable year, such cost or expense is allocated among each such cloud transaction based on the relative gross income earned from each cloud transaction.

(ii) Portion from sources within the United States . With respect to a cloud transaction provided in a taxable year, the portion of the intangible property factor from sources within the United States is determined using a formula based on the location of all of the taxpayer’s employees whose primary function is to perform research and experimentation activities associated with cloud transactions in the same product line in that taxable year (the research and experimentation personnel). The formula is as follows: applying the principles of §1.861-4(b)(2)(ii)(E) (relating to sourcing income from labor or per

sonal services on a time basis), divide the sum of the total compensation paid to the research and experimentation personnel for services performed within the United States by the sum of the total compensation paid to the research and experimentation personnel, and multiply the resulting quotient by the intangible property factor described in paragraph (d)(2)(i) of this section.

(3) Personnel factor --(i) Total . For purposes of paragraph (d)(1) of this section, the personnel factor with respect to a cloud transaction performed in a taxable year is equal to the sum of the total compensation paid to all of the taxpayer’s employees in that taxable year whose primary function is to directly contribute to the provision of the cloud transaction, excluding compensation amounts that are paid to research and experimentation personnel described in paragraph (d)(2) of this section. If, however, an employee’s primary function is to directly contribute to multiple cloud transactions, then all of such employee’s compensation is allocated among the cloud transactions that the employee directly contributes to as part of their primary function based on the relative amount of time the employee spends contributing to each cloud transaction. If an employee contributes to multiple cloud transactions simultaneously, then that employee’s compensation is allocated among those cloud transactions based on the relative gross income earned from each cloud transaction.

(ii) Portion from sources within the United States . With respect to a cloud transaction, the portion of the personnel factor described in paragraph (d)(3)(i) of this section that is from sources within the United States is equal to the part of that factor paid for services performed in the United States, as determined using the principles of §1.861-4(b)(2)(ii)(E) (relating to sourcing income from labor or personal services on a time basis).

(iii) Personnel considered to directly contribute to the provision of the cloud transaction . Personnel are considered to directly contribute to the provision of the cloud transaction to the extent they personally perform technical or operational activities for the provision of the cloud transaction, or to the extent they are a manager who directly supports or

immediately supervises such technical or operational personnel. Such technical or operational activities are the conduct of scientific, engineering, or technical activities for the configuration, delivery, or maintenance of the cloud transaction; the provision of monitoring, diagnostics, or incident response with respect to the cloud transaction’s performance, reliability, efficiency, or security; the management of the cloud transaction’s infrastructure; the delivery of end-user support with respect to the cloud transaction; and the conduct of any similar functions.

(iv) Personnel not considered to directly contribute to the provision of the cloud transaction . Personnel are not considered to directly contribute to the provision of the cloud transaction to the extent they conduct business strategy, leadership, legal or compliance, marketing, communications, sales, business development, finance, accounting, clerical, human resources or administrative duties, or similar functions.

(4) Tangible property factor --(i) Total . For purposes of paragraph (d)(1) of this section, the tangible property factor with respect to a cloud transaction performed in a taxable year is equal to the sum of the depreciation expense for that taxable year for tangible property owned by the taxpayer and rental expense for that taxable year for tangible property leased by the taxpayer, in each case to the extent directly used to provide the cloud transaction. If any depreciation expense or rental expense would be included in the tangible property factor for more than one cloud transaction during the taxable year, such depreciation expense or rental expense is allocated among the cloud transactions based on relative gross income earned from each cloud transaction.

(ii) Portion from sources within the United States . The portion of the tangible property factor described in paragraph (d) (4)(i) of this section from sources within the United States is equal to the part of that factor attributable to property located within the United States.

(iii) Determination of depreciation expense . For purposes of paragraph (d)(4) of this section, depreciation expense for a taxable year is determined by dividing the adjusted depreciable basis (as defined in §1.168(b)-1(a)(4)) of the tangible prop

February 18, 2025 862 Bulletin No. 2025–8

erty by the applicable recovery period as though the alternative depreciation system set forth in section 168(g)(2) applied for the entire period that such property has been in service, without regard to the election to expense certain depreciable property under section 179 and without regard to any additional first-year depreciation provision (for example, section 168(k)).

(5) Primary function . For purposes of this section, an employee’s primary function is the set of tasks to which they are assigned to spend the majority of their working time.

(6) Employee . For purposes of this section, the term employee has the meaning given to it in §31.3121(d)-1(c).

(7) Aggregation rule . For purposes of applying this paragraph (d), a taxpayer may aggregate substantially similar cloud transactions unless it knows or has reason to know that doing so would materially distort the source of gross income from any cloud transaction.

(8) Product line . For purposes of this section, a product line is defined as all products within the same Corresponding Index Entry under a North American Industry Classification System (NAICS) code number. Once a taxpayer selects a Corresponding Index Entry and NAICS code number for the first taxable year for which this section applies, it must continue to use that Corresponding Index Entry and NAICS code number in following years unless the taxpayer establishes to the satisfaction of the Commissioner that, due to changes in the relevant facts, a change in Corresponding Index Entry and NAICS code number is appropriate.

(9) Anti-Abuse Rule . The purpose of this paragraph (d) is to attribute the source of the taxpayer’s gross income from a cloud transaction to the location where the cloud transaction is performed. Therefore, if the taxpayer has entered into or structured one or more transactions with a principal purpose of reducing its U.S. tax liability in a manner inconsistent with the purpose of this paragraph (d), appropriate adjustments will be made so that the source of the taxpayer’s gross income reflects the location where the cloud transaction is performed.

(e) * * * (12) Example 12 : Sourcing gross income from a cloud transaction --(i) Facts . (A) Corp A provides

customers on-demand network access to Program Y in exchange for a monthly fee. All of the transactions with customers are substantially similar to one another. Customers must be connected to the Internet to access the functionality of Program Y.

(B) Corp A has employees whose primary function (as determined under paragraph (d)(5) of this section) is to conduct research and experimentation associated with developing new versions of Program Y and other products in the same product line (as determined under paragraph (d)(8) of this section). Corp A paid $160x in compensation to such employees, of which $80x was paid for services performed within the United States as determined in accordance with the principles of §1.861-4(b)(2) (ii)(E). Besides employee compensation, Corp A spent an additional $200x for research and experimentation costs associated with developing new versions of Program Y and other products in the same product line. Corp A did not take any amortization deductions with respect to intellectual property used to provide Program Y.

(C) Corp A paid $400x in compensation to employees whose primary function was to directly contribute (as determined under paragraphs (d)(3) (iii) and (iv) of this section) to Corp A’s provision of Program Y to customers, of which $100x was paid for services performed in the United States as determined in accordance with the principles of §1.861-4(b)(2)(ii)(E). None of these employees were research and experimentation personnel (as defined in paragraph (d)(2)(ii) of this section).

(D) Corp A hosts Program Y on servers it owns that are located both within and without the United States. These servers are used only to host Program Y. Corp A deducted $140x for depreciation expense attributable to these servers, $80x of which was attributable to the servers located within the United States, and $60x of which was attributable to the servers located without the United States. These depreciation deductions are in accordance with the rules of section 168(g)(2).

(E) Corp A earned $800x of gross income from providing customers access to Program Y. Corp A does not know or have reason to know that any of the costs, functions or assets described in this paragraph are disproportionately allocated to certain transactions or groups of transactions among all of the transactions that generated $800x of gross income.

(ii) Analysis . (A) Under paragraph (b) of this section, each transaction between Corp A and a customer is a cloud transaction because Corp A provides on-demand network access to Program Y. Under paragraph (c)(1) of this section, each cloud transaction is classified as the provision of services. Under paragraph (d)(7) of this section, because all of these transactions are substantially similar and Corp A does not know or have reason to know that there is any disproportionate allocation of costs, functions or assets among them, all of the transactions may be considered in the aggregate for purposes of applying paragraph (d) of this section.

(B) Under paragraph (d)(1) of this section, the source of Corp A’s $800x of gross income from providing access to Program Y to customers is determined based on the intangible property factor described in paragraph (d)(2) of this section, the personnel factor described in paragraph (d)(3) of this

section, and the tangible property factor described in paragraph (d)(4) of this section.

(C) Under paragraph (d)(2) of this section, the intangible property factor is equal to $360x because Corp A paid $160x in compensation to employees whose primary function was to conduct research and experimentation associated with developing new versions of Program Y and other products in the same product line, and incurred $200x in other research and experimentation costs associated with developing new versions of Program Y and other products in the same product line. $80x/$160x of such compensation, or 50%, is paid to employees for research and experimentation services performed with respect to Program Y and other products in the same product line in the United States. Corp A’s $360x intangible property factor is multiplied by the same quotient to determine that $180x is from sources within the United States pursuant to paragraph (d)(2)(ii) of this section.

(D) Under paragraph (d)(3) of this section, the personnel factor is equal to $400x because Corp A paid $400x in compensation to employees whose primary function was to directly contribute to the provision of Program Y to customers and none of these employees were research and experimentation personnel (as defined in paragraph (d)(2)(ii) of this section). Pursuant to paragraph (d)(3)(ii) of this section, $100x of the personnel factor is from sources within the United States because Corp A paid $100x in compensation to employees for services performed in the United States that directly contributed to the provision of Program Y to customers.

(E) Under paragraph (d)(4) of this section, the tangible property factor is equal to $140x because Corp A deducted $140x in depreciation expense for tangible property directly used to provide Program Y to customers under the method described in section 168(g)(2). $80x of the tangible property factor is from sources within the United States because this amount of the $140x depreciation expense is attributable to tangible property located within the United States.

(F) The sum of the intangible property factor ($360x), the personnel factor ($400x), and the tangible property factor ($140x) is equal to $900x. The sum of these factors from sources within the United States is $360x ($180x with respect to the intangible property factor, $100x with respect to the personnel factor, and $80x with respect to the tangible property factor). Accordingly, Corp A’s $800x of gross income from providing Program Y to customers for the taxable year is multiplied by the quotient of $360x/$900x pursuant to paragraph (d)(1) of this section to determine that $320x is from sources within the United States. Pursuant to paragraph (d) (1) of this section, the remaining $480x ($800x $320x) is from sources without the United States.

(13) Example 13 : Sourcing gross income from multiple cloud transactions --(i) Facts . (A) The facts are the same as in paragraph (e)(12) of this section ( Example 12 ), except that Corp A also provides customers on-demand network access to software platform Z in exchange for a monthly fee, and Corp A hosts software platform Z on the same servers it uses to host Program Y (which generate more depreciation than in Example 12 ). All of the transactions for software platform Z customers are substantially similar to one another. Customers must be connected

Bulletin No. 2025–8 863 February 18, 2025

to the Internet to access the functionality of software platform Z.

(B) Corp A has employees whose primary function (as determined under paragraph (d)(5) of this section) is to conduct research and experimentation associated with developing new versions of software platform Z and other products in the same product line. The software platform Z product line is not the same as the Program Y product line under the definition in paragraph (d)(8) of this section. Corp A paid $200x in compensation to such employees, all of which was paid for services performed in the United States as determined in accordance with the principles of §1.861-4(b)(2)(ii)(E). Corp A also has employees whose primary function as determined under paragraph (d)(5) of this section is to conduct research and experimentation associated with developing functionality for new versions of both Program Y and software platform Z. Corp A paid $100x in compensation to such employees, all of which was paid for services performed in the United States as determined in accordance with the principles of §1.861-4(b)(2)(ii)(E). Corp A did not have any other research and experimentation costs associated with software platform Z.

(C) Corp A paid $100x in compensation to employees whose primary function was to directly contribute (as determined under paragraphs (d) (3)(iii) and (iv) of this section) to Corp A’s provision of software platform Z to customers, and that entire amount was paid for services performed in the United States as determined in accordance with the principles of §1.861-4(b)(2)(ii)(E). None of these employees were research and experimentation personnel (as defined in paragraph (d)(2)(ii) of this section). Corp A also paid $80x in compensation to employees whose primary function was to directly contribute (as determined under paragraphs (d)(3) (iii) and (iv) of this section) to Corp A’s provision of both Program Y and software platform Z to customers, and that entire amount was paid for services performed in the United States as determined in accordance with the principles of §1.861-4(b)(2)(ii) (E). These employees spent half their time contributing to software platform Z transactions and half their time contributing to Program Y transactions. None of these employees were research and experimentation personnel (as defined in paragraph (d)(2)(ii) of this section).

(D) Corp A hosts software platform Z on servers it owns that are located both within and without the United States. These servers are used to host both Program Y and software platform Z. Corp A deducted $180x for depreciation expense attributable to these servers, $120x of which was attributable to the servers located within the United States, and $60x of which was attributable to the servers located without the United States. These depreciation deductions are in accordance with the rules of section 168(g)(2).

(E) Corp A earned $800x of gross income from providing customers access to software platform Z. Corp A does not know or have reason to know that any of the costs, functions or assets described in this paragraph are disproportionately allocated to certain transactions or groups of transactions among all of the transactions that generated $800x of gross income.

(ii) Analysis . (A) Under paragraph (b) of this section, each transaction between Corp A and a customer for software platform Z is a cloud transaction

because Corp A provides on-demand network access to software platform Z. Under paragraph (c)(1) of this section, each cloud transaction is classified as the provision of services. Under paragraph (d)(7) of this section, because all of these software platform Z transactions are substantially similar and Corp A does not know or have reason to know that there is any disproportionate allocation of costs, functions or assets among them, all of the software platform Z transactions may be considered in the aggregate for purposes of applying paragraph (d) of this section.

(B) Under paragraph (d)(1) of this section, the source of Corp A’s $800x of gross income from providing access to software platform Z to customers is determined based on the intangible property factor described in paragraph (d)(2) of this section, the personnel factor described in paragraph (d)(3) of this section, and the tangible property factor described in paragraph (d)(4) of this section.

(C) Under paragraph (d)(2) of this section, the intangible property factor is equal to $250x. Corp A paid $200x in compensation to employees whose primary function was to conduct research and experimentation associated with developing new versions of software Platform Z and other products in the same product line. Corp A also paid $100x in compensation to employees whose primary function was to conduct research and experimentation developing functionality for new versions of both Program Y and software platform Z, of which Corp A allocates $50x to software Platform Z and $50x to Program Y based on Corp A’s relative gross income from Program Y and software platform Z transactions in the taxable year. $250x/$250x of such compensation, or 100%, is paid to employees for research and experimentation services performed in the United States with respect to software Platform Z and other products in the same product line. Corp A’s $250x intangible property factor is multiplied by the same quotient to determine that $250x is from sources within the United States pursuant to paragraph (d)(2)(ii) of this section.

(D) Under paragraph (d)(3) of this section, the personnel factor is equal to $140x. Corp A paid $100x in compensation to employees whose primary function was to directly contribute to the provision of software platform Z to customers and none of these employees were research and experimentation personnel (as defined in paragraph (d)(2)(ii) of this section). Corp A also paid $80x in compensation to employees whose primary function was to directly contribute to the provision of both Program Y and software platform Z (and none of these employees were research and experimentation personnel (as defined in paragraph (d)(2)(ii) of this section)), and Corp A allocated $40x to software platform Z and $40x to Program Y based on the relative amount of time these employees spent contributing to Program Y and software platform Z transactions in the taxable year. $140x/$140x of such compensation, or 100%, is paid to employees for services performed in the United States that directly contributed to the provision of software platform Z to customers.

(E) Under paragraph (d)(4) of this section, the tangible property factor is equal to $90x. Corp A deducted $180x in depreciation expense for tangible property directly used to provide both Program Y and software platform Z transactions under the method described in section 168(g)(2), of which $120x is from sources within the United States because this amount is attrib

utable to tangible property located within the United States. Based on Corp A’s relative gross income from Program Y and software platform Z transactions in the taxable year, Corp A reasonably allocates $90x to software platform Z, of which $60x is from sources within the United States and $90x to Program Y, of which $60x is from sources within the United States.

(F) The sum of the intangible property factor ($250x), the personnel factor ($140x), and the tangible property factor ($90x) is equal to $480x. The sum of these factors from sources within the United States is $450x ($250x with respect to the intangible property factor, $140x with respect to the personnel factor, and $60x with respect to the tangible property factor). Accordingly, Corp A’s $800x of gross income from providing software platform Z to customers for the taxable year is multiplied by the quotient of $450x/$480x pursuant to paragraph (d)(1) of this section to determine that $750x is from sources within the United States. Pursuant to paragraph (d) (1) of this section, the remaining $50x ($800x $750x) is from sources without the United States.

(f) Applicability date --(1) In general . Except as otherwise provided in this paragraph (f), this section applies to taxable years beginning on or after January 14, 2025. Paragraphs (d), (e)(12) and (13) of this section apply to taxable years beginning on or after the date of publication of the Treasury decision adopting those paragraphs as final regulations in the Federal Register .

(2) Early application . Except for paragraphs (d), (e)(12) and (13) of this section, a taxpayer can apply this section to taxable years beginning on or after August 14, 2019 and all subsequent taxable years not described in paragraph (f)(1) (early application years) if- (i) The taxpayer also applies §1.861-18 to the early application years;

(ii) This section and §1.861-18 are applied to the early application years by all persons related to the taxpayer (within the meaning of sections 267(b) and 707(b));

(iii) The period of limitations on assessment for each early application year of the taxpayer and all related parties (within the meaning of sections 267(b) and 707(b)) is open under section 6501; and

(iv) The taxpayer would not be required under this section to change its method of accounting as a result of such election.

Douglas W. O’Donnell,

Deputy Commissioner .

(Filed by the Office of the Federal Register January 10, 2025, 8:45 a.m., and published in the issue of the Federal Register for January 14, 2025, 90 FR 3075)

February 18, 2025 864 Bulletin No. 2025–8

Notice of Proposed Rulemaking

Multi-Year Reporting Requirements for Corporate Separations and Related Transactions

REG-116085-23

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations that would require multi-year tax reporting for corporate separations and related transactions. The information to be reported under these proposed regulations would establish the taxpayer’s position that the corporate separation and related transactions qualify for nonrecognition treatment under subchapter C of the Internal Revenue Code. The proposed regulations would affect corporations and their shareholders and security holders. Proposed regulations regarding certain matters relating to corporate separations, incorporations, and reorganizations qualifying for nonrecognition of gain or loss are published elsewhere in the Proposed Rules section of this issue of the Federal Register .

DATES: Written or electronic comments and requests for a public hearing must be received by March 17, 2025.

ADDRESSES: Commenters are strongly encouraged to submit public comments on these proposed regulations and the related form and instructions electronically via the Federal eRulemaking Portal at https:// www.regulations.gov (indicate IRS and REG-116085-23) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of

the Treasury (Treasury Department) and the IRS will publish for public availability any comments to the IRS’s public docket. Send paper submissions to CC:PA:01:PR (REG-116085-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Barrett D. Cappadonna at (202) 317-6975 (not a toll-free number); concerning submissions of comments and requests for a hearing, contact the Publications and Regulations branch at (202) 3176901 (not a toll-free number) or by email to publichearings@irs.gov (preferred).

SUPPLEMENTARY INFORMATION:

Authority

This document contains proposed regulations under section 355 of the Internal Revenue Code (Code) that would amend the Income Tax Regulations (26 CFR part

by substantially revising the information reporting requirements of §1.355-5 (proposed regulations). The proposed regulations are issued under the express delegation of section 7805(a) of the Code, which authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.”

Background

I. Overview of Section 355

Section 355(a)(1) provides that, if certain requirements are met, a distribution of stock, or stock and securities, of one or more controlled corporations by a distributing corporation to the distributing corporation’s shareholders, or to the distributing corporation’s shareholders and security holders, may be received by the distributees without the distributees recognizing gain or loss or including any amount in income (section 355 transaction). Section 355(c) generally provides that no gain or loss is recognized to a distributing corporation upon a distribution of qualified property that is not in pursu

ance of a plan of reorganization (section 355(c) distribution). Section 355(c)(2) (B) defines “qualified property” as any stock or securities in a controlled corporation. If, in addition to the distribution of qualified property, the distributing corporation distributes other property in the section 355 transaction and the fair market value of that other property exceeds the distributing corporation’s adjusted basis in that other property, gain is recognized to the distributing corporation as if the property were sold to the distributee at its fair market value. See section 355(c)(2)(A). Taxpayers also may carry out a section 355 transaction as part of a transaction that qualifies as a reorganization under section 368(a)(1)(D) or (G) of the Code and to which neither section 354 of the Code nor so much of section 356 of the Code as relates to section 354 applies (divisive reorganization). A transfer by a distributing corporation of part of its assets to a controlled corporation is a divisive reorganization if, immediately after the transfer, one or more of the distributing corporation’s shareholders (including persons who were shareholders immediately before the transfer) have control (as defined in section 368(c)) of the controlled corporation and if, pursuant to the plan of reorganization, stock or securities of the controlled corporation are distributed in a transaction that qualifies under section 355.

Section 361(c) of the Code generally provides that no gain or loss is recognized to a distributing corporation upon a distribution of qualified property in pursuance of a plan of reorganization. Section 361(c) (2)(B) defines “qualified property” as (i) any stock, right to acquire stock, or obligation (including a security) of the distributing corporation, or (ii) any stock, right to acquire stock, or obligation (including a security) of a controlled corporation received by the distributing corporation as part of the divisive reorganization. If, in addition to the distribution of qualified property, the distributing corporation distributes other property as part of a divisive reorganization and the fair market value of that other property exceeds the distributing corporation’s adjusted basis in that other property, gain is recognized to the distributing corporation as if the property

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were sold to the distributee at its fair market value. See section 361(c)(2)(A).

II. Current Reporting Requirements for Section 355 Transactions

Section 1.355-5(a)(1) currently requires the distributing corporation to report a section 355 transaction to the IRS by including a statement with the distributing corporation’s Federal income tax return for the year of the section 355 transaction (§1.355-5(a) statement). The §1.355-5(a) statement must include: (i) the name and employer identification number (if any) of the controlled corporation; (ii) the name and taxpayer identification number (if any) of every “significant distributee” (as defined in §1.355-5(c)(1)); (iii) the date of the section 355 transaction; (iv) the aggregate fair market value and basis, determined immediately before the section 355 transaction, of the stock, securities, or other property (including money) distributed by the distributing corporation; and (v) the date and control number of any private letter ruling(s) issued by the IRS in connection with the section 355 transaction.

If the distributing corporation is a controlled foreign corporation within the meaning of section 957 of the Code (CFC), each United States shareholder (within the meaning of section 951(b) of the Code) with respect to the CFC must include a §1.355‑5(a) statement on or with its return. See §1.355-5(a)(1). If the distributing corporation transfers assets to a controlled corporation in a transaction described in a divisive reorganization, then the distributing corporation (or, if the distributing corporation is a CFC, each United States shareholder) also must include the statement required by §1.3683(a) on or with its return for the year of the section 355 transaction. See §1.3555(a)(2). Section 1.355-5(b) currently imposes requirements similar to those in §1.3555(a) upon significant distributees. More specifically, §1.355-5(b)(1) requires every significant distributee to include a statement on or with the significant distributee’s return for the year in which the section 355 transaction is received (§1.355-5(b) statement). The §1.355-5(b) statement must include: (i) the names

and employer identification numbers (if any) of the distributing and controlled corporations; (ii) the date of the section 355 transaction; (iii) the aggregate basis, determined immediately before the section 355 transaction, of any stock or securities transferred by the significant distributee in the transaction; and (iv) the aggregate fair market value, determined immediately before the section 355 transaction, of the stock, securities, or other property (including money) received by the significant distributee in the section 355 transaction. If a significant distributee is a CFC, each United States shareholder with respect to the CFC must include this statement on or with the United States shareholder’s return.

Section 1.355-5(d) currently imposes substantiation requirements. More specifically, §1.355-5(d) requires taxpayers to retain their permanent records (specifically including information regarding the amount, basis, and fair market value of all property distributed or exchanged in the section 355 transaction, and relevant facts regarding any liabilities assumed or extinguished as part of the section 355 transaction) and make those records available to any authorized IRS officers and employees. See §1.6001-1(e).

Explanation of Provisions

The Treasury Department and the IRS are of the view that enhancing the reporting requirements for section 355 transactions would improve the IRS’s ability to administer section 355 (and related provisions of the Code) to ensure that transactions intended to qualify under section 355 (and such related provisions) satisfy the requirements for nonrecognition treatment. Accordingly, these proposed regulations would revise §1.355-5 to require all covered filers, as defined in proposed §1.355-5(b)(1), to file with the IRS an annual report with regard to each section 355 transaction (Form 7216, Multi-Year Reporting Related to Section 355 Trans- actions ) that would be attached to the covered filer’s Federal income tax return.

For purposes of the proposed regulations, the term “section 355 transaction” includes both divisive reorganizations and section 355(c) distributions. The term “covered filer” would include, with

regard to any section 355 transaction: (i) a distributing corporation or a person that, immediately before the first distribution, was a United States shareholder (within the meaning of section 951(b)) with respect to a controlled foreign corporation (within the meaning of section 957 of the Code, but determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) of the Code) that is the distributing corporation; (ii) a controlled corporation or a person that, immediately before the first distribution, was a United States shareholder with respect to a controlled foreign corporation that is the controlled corporation; (iii) a significant distributee or a person that, immediately before the first distribution, was a United States shareholder with respect to a controlled foreign corporation that is a significant distributee; or (iv) any other person required by the Commissioner of Internal Revenue (Commissioner) to file Form 7216 (or any successor form) in instructions, guidance, or publications published in the Internal Revenue Bulletin ( see §§601.601(d)(2) and 601.602 of this chapter). The term “covered filer” also would include any successor (within the meaning of section 381(a) of the Code) to an entity described in the preceding sentence. The proposed regulations also would revise the definition of a “significant distributee” in current §1.355-5(c)(1) (i) by raising the ownership threshold for non-publicly traded stock from one percent to five percent.

However, the term “covered filer” would be defined to encompass solely taxpayers required to file certain specified Federal income tax returns. These returns would be limited to: (i) Form 1040, U.S. Individual Income Tax Return ; (ii) Form 1040‑NR, U.S Nonresident Alien Income Tax Return ; (iii) Form 1065, U.S. Return of Partnership Income ; (iv) Form 1120, U.S. Corporation Income Tax Return ; (v) Form 1120-F, U.S. Income Tax Return of a Foreign Corporation ; (vi) Form 1120S, U.S. Income Tax Return for an S Cor- poration ; and (vii) any other form listed in instructions, guidance, or publications published in the Internal Revenue Bulletin ( see §§601.601(d)(2) and 601.602 of this chapter). Accordingly, a taxpayer that is not required to file one of these specified Federal income tax returns (such as

February 18, 2025 866 Bulletin No. 2025–8

an estate, a trust, or a regulated investment company (as defined in section 851(a) of the Code)) would not be required to file Form 7216. The Treasury Department and the IRS request comments as to whether taxpayers required to file additional types of Federal income tax returns should be required to file Form 7216.

Each covered filer would be required to file Form 7216 with regard to each section 355 transaction for the required reporting period. For this purpose, the term “required reporting period” would mean the period (i) beginning in the covered filer’s taxable year in which the first distribution occurs, and (ii) ending in the fifth taxable year of the covered filer after the taxable year in which the control distribution occurs. The five-year required reporting period would apply to a covered filer (or its successor) even in cases where the covered filer (or its successor) ceases to be a United States shareholder with respect to a relevant corporation and is no longer required to file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, with respect to such corporation.

Consistent with current §1.355-5(d), the proposed regulations would require that, under §1.6001-1(e), a covered filer must retain its permanent books and records and make those books and records available for inspection by any authorized IRS officers and employees. In addition, the proposed regulations would provide that, in connection with the section 355 transaction, the covered filer’s books and records, as relevant to the section 355 transaction, will be considered to be complete and accurate if they contain all information necessary to document and substantiate satisfaction of the requirements under section 355.

The proposed regulations would significantly enhance the IRS’s ability to identify section 355 transactions that pose the highest risk of potential Federal income tax noncompliance and abuse. These proposed regulations also would help effectuate a broader effort by the Treasury Department and the IRS to close the portion of the Federal tax gap (that is, the difference between all Federal taxes that are owed and those that are collected) due to such potential noncompliance and abuse.

Because the enhanced reporting requirements in these proposed regulations would augment the IRS’s ability to identify section 355 transactions with the highest risk of potential noncompliance and abuse, the Treasury Department and the IRS are of the view that additional flexibility can be provided in the substantive rules applicable to section 355 transactions (for example, by affording taxpayers additional time to carry out a plan of distribution). Proposed regulations that would provide guidance regarding certain matters relating to corporate separations, incorporations, and reorganizations qualifying, in whole or in part, for nonrecognition of gain or loss are published elsewhere in the Proposed Rules section of this issue of the Federal Register .

The proposed reporting requirements would apply to all types of section 355 transactions with a covered filer. Specifically, the proposed regulations would apply to (i) section 355 transactions within an affiliated group (as defined in section 1504(a)(1) of the Code, without regard to the exceptions in section 1504(b)) (internal section 355 transaction), and (ii) section 355 transactions in which stock or securities of a controlled corporation are distributed to a distributing corporation shareholder or security holder that is not a member of the distributing corporation’s affiliated group (external section 355 transaction). To reflect the differences between internal section 355 transactions and external section 355 transactions (including the different statutory requirements and potential for Federal income tax noncompliance or abuse), the proposed regulations would impose, through the annual Form 7216, different reporting requirements for each type of section 355 transaction.

These proposed regulations are consistent with the recommendations set forth in the Treasury Inspector General for Tax Administration (TIGTA) report titled “A Strategy Is Needed to Assess the Compliance of Corporate Mergers and Acquisitions With Federal Tax Requirements,” Ref. No. 2019-30-050 (Sept. 5, 2019). In that report, TIGTA recommended that the Commissioner determine whether merger and acquisition (M&A) tax forms, and

information provided on those forms, could be used as a compliance tool within a larger strategy to assess risk and ensure that corporate M&A transactions are compliant with the Code. These proposed regulations would enable the IRS to collect information on section 355 transactions from taxpayers engaging in those transactions and utilize that information to identify potential noncompliance with section 355 and other related provisions of the Code.

Special Analyses

I. Regulatory Planning and Review

II. Paperwork Reduction Act

The collections of information in these proposed regulations contain reporting and recordkeeping requirements that are necessary to identify potential noncompliance with the requirements of section 355 and related sections of the Code. These collections of information generally would be used by the IRS for tax compliance purposes and by taxpayers to facilitate proper reporting and compliance.

The recordkeeping requirements within this proposed regulation are considered general tax records under §1.6001-1. These records are required for the IRS to validate that taxpayers have met the requirements under section 355

Bulletin No. 2025–8 867 February 18, 2025

and related sections of the Code. For PRA purposes, general tax records are already approved by OMB under control numbers 1545-0123 for business filers and 15450074 for individual filers. The reporting requirements outlined in §1.355-5 will be covered within the form and instructions for IRS Form 7216 (or any successor form). This form will be approved under 1545-0123 for business filers and 1545-0074 for individual filers. The IRS will be submitting the form to OMB for approval under these OMB control numbers in accordance with the PRA procedures in 5 CFR 1320.10.

III. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these proposed regulations would not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these proposed regulations primarily would affect corporations that are publicly traded corporations, which tend to be larger businesses. Specifically, the Research, Applied Analytics, and Statistics Division of the IRS estimates that approximately 110 small businesses with gross receipts under $25 million would be subject to collection of information in these regulations annually. In addition, the collection of information in these proposed regulations is an incremental, additional obligation on small entities to a currently existing collection of information. Moreover, the economic impact of these proposed regulations will not be significant.

Therefore, these proposed regulations would not create significant additional obligations for, or impose any meaningful economic impact on, a substantial number of small entities. Accordingly, the Secretary certifies that the proposed regulations would not have a significant economic impact on a substantial number of small entities and a regulatory flexibility analysis is not required.

Pursuant to section 7805(f) of the Code, the proposed regulations have been submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

IV. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector, in excess of that threshold.

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This proposed rule does not have federalism implications and does not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in the preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All commenters are strongly encouraged to submit comments electronically. The Treasury Department and the IRS will publish for public availability any comment submitted electronically or on paper to its public docket on https://www.regulations.gov .

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing also are encouraged to be made electronically.

If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these proposed regulations is Barrett D. Cappadonna of the Office of Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

PART 1–INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.355-5 is revised to read as follows:

§1.355-5 Information reporting and record retention requirements.

(a) Reporting of transaction informa- tion —(1) Annual reporting form —(i) In general . For each taxable year of the required reporting period, a covered filer must file annually with the IRS a complete and accurate Form 7216, Multi-Year Reporting Related to Section 355 Trans- actions (or as provided in publications, forms, instructions, or other guidance), with regard to a section 355 transaction.

(ii) Manner of filing form . A covered filer must file Form 7216 (or any successor form)—

(A) With the specified Federal income tax return of the covered filer for the taxable year ( see section 6011 of the Code and §1.6011-1); and

(B) In the manner prescribed by the Commissioner in instructions, guidance,

February 18, 2025 868 Bulletin No. 2025–8

or publications published in the Internal Revenue Bulletin ( see §§601.601(d)(2) and 601.602 of this chapter).

(2) [Reserved] (3) [Reserved] (b) Definitions . The following definitions apply for purposes of this section:

(1) Covered filer —(i) In general . The term covered filer means a taxpayer that is required to file a specified Federal income tax return and that is—

(A) A distributing corporation or a person that, immediately before the first distribution, was a United States shareholder (within the meaning of section 951(b) of the Code) with respect to a controlled foreign corporation (within the meaning of section 957 of the Code, but determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3)) that is the distributing corporation;

(B) A controlled corporation or a person that, immediately before the first distribution, was a United States shareholder with respect to a controlled foreign corporation that is the controlled corporation;

(C) A significant distributee or a person that, immediately before the first distribution, was a United States shareholder with respect to a controlled foreign corporation that is a significant distributee; or

(D) Any other person required by the Commissioner to file Form 7216 (or any successor form) in accordance with instructions, guidance, or publications published in the Internal Revenue Bulletin ( see §§601.601(d)(2) and 601.602 of this chapter).

(ii) Successors . The term covered filer includes any successor (within the meaning of section 381(a) of the Code) to an entity described in paragraph (b)(1)(i) of this section.

(2) Required reporting period . The term required reporting period means the period—

(i) Beginning in the taxable year of the covered filer during which the first distribution occurs; and

(ii) Ending in the fifth taxable year of the covered filer after the taxable year in which the control distribution occurs.

(3) Significant distributee . The term significant distributee means:

(i) A holder of stock of a distributing corporation that—

(A) Receives stock of a controlled corporation in a section 355 transaction; and

(B) Owned at least five percent (by vote or value) of the total outstanding stock of the distributing corporation immediately before the first distribution.

(ii) A holder of securities of a distributing corporation that—

(A) Receives stock or securities of a controlled corporation in a section 355 transaction; and

(B) Owned securities in the distributing corporation with a basis of at least $1,000,000 immediately before the first distribution.

(4) Specified Federal income tax return . The term specified Federal income tax return means—

(i) Form 1040, U.S. Individual Income Tax Return ;

(ii) Form 1040-NR, U.S. Nonresident Alien Income Tax Return ;

(iii) Form 1065, U.S. Return of Part- nership Income ;

(iv) Form 1120, U.S. Corporation Income Tax Return ;

(v) Form 1120-F, U.S. Income Tax Return of a Foreign Corporation ;

(vi) Form 1120-S, U.S. Income Tax Return for an S Corporation ; or

(vii) Any other form listed in instructions, guidance, or publications published in the Internal Revenue Bulletin ( see §§601.601(d)(2) and 601.602 of this chapter).

(c) Substantiation information . Under §1.6001-1(e), a covered filer must retain its permanent books and records and make those books and records available for inspection by any authorized IRS officers and employees. In connection with the section 355 transaction, the covered filer’s books and records, as relevant to the section 355 transaction, will be considered to be complete and accurate if they contain all information necessary to document and substantiate satisfaction of the requirements under section 355.

(d) Applicability date —(1) In general . Except as provided in paragraph (d)(2) of this section, the rules of this section apply to taxable years ending after [date of publication of final regulations in the Fed- eral Register ] with respect to section 355 transactions occurring after January 16, 2025. For rules applicable to prior taxable years, see §1.355-5 as in effect and con

tained in 26 CFR part 1, as revised April 1, 2024. (2) [Reserved]

Douglas W. O’Donnell,

Deputy Commissioner .

(Filed by the Office of the Federal Register January 13, 2025, 4:15 p.m., and published in the issue of the Federal Register for January 16, 2025, 90 FR 4687)

Notice of Proposed Rulemaking

Certain Employee Remuneration in Excess of $1,000,000 under Internal Revenue Code Section 162(m)

REG-118988-22

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document sets forth proposed regulations under section 162(m) of the Internal Revenue Code, which limits the deduction for certain employee remuneration in excess of $1,000,000 for Federal income tax purposes. These proposed regulations implement the amendments made to section 162(m) by the American Rescue Plan Act of 2021. These proposed regulations would affect publicly held corporations.

DATES: Written or electronic comments and requests for a public hearing must be received by March 17, 2025.

ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-118988-22) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Com

Bulletin No. 2025–8 869 February 18, 2025

ments and Requests for a Public Hearing” section of this preamble. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS’s public docket. Send paper submissions to: CC:PA:01:PR (REG118988-22), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Ilya Enkishev at (202) 3175600; concerning submissions of comments and/or requests for a public hearing, contact the Publications and Regulations Section of the Office of Associate Chief Counsel (Procedure and Administration) by email at publichearings@irs.gov (preferred) or by telephone at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Authority

These proposed regulations are issued under the express delegation of authority under section 7805 of the Code. Section 7805(a) directs the Secretary of the Treasury or her delegate to prescribe all needful rules and regulations for the enforcement of the Code, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

Background

This document sets forth proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 162(m). Section 162(m)(1) disallows a deduction by any publicly held corporation for applicable employee remuneration that is otherwise deductible with respect to any covered employee to the extent that such remuneration for the taxable year exceeds $1,000,000. ¹ Section 162(m) was added to the Internal Reve

nue Code (Code) by section 13211(a) of the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66, 107 Stat. 312, 469). Proposed regulations under section 162(m) were published in the Federal Register by the Treasury Department and the IRS on December 20, 1993 (58 FR 66310) (1993 proposed regulations). On December 2, 1994, the Treasury Department and the IRS published in the Federal Register amendments to the proposed regulations (59 FR 61884) (1994 proposed regulations). On December 20, 1995, the Treasury Department and the IRS published in the Federal Register final regulations under section 162(m) (TD 8650) (60 FR 65534) (1995 regulations).

In 2017, section 162(m) was amended by section 13601 of the Tax Cuts and Jobs Act (TCJA) (Pub. L. 115-97, 131 Stat. 2054, 2155 (2017)). Specifically, section 13601 of TCJA amended the definitions of covered employee, publicly held corporation, and applicable employee remuneration in section 162(m). On December 20, 2019, the Treasury Department and the IRS published in the Federal Register proposed regulations relating to the TCJA amendments (84 FR 70356). On December 30, 2020, the Treasury Department and the IRS published in the Federal Reg- ister final regulations (TD 9932) relating to the TCJA amendments (85 FR 86481) (the current regulations).

Section 162(m)(3) provides the definition of “covered employee.” Specifically, section 162(m)(3) defines the term “covered employee” as an “employee of the taxpayer” if (1) the employee is the principal executive officer (PEO) or principal financial officer (PFO) of the taxpayer at any time during the taxable year, or was an individual acting in such a capacity, (2) the total compensation of the employee for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 (Exchange Act) by reason of the employee being among the three highest compensated officers for the taxable year (other than the PEO and PFO), or (3) the individual was a covered employee of the taxpayer (or any predecessor) for any preceding

taxable year beginning after December 31, 2016. Section 162(m)(3) also contains flush language providing that a covered employee includes any employee of the taxpayer whose total compensation for the taxable year places the individual among the three highest compensated officers for the taxable year (other than any individual who is the PEO or PFO of the taxpayer at any time during the taxable year, or was an individual acting in such a capacity) even if the compensation of the officer is not required to be reported to shareholders under the Exchange Act.

In 2021, section 162(m) was amended by section 9708 of the American Rescue Plan Act of 2021 (ARP) (Pub. L. 117-2, 135 Stat. 4, 206) to expand the definition of covered employee for taxable years beginning after December 31, 2026. The ARP amended the definition of “covered employee” in section 162(m)(3) by adding section 162(m)(3)(C), ² which includes any employee who is among the five highest compensated employees for the taxable year other than the PEO or PFO (as identified in section 162(m)(3)(A)) or the three highest compensated executive officers for the taxable year (as identified in section 162(m)(3)(B)). This amendment is effective for taxable years beginning after December 31, 2026. These proposed regulations (proposed regulations) would provide guidance on this amendment.

Explanation of Provisions

I. Definition of Employee

These proposed regulations would provide that, for purposes of determining whether an employee is one of the five highest compensated employees as defined in new section 162(m)(3)(C), the term “employee” means an “employee” as defined in section 3401(c). In general, under section 3401(c) and the corresponding regulations, the term “employee” includes a common law employee and an officer of a corporation. Accordingly, for purposes of section 162(m)(3)(C), the term “employee” would include, but not be limited to, executive officers. ³

1 As a result, for example, such disallowed amounts generally may not be capitalized. See §§1.263(a)-1(b) and 1.263A-1(c)(2).

2 The addition of section 162(m)(3)(C) resulted in pre-ARP section 162(m)(3)(C) being redesignated as section 162(m)(3)(D).

3 This interpretation is consistent with the description of section 162(m)(3)(C) by the Joint Committee on Taxation in General Explanation of the Tax Legislation Enacted in the 117th Con- gress . JCS-1-23, 129 (Dec. 2023).

February 18, 2025 870 Bulletin No. 2025–8

The text of section 162(m)(3)(C) does not exclude an individual who is a covered employee as defined in section 162(m) (3)(D). Accordingly, these proposed regulations would provide that a covered employee by reason of section 162(m)(3) (C) includes an individual who is both one of the five highest compensated employees for the current taxable year (regardless of whether the individual is employed on the last day of the taxable year) and also a covered employee on the basis of being a covered employee for a preceding taxable year (as provided in section 162(m) (3)(D)).

II. Determination of the Five Highest Compensated Employees

These proposed regulations would use “compensation” as defined in paragraph (c)(3) of the current regulations (that is, compensation that would (but for section 162(m)) be allowable as a deduction) to determine whether an employee is one of the five highest compensated employees as defined in new section 162(m)(3)(C). The Treasury Department and the IRS expect this approach to be easily administrable because taxpayers currently track compensation to determine their tax liability for the taxable year.

Because section 162(m)(3)(B) determines the three highest compensated employees based on the total compensation required to be disclosed under the Exchange Act for executive officers, the Treasury Department and the IRS considered using this approach to determine the five highest compensated employees for purposes of section 162(m)(3)(C). These proposed regulations would not adopt this approach because, unlike the statutory text of section 162(m)(3)(B), section 162(m) (3)(C) does not reference compensation disclosure under the Exchange Act. Furthermore, unlike the covered employees defined in section 162(m)(3)(B), the five highest compensated employees under section 162(m)(3)(C) are not limited to executive officers.

Like the 1995 regulations, §1.16233(c)(1)(ii) of the current regulations defines the term “publicly held corporation” to include an affiliated group of corporations, as defined in section 1504 (without regard to section 1504(b)) (affiliated group) that includes a corporation that is a publicly held corporation. ⁴ This definition was needed in the 1995 regulations because, among other things, the executive officers to whom section 162(m) applied could include officers of subsidiaries, ⁵ and their remuneration could come from subsidiaries, as well, so failure to include members of the affiliated group would have thwarted Congress’s intent to deny a deduction for all compensation of a covered employee in excess of $1 million per year. ⁶ The definition also confirmed that each member of the affiliated group is potentially a “taxpayer” within the meaning of section 162(m)(3).

The Treasury Department and the IRS are now similarly concerned that a publicly held corporation may employ many of its highest compensated employees at subsidiaries, and may even attempt to alter the composition of its five highest compensated employees (as defined in section 162(m)(3)(C)) by transferring highly compensated employees to a subsidiary or by adopting a holding company structure, thereby thwarting Congress’s intent to expand significantly the number of covered employees whose compensation is subject to section 162(m). ⁷ Accordingly, these proposed regulations would provide that any employee of any corporation in the affiliated group may be one of the five highest compensated employees of the publicly held corporation regardless of whether the employee is an employee of or performs services for the publicly held corporation, as defined in §1.162-33(c)(1) (i).

Consistent with the rule in the current regulations for affiliated groups that contain more than one publicly held corporation (as defined in §1.162-33(c)(1)(i)), these proposed regulations would provide that in such an affiliated group, each pub

licly held corporation has its own set of five highest compensated employees (as defined in section 162(m)(3)(C)). Because, as explained in the preceding paragraph, those individuals may be employees of a corporation in the affiliated group that is not a publicly held corporation, the affiliated group is divided into smaller affiliated groups for this purpose, each consisting of a publicly held corporation and certain affiliated non-publicly held corporations, if any. These proposed regulations provide rules for dividing up the affiliated group for this purpose.

Similar to the current regulations, these proposed regulations would provide that, if an employee of a publicly held corporation (as defined in §1.162-33(c)(1) (i)) is paid compensation by more than one member of an affiliated group, then compensation paid to the employee by each member of the affiliated group is aggregated in determining whether the employee is one of the five highest compensated employees. These proposed regulations would provide rules similar to the rules in the current regulations, but reflecting the rules described in the preceding paragraphs, for situations in which an individual performs services for members of an affiliated group that contains more than one publicly held corporation, and might also contain one or more corporations that are not publicly held corporations. Specifically, these proposed regulations would provide that whether the individual is one of the five highest compensated employees of a publicly held corporation is determined separately with respect to each publicly held corporation in the group, excluding compensation taken into account with respect to another publicly held corporation of the affiliated group. Section 1.162-33(c)(2)(i)(D)(4) of the proposed regulations also explains how that determination is made.

For purposes of section 162(m), an affiliated group includes a foreign corporation. Pursuant to the 1995 regulations and the current regulations, compensation includes remuneration paid by a mem

4 These proposed regulations take the same approach as the current regulations of using “publicly held corporation” to mean the affiliated group (as defined in §1.162-33(c)(1)(ii)) of which the corporation that is a publicly held corporation (as defined in §1.162-33(c)(1)(i)) is a part, and distinguishing between the two only where necessary.

5 See 17 C.F.R. §229.402, Instructions to Item 402(a)(3).

6 See H.R. Conf. Rep. No. 103-213, at 585 (1993) (“Unless specifically excluded, the deduction limitation applies to all remuneration for services.”).

7 See, for example, the Joint Committee on Taxation estimate that the amendment would raise $7.8 billion through Fiscal Year 2031. JCX-14-21, 3 (March 9, 2021).

Bulletin No. 2025–8 871 February 18, 2025

ber of an affiliated group that is a foreign corporation to the extent it is otherwise allowable as a deduction under chapter 1 of the Code. Accordingly, such compensation would be taken into account under these proposed regulations, among other things, to determine whether an individual is one of the five highest compensated employees. Compensation and other expenses of a foreign corporation normally may be taken as a deduction by the foreign corporation in computing its U.S. income tax, and thus may be actually be disallowed by section 162(m), only if they are incurred in connection with a trade or business carried on in the United States. ⁸ However, if the foreign corporation is a controlled foreign corporation as defined in section 957, ⁹ a pro rata share of certain types of income less associated deductions may be taken into account by a United States shareholder of the corporation under subpart F (sections 951 through 965). To assist taxpayers with compliance, section 1.162-33(c)(3)(iii) of the proposed regulations would add an explicit rule to the definition of compensation regarding remuneration paid by a controlled foreign corporation that is a member of a publicly held corporation’s affiliated group. This rule is not a substantive change to the 1995 regulations and the current regulations. Comments are requested on the application of these proposed rules to controlled foreign corporations, and whether these proposed rules should apply to controlled foreign corporations that are not members of an affiliated group.

These proposed regulations would also provide that an “employee” of a publicly held corporation includes an individual who, under section 3401(c), is an “employee” of a person other than the publicly held corporation (such as a related but unaffiliated organization or certified professional employer organization) but nevertheless functions as an employee of the publicly held corporation in that the individual performs substantially all the individual’s services during the taxable year for the publicly held corporation. Consequently, these proposed regulations would provide that, in such

circumstance, to the extent allowable as a deduction to the publicly held corporation, amounts paid to the individual or to a third party to obtain the services performed by the individual are considered “compensation.” Absent such a rule, the adoption of the section 3401(c) definition by these proposed regulations could permit avoidance of section 162(m) through the use of third-party payors, which is not a concern under sections 162(m) (3)(A) and (B) due to their inclusion of all individuals acting as executive officers and the application of the executive compensation disclosure rules under the Exchange Act.

III. Amendment to the Current Regulations

These proposed regulations also include a technical correction that would amend the reference to Example 22 in the conclusion to the facts in Example 23 (section 1.162-33(c)(1)(vi)(W)( 2 )) in the current regulations. The correct reference is to Example 20 of the current regulations. These proposed regulations would make that correction.

Proposed Applicability Date

These regulations generally are proposed to apply to compensation that is otherwise deductible for taxable years beginning after the later of December 31, 2026, or the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Regis- ter . The amendment to the conclusion of Example 23 in section 1.162-33(c)(1)(vi) (W)( 2 )) of the current regulations is proposed to apply to taxable years ending on or after January 16, 2025.

Statement of Availability of IRS Documents

For copies of recently issued revenue procedures, revenue rulings, notices and other guidance published in the Internal Revenue Bulletin, please visit the IRS website at www.irs.gov or contact the

Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402.

Special Analyses

I. Regulatory Planning and Review

II. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby certified that these proposed regulations would not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that section 162(m)(1) applies only to publicly held corporations (for example, corporations that list securities on a national securities exchange and are rarely small entities) and only impacts those publicly held corporations that compensate certain employees in excess of $1,000,000 in a taxable year.

III. Section 7805(f)

Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

IV. Unfunded Mandates Reform Act

8 See section 882(c)(1).

9 In relevant part, section 957(a) defines a controlled foreign corporation as a foreign corporation of which more than 50% (vote or value) is owned by United States shareholders as defined in section 951(b). Publicly held corporations as defined in section 162(m)(2) can be treated as United States shareholders.

February 18, 2025 872 Bulletin No. 2025–8

dollars, updated annually for inflation. This proposed rule does not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This proposed rule does not have federalism implications, does not impose substantial direct compliance costs on State and local governments, and does not preempt State law within the meaning of the Executive order.

Comments and Requests for a Public Hearing

Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in the preamble under the “ ADDRESSES ” section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments submitted will be made available at www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically by sending an email to publichearings@ irs.gov . If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Ilya Enkishev, Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from

the Treasury Department and the IRS participated in the development of these regulations.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

PART 1—INCOME TAXES

Paragraph 1 . The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2 . Section 1.162-33 is amended by: a. Revising paragraphs (c)(1)(vi)(W)( 2 ) and (c)(2)(i)(C); b. Adding paragraphs (c)(2)(i)(D) and (c)(2)(vii)(CC) through (EE); c. Redesignating paragraphs (c)(3)(iii) and (iv) as paragraphs (c)(3)(v) and (vi); d. Adding new paragraphs (c)(3)(iii) and (iv) and adding paragraphs (c)(3) (vi)(D) and (E); e. Revising paragraph (h)(2)(ii)(C); and f. Adding paragraphs (h)(2)(ii)(F) and G. The revisions and additions read as follows:

§1.162-33 Certain employee remuneration in excess of $1,000,000 not deductible for taxable years beginning after December 31, 2017.

(c) * * * (1) * * * (vi) * * * (W) * * * ( 2 ) Conclusion . The result is the same as in paragraph (c)(1)(vi)(T) of this section ( Example 20 ). Even though Corporations P, Q, and R each are publicly held corporations, they comprise an affiliated group. Because Employee C is a covered

employee of both Corporations P and Q, the amount disallowed as a deduction is prorated separately between Corporations P and R and between Corporations Q and R.

(2) * * * (i) * * * (C) Any individual who was a covered employee of the publicly held corporation (or any predecessor of a publicly held corporation, within the meaning of paragraph (c)(2)(ii) of this section) for any preceding taxable year beginning after December 31, 2016, other than an individual who was a covered employee in that year solely on account of paragraph (c)(2)(i)(D) of this section. For taxable years beginning prior to January 1, 2018, covered employees are identified in accordance with the rules in §1.162-27(c)(2).

(D) The five highest compensated employees of the publicly held corporation for the taxable year regardless of whether the individual is serving at the end of the publicly held corporation’s taxable year, other than any individual described in paragraph (c)(2)(i)(A) or (B) of this section, determined in accordance with the rules in this paragraph (c) (2)(i)(D). See paragraph (c)(3)(iv) of this section for a special rule treating certain employees of a person other than the publicly held corporation as employees of the publicly held corporation.

( 1 ) Compensation . The amount of compensation used to identify the five most highly compensated employees for the taxable year for purposes of paragraph (c)(2)(i)(D) of this section is the amount of compensation as defined in paragraph (c)(3) of this section, provided that, in determining compensation for purposes of applying this paragraph (c)(2)(i)(D), references to “covered employee” or “covered employee (as defined in paragraphs (c)(2)(i) through (v) of this section)” in paragraph (c)(3) of this section shall be replaced with references to “employee.”

( 2 ) Employee . For purposes of this paragraph (c)(2)(i)(D), the term “employee” means an employee as defined in section 3401(c). ( 3 ) Determining the employees eligible to be the five highest compensated employ- ees with respect to an affiliated group with one publicly held corporation . In the

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portion of the affiliated group of which the publicly held corporation (as defined in paragraph (c)(1)(i) of this section) is a part, as determined under paragraph (c)(2) (i)(D)( 4 ) of this section.

(vii) * * * (CC) Example 29 (Individual as one of the five highest compensated employees of a publicly held corporation that includes the affiliated group) --( 1 ) Facts . Corporation CO is a publicly held corporation for its 2026 and 2027 taxable years. Corporation CP is a foreign corporation and is a wholly-owned subsidiary of Corporation CO. Corporation CP is a controlled foreign corporation, but the only income it has is effectively connected with a U.S. trade or business. Corporation CO is a partner in Partnership CQ (a partnership for Federal tax purposes). Under the partnership agreement, Corporation CO has a 50% distributive share of the partnership’s income, gain, loss, deductions, and credits. These allocations comply with section 704(b) and its regulations. Employee EO is an employee of Corporation CO. In 2026, Employee EO is a covered employee of Corporation CO because Employee EO is one of the three highest compensated executive officers of Corporation CO. In 2027, Employee EO is not an executive officer of Corporation CO but performs services for and receives compensation from Corporation CO for services as its employee. Furthermore, in 2027, Employee EO performs services for and receives compensation from Corporation CP and Partnership CQ (Employee EO is not a partner of Partnership CQ). In 2027, the total compensation paid to Employee EO is $3,600,000, of which Corporation CO pays $1,500,000, Corporation CP pays $900,000, and Partnership CQ pays $1,200,000. For the 2027 taxable year, the total compensation paid to any employee of Corporations CO and CP did not exceed $2,500,000.

( 2 ) Conclusion (Compensation paid by Corpora- tion CO) . The $1,500,000 in compensation paid by Corporation CO is taken into account to determine whether Employee EO is one of the five highest compensated employees of Corporation CO for its 2027 taxable year. ( 3 ) Conclusion (Compensation paid by Corpora- tion CP) . Corporations CO and CP are an affiliated group as defined in paragraph (c)(1)(ii) of this section. Therefore, the $900,000 in compensation paid by Corporation CP is taken into account to determine whether Employee EO is one of the five highest compensated employees of Corporation CO for its 2027 taxable year. Because a publicly held corporation includes an affiliated group for purposes of paragraph (c)(3) of this section, the result would be the same even if there were intermediary privately held subsidiaries between Corporations CO and CP as long as all these corporations comprised an affiliated group.

( 4 ) Conclusion (Compensation paid by Partner- ship CQ) . Under paragraph (c)(3)(ii) of this section, Corporation CO’s $600,000 distributive share of Partnership CQ’s deduction (50% of $1,200,000) is compensation that is taken into account to determine whether Employee EO is one of the five highest compensated employees of Corporation CO for its

case of an affiliated group (as defined in paragraph (c)(1)(ii) of this section) that includes one publicly held corporation (as defined in paragraph (c)(1)(i) of this section), an employee of any member of the affiliated group is eligible to be one of the five highest compensated employees of the publicly held corporation regardless of whether the individual is an employee of the publicly held corporation itself or performs services for the publicly held corporation itself.

( 4 ) Determining the employees eli- gible to be the five highest compensated employees with respect to an affiliated group with more than one publicly held corporation . In the case of an affiliated group (as defined in paragraph (c)(1)(ii) of this section) that includes more than one publicly held corporation (as defined in paragraph (c)(1)(i) of this section), the group of employees eligible to be the five highest compensated employees is determined separately with respect to the parent corporation (as defined below) and each publicly held corporation (as defined in paragraph (c)(1)(i) of this section) that is not the parent corporation (an additional publicly held corporation). For this purpose, the parent corporation is the highest corporation in the chain or chains of includible corporations (that comprise the affiliated group) that is a publicly held corporation as defined in paragraph (c)(1)(i) of this section. In the case of an affiliated group in which more than one member may be the parent corporation (such as where a common parent that is not publicly held owns multiple publicly held corporations), the affiliated group must choose which member to treat as the parent corporation for the taxable year. With respect to the parent corporation, an employee of any member of the affiliated group, excluding a member of an affiliated group of an additional publicly held corporation (as defined below), is eligible to be one of its five highest compensated employees regardless of whether the individual is an employee of the parent corporation itself or performs services for the parent corporation itself. Similarly, with respect to an additional publicly held corporation, any employee of the affiliated group of the additional publicly held corporation is eligible to be one of its five highest compensated employees

regardless of whether the individual is an employee of the additional publicly held corporation itself or performs services for the additional publicly held corporation itself. For this purpose, an affiliated group of an additional publicly held corporation means, with respect to any corporation, the affiliated group which would be determined under section 1504(a) if such corporation were the common parent and if section 1504(b) did not apply. These rules similarly apply to all additional publicly held corporations, beginning at the bottom of each chain of corporations and proceeding up until all members of the affiliated group that may be so allocated have been allocated to one (and only one) affiliated group of an additional publicly held corporation. If the affiliated group includes only publicly held corporations (as defined in paragraph (c)(1)(i) of this section), the affiliated group used to determine the employees eligible to be each publicly held corporation’s five highest compensated employees is that publicly held corporation itself.

( 5 ) Determining the five highest com- pensated employees in an affiliated group . In determining whether an employee is one of the five highest compensated employees with respect to the parent corporation (as defined in paragraph (c)(2)(i) (D)( 4 ) of this section) for the taxable year, compensation paid by each member of the affiliated group (as defined in paragraph (c)(1)(ii) of this section) in the taxable year, excluding any member of an affiliated group of an additional publicly held corporation (as defined in paragraph (c)(2) (i)(D)( 4 ) of this section), is aggregated. In determining whether an employee is one of the five highest compensated employees with respect to a publicly held corporation (as defined in paragraph (c)(1)(i) of this section) in an affiliated group of an additional publicly held corporation, compensation paid by each member of the affiliated group of the additional publicly held corporation in the taxable year is aggregated.

( 6 ) Application of proration rules . The proration rules in paragraph (c)(1)(ii)(B) of this section generally apply in the same way to covered employees determined under this paragraph (c)(2)(i)(D), except that a publicly held corporation or publicly held payor corporation refers to the

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2027 taxable year. Because a publicly held corporation includes an affiliated group for purposes of paragraph (c)(3) of this section, the result would be the same even if there were an intermediary privately held subsidiary between Corporation CO and Partnership CQ (so that, instead of Corporation CO, an intermediary subsidiary was a partner in Partnership CQ), as long as Corporation CO and the intermediary subsidiary comprised an affiliated group.

( 5 ) Conclusion (Employee EO as a covered employee) . Because the aggregate compensation taken into account with respect to Employee EO is $3,000,000 ($1,500,000 + $900,000 + $600,000), Employee EO is a covered employee of Corporation CO for its 2027 taxable year by reason of being one of its five highest compensated employees for the taxable year as provided in paragraph (c)(2)(i)(D) of this section (even though Employee EO is also a covered employee of Corporation CO for its 2027 taxable year by reason of being a covered employee for its 2026 taxable year (as provided in paragraph (c)(2)(i)(C) of this section)).

( 6 ) Conclusion (Amount disallowed as a deduc- tion) . Because the compensation paid by all affiliated group members is aggregated for purposes of section 162(m)(1), the aggregate compensation of $3,000,000 exceeds the limitation in section 162(m) (1) and $2,000,000 of the compensation paid to Employee EO is nondeductible. Corporations CO and CP each are treated as paying a ratable portion of the nondeductible compensation. Thus, two thirds of each corporation’s payment will be nondeductible. Taking into account Corporation CO’s $600,000 distributive share of the Partnership CQ’s deduction, Corporation CO has an otherwise allowable deduction of $2,100,000 ($1,500,000 + $600,000). Therefore, Corporation CO has a nondeductible compensation expense of $1,400,000 ($2,100,000 x $2,000,000/$3,000,000). Corporation CP has an otherwise allowable deduction of $900,000, of which $600,000 ($900,000 x $2,000,000/$3,000,000) is a nondeductible compensation expense.

(DD) Example 30 (Individual as one of the five highest compensated employees of a publicly held corporation that includes the affiliated group and affiliated groups of additional publicly held corpo- rations) --( 1 ) Facts . Corporations CR, CT, and CV are publicly held corporations for their 2027 taxable years. Corporations CS and CU are privately held for their 2027 taxable years. Corporation CT is a subsidiary of Corporation CS, which is a subsidiary of Corporation CR. Corporation CV is a subsidiary of Corporation CU, which is a subsidiary of Corporation CT. Corporations CR, CS, CT, CU, and CV are members of an affiliated group. Employee EP is an employee of Corporations CR, CS, CU, and CV. In 2027, Employee EP performs services for and receives compensation from Corporations CR, CS, CU, and CV. The total compensation paid to Employee EP from the affiliated group members is $7,000,000 for the taxable year, of which Corporation CR pays $1,200,000, Corporation CS pays $1,800,000, Corporation CU pays $1,500,000, and Corporation CV pays $2,500,000.

( 2 ) Conclusion (Employee EP is eligible to be a covered employee of Corporation CR) . Because Employee EP is an employee of Corporation CR, Employee EP is eligible to be one of the five highest

compensated employees of Corporation CR. Even though Corporations CR, CS, CT, CU, and CV comprise an affiliated group as defined in paragraph (c) (1)(ii) of this section, because Corporations CT and CV are additional publicly held corporations of the affiliated group, the affiliated group contains affiliated groups of these additional publicly held corporations (as defined in paragraph (c)(2)(i)(D)( 4 ) of this section). Compensation paid by the affiliated groups of these additional publicly held corporations is not taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CR for its 2027 taxable year. Accordingly, Corporations CT and CU comprise an affiliated group of an additional publicly held corporation (Corporation CT), and compensation paid by Corporation CU is not taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CR for its 2027 taxable year. Furthermore, Corporation CV is an affiliated group of an additional publicly held corporation (Corporation CV), and compensation paid by Corporation CV is not taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CR for its 2027 taxable year. Therefore, only the $1,200,000 in compensation paid by Corporation CR and the $1,800,000 paid by Corporation CS are taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CR for its 2027 taxable year.

( 3 ) Conclusion (Employee EP is eligible to be a covered employee of Corporation CT) . Because Corporation CT is a publicly held corporation, Corporations CT and CU comprise an affiliated group of an additional publicly held corporation (as defined in paragraph (c)(2)(i)(D)( 4 ) of this section). Because an employee of any member of the affiliated group is eligible to be one of the five highest compensated employees of the publicly held corporation (regardless of whether the employee performs services for the publicly held corporation), Employee EP is eligible to be a covered employee of Corporation CT, even though Employee EP does not perform services for Corporation CT. Because only compensation paid by a member of the affiliated group of the additional publicly held corporation in the taxable year is taken into account to determine whether an individual is one of the five highest compensated employees with respect to the additional publicly held corporation, only compensation paid by Corporation CU is taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CT for its 2027 taxable year. Accordingly, the $1,500,000 in compensation paid by Corporation CU is taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CT for its 2027 taxable year. ( 4 ) Conclusion (Employee EP is eligible to be a covered employee of Corporation CV) . Because Employee EP is an employee of Corporation CV, Employee EP is eligible to be one of the five highest compensated employees of Corporation CV. Because Corporation CV is a publicly held corporation, Corporation CV comprises an affiliated group of an additional publicly held corporation (as defined in paragraph (c)(2)(i)(D)( 4 ) of this section). Because

only compensation paid by a member of the affiliated group of the additional publicly held corporation in the taxable year is taken into account to determine whether an individual is one of the five highest compensated employees with respect to the additional publicly held corporation, only compensation paid by Corporation CV is taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CV for its 2027 taxable year. Accordingly, the $2,500,000 in compensation paid by Corporation CV is taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CV for its 2027 taxable year.

( 5 ) Conclusion (Employee EP as covered employee of Corporation CR) . The $1,200,000 in compensation paid by Corporation CR and the $1,800,000 in compensation paid by Corporation CS are taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CR for its 2027 taxable year. If, pursuant to paragraph (c)(2)(i)(D) of this section, Employee EP is a covered employee of Corporation CR, then Corporation CR’s deduction for $1,200,000 and Corporation CS’s deduction for $1,800,000 for the 2027 taxable year would be subject to the section 162(m)(1) limit. Because the compensation paid by the affiliated group members is aggregated for purposes of section 162(m)(1), the aggregate compensation of $3,000,000 exceeds the limitation in section 162(m)(1) and $2,000,000 of the compensation paid to Employee EP would be nondeductible. Corporations CR and CS each are treated as paying a ratable portion of the nondeductible compensation. Corporation CR has an otherwise allowable deduction of $1,200,000, of which $800,000 ($1,200,000 x $2,000,000/$3,000,000) would be a nondeductible compensation expense. Corporation CS has an otherwise allowable deduction of $1,800,000, of which $1,200,000 ($1,800,000 x $2,000,000/$3,000,000) would be a nondeductible compensation expense.

( 6 ) Conclusion (Employee EP as covered employee of Corporation CT) . The $1,500,000 in compensation paid by Corporation CU is taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CT for its 2027 taxable year. If, pursuant to paragraph (c)(2)(i)(D) of this section, Employee EP is a covered employee of Corporation CT, then Corporation CU’s deduction for $1,500,000 for the 2027 taxable year would be subject to the section 162(m) (1) limit. Accordingly, pursuant to paragraph (c)(2) (i)(D)( 6 ) of this section, Corporation CU would have a nondeductible compensation expense of $500,000.

( 7 ) Conclusion (Employee EP as covered employee of Corporation CV) . The $2,500,000 in compensation paid by Corporation CV is taken into account to determine whether Employee EP is one of the five highest compensated employees of Corporation CV for its 2027 taxable year. If, pursuant to paragraph (c)(2)(i)(D) of this section, Employee EP is a covered employee of Corporation CV, then Corporation CV’s deduction for $2,500,000 for the 2027 taxable year would be subject to the section 162(m) (1) limit. Accordingly, Corporation CV would have a nondeductible compensation expense of $1,500,000.

(EE) Example 31 (Individual as one of the five highest compensated employees of a publicly held

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corporation that includes the affiliated group that chooses a parent corporation) --( 1 ) Facts . Corporations CX and CY are publicly held corporations for their 2027 taxable years. Corporations CW and CZ are privately held corporations for their 2027 taxable years. Corporations CX and CY are subsidiaries of Corporation CW. Corporations CX and CY each directly own 50% (by vote and value) of Corporation CZ’s only class of stock. In 2027, Employee EQ performs services for and receives compensation from Corporations CW, CX, CY, and CZ. The total compensation paid to Employee EQ from all corporations is $4,700,000 for the taxable year, of which Corporation CW pays $1,500,000, Corporation CX pays $900,000, Corporation CY pays $1,700,000, and Corporation CZ pays $600,000.

( 2 ) Conclusion (Employee EQ is eligible to be a covered employee of Corporations CX and CY) . Because Employee EQ is an employee of Corporations CX and CY, Employee EQ is eligible to be one of the five highest compensated employees of these publicly held corporations. Because both Corporations CX and CY are the highest publicly held corporations in the chain of includible corporations that comprise an affiliated group (composed of Corporations CW, CX, CY, and CZ) as defined in paragraph (c)(1)(ii) of this section, the affiliated group may choose to treat either Corporation CX or CY as the parent corporation for the 2027 taxable year. If the affiliated group chooses to treat Corporation CX as the parent corporation, then only compensation paid by Corporations CW, CX, and CZ is taken into account to determine whether Employee EQ is one of the five highest compensated employees of Corporation CX for the 2027 taxable year. Because Corporation CY is an affiliated group of the additional publicly held corporation composed of one corporation (Corporation CY), only compensation paid by Corporation CY is taken into account to determine whether Employee EQ is one of the five highest compensated employees of Corporation CY. A similar analysis would apply if the affiliated group chose to treat Corporation CY as the parent.

( 3 ) Conclusion (Employee EQ as a covered employee of Corporation CX) . The $1,500,000 in compensation paid by Corporation CW, the $900,000 paid by Corporation CX, and the $600,000 in compensation paid by Corporation CZ (that is, aggregate compensation of $3,000,000) are taken into account to determine whether Employee EQ is one of the five highest compensated employees of Corporation CX for its 2027 taxable year. If, pursuant to paragraph (c) (2)(i)(D) of this section, Employee EQ is a covered employee of Corporation CX, then Corporation CW’s deduction for $1,500,000, Corporation CX’s deduction for $900,000, and Corporation CZ’s deduction for $600,000 for the 2027 taxable year would be subject to the section 162(m)(1) limit. Because the compensation paid by the affiliated group members is aggregated for purposes of section 162(m)(1), the aggregate compensation of $3,000,000 exceeds the limitation in section 162(m)(1) and $2,000,000 of the compensation paid to Employee EQ would be nondeductible. Corporations CW, CX, and CZ each are treated as paying a ratable portion of the nondeductible compensation. Corporation CW would have a nondeductible compensation expense of $1,000,000 ($1,500,000 x $2,000,000/$3,000,000).

Corporation CX would have a nondeductible compensation expense of $600,000 ($900,000 x $2,000,000/$3,000,000). Corporation CZ would have a nondeductible compensation expense of $400,000 ($600,000 x $2,000,000/$3,000,000).

( 4 ) Conclusion (Employee EQ as a covered employee of Corporation CY) . The $1,700,000 in compensation paid by Corporation CY is taken into account to determine whether Employee EQ is one of the five highest compensated employees of Corporation CY for its 2027 taxable year. If, pursuant to paragraph (c)(2)(i)(D) of this section, Employee EQ is a covered employee of Corporation CY, then Corporation CY’s deduction for $1,700,000 for the 2027 taxable year would be subject to the section 162(m) (1) limit. Accordingly, Corporation CY would have a nondeductible compensation expense of $700,000.

(3) * * * (iii) Compensation paid by a controlled foreign corporation that is a member of an affiliated group . For purposes of paragraph (c)(3)(i) of this section, compensation includes a publicly held corporation’s pro rata share (as determined under the principles of sections 951(a)(2) and 951A(e) (1)) of the amounts that would be claimed by a controlled foreign corporation (as defined in section 957) that is a member of an affiliated group (as defined in paragraph (c)(1)(ii) of this section) as properly allocable to gross income included under sections 951(a)(1) and 951A(a) under sections 954(b)(5), 951A(c)(2)(A)(ii), and similar provisions, determined without regard to the disallowance of any such expenses by reason of section 162(m) and these regulations, for compensation expenses attributable to the remuneration paid by the controlled foreign corporation to a covered employee of a publicly held corporation for services performed by the covered employee.

(iv) Amounts paid to individuals per- forming substantially all their services for a publicly held corporation . Notwithstanding paragraph (c)(2)(i)(D)( 2 ) of this section, for purposes of paragraph (c)(2) (i)(D) of this section, an employee of a publicly held corporation includes an individual who, pursuant to section 3401(c), is an employee of a person other than the publicly held corporation but performs substantially all the individual’s services during the relevant taxable year for the publicly held corporation. Consequently, for purposes of paragraph (c)(3) of this section, compensation includes the aggregate amount allowable as a deduction to the publicly held corporation under chapter 1 of the Internal Revenue Code for the

taxable year (determined without regard to section 162(m)(1)) to obtain the services performed by such individual, whether or not the particular services that give rise to the deduction were performed during the relevant taxable year. This rule applies regardless of how the amounts allowable as a deduction are paid or denominated, and regardless of whether the individual is compensated directly or by a third-party payor, including a related organization or certified professional employer organization under section 7705. The disallowance under paragraph (b) of this section likewise is applied to those amounts, however denominated, otherwise allowable as a deduction to obtain those services. Nothing in the previous sentence is intended to imply that such amounts paid to a third party for services by a covered employee, however denominated, are not already treated as remuneration for those services and thus compensation for purposes of paragraph (c)(3) of this section.

(D) Example 4 --( 1 ) Facts . Corporation U is a publicly held corporation for its 2027 taxable year and is not a member of an affiliated group. Corporation U has a services agreement with unrelated Corporation V. In Corporation U’s 2027 taxable year, it pays $1,500,000 to Corporation V pursuant to the agreement in exchange for the services of an interim chief accountant (Individual E) in the same year. The $1,500,000 is otherwise deductible for Corporation U’s 2027 taxable year. Individual E performs substantially all Individual E’s services in 2027 for Corporation U.

( 2 ) Conclusion . Pursuant to paragraph (c)(3)(iv) of this section, Individual E is treated as an employee of Corporation U for purposes of this section. The $1,500,000 paid to Corporation V by Corporation U in 2027 is compensation within the meaning of paragraph (c)(3) of this section and is taken into account to determine whether Individual E is a covered employee as one of the five highest compensated employees of Corporation U for its 2027 taxable year. If, pursuant to paragraph (c)(2)(i)(D) of this section, Individual E is a covered employee of Corporation U, then Corporation U’s deduction for $1,500,000 for the 2027 taxable year is subject to the section 162(m)(1) limit. Because a publicly held corporation includes an affiliated group for purposes of paragraph (c)(3) of this section, the result would be the same even if Corporation U owned a privately held subsidiary, and Individual E performed substantially all Individual E’s services for the subsidiary. In addition, the result would also be the same if Individual E performed substantially all Individual E’s services for both Corporation U and its subsidiary, as long as Corporation U and its subsidiary comprised an affiliated group (regardless of whether Corporation U or its subsidiary paid the $1,500,000 to Corporation V). In such case, pursuant to paragraph (c)

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(1)(ii) of this section, the amount disallowed as a deduction would be prorated between Corporation U and its subsidiary. Furthermore, the result would be the same even if Individual E were an employee of Corporation U (regardless of whether Individual E were also an employee of Corporation V).

(E) Example 5 --( 1 ) Facts . Corporation W is a publicly held corporation for its 2027 taxable year and is not a member of an affiliated group. Corporation W is a partner in Partnership X (a partnership for Federal tax purposes), that owns all the stock of Corporation Y. Under the partnership agreement, Corporation W has a 50% distributive share of the partnership’s income, gain, loss, deductions, and credits. These allocations comply with section 704(b) and its regulations. Individual F is a partner of Partnership X. In 2027, Individual F performs services for the partnership, and the partnership pays $1,000,000 to Individual F as a guaranteed payment for these services. With respect to the $1,000,000 paid to Individual F, a deduction of $500,000 is allocated to Corporation W. Corporation W’s $500,000 distributive share of the partnership’s deduction is reported separately to Corporation W pursuant to §1.702-1(a)(8)(iii). Individual F is also an employee (within the meaning of section 3401(c)) of Corporation Y. In Corporation W’s 2027 taxable year, it pays $8,000,000 to Corporation Y in exchange for Individual F’s services. The $8,000,000 is otherwise deductible for Corporation W’s 2027 taxable year. Individual F performs substantially all Individual F’s services in 2027 for Corporation W.

( 2 ) Conclusion . Pursuant to paragraph (c)(3)(iv) of this section, Individual F is treated as an employee of Corporation W for purposes of this section. The entire $8,000,000 paid to Corporation Y by Corporation W in 2027 is compensation within the meaning of paragraph (c)(3) of this section and is taken into account to determine whether Individual F is one of the five highest compensated employees of Corporation W for its 2027 taxable year. Because Corporation W’s $500,000 distributive share of the partnership’s deduction is attributable to the compensation paid by the partnership for services performed by Individual F (who is treated as an employee of Corporation W), the $500,000 is compensation within the meaning of paragraph (c)(3)(ii) of this section. Accordingly, Corporation W’s $500,000 distributive share of the

partnership’s deduction is aggregated with Corporation W’s deduction for $8,000,0000 paid to Corporation Y in determining whether Individual F is a covered employee as one of the five highest compensated employees of Corporation W for its 2027 taxable year. If, pursuant to paragraph (c)(2)(i)(D) of this section, Individual F is a covered employee of Corporation W, then Corporation W’s deduction for $8,500,000 for its 2027 taxable year is subject to the section 162(m)(1) limit. Because a publicly held corporation includes an affiliated group for purposes of paragraph (c)(3) of this section, the result would be the same even if there were an intermediary privately held subsidiary between Corporation W and Partnership X (so that, instead of Corporation W, an intermediary subsidiary was a partner in Partnership X), as long as Corporation W and the intermediary subsidiary comprised an affiliated group, and as long as Individual F performed substantially all Individual F’s services for the intermediary subsidiary. Furthermore, the result would also be the same if Individual F performed substantially all Individual F’s services for both Corporation W and the intermediary subsidiary (regardless of whether Corporation W or the intermediary subsidiary paid the $8,000,000 to Corporation Y). In such case, pursuant to paragraph (c)(1)(ii) of this section, the amount disallowed as a deduction would be prorated between Corporation W and the intermediary subsidiary.

(h) * * * (2) * * * (ii) * * * (C) Definition of compensation . The definition of compensation provided in paragraph (c)(3)(ii) of this section (relating to distributive share of partnership deductions for compensation paid) applies to any deduction for compensation that is paid after December 18, 2020. The definition of compensation in paragraph (c)(3) (ii) of this section does not apply to compensation paid pursuant to a written binding contract that is in effect on December 20, 2019, and that is not materially modi

fied after that date. For purposes of paragraph (h)(2)(C) of this section, written binding contract and material modification have the same meanings as provided in paragraphs (g)(1) and (2) of this section. The definition of compensation provided in paragraphs (c)(3)(iii) and (iv) of this section and the examples in paragraphs (c)(3)(vi)(D) and (E) of this section apply to any deduction for compensation that is otherwise deductible for taxable years beginning after the later of December 31, 2026, or the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register .

(F) Five highest compensated employ- ees . Paragraph (c)(2)(i)(D) of this section (describing the five highest compensated employees of a publicly held corporation) and the examples in paragraphs (c)(2)(vii) (CC) through (EE) of this section apply to taxable years beginning after the later of December 31, 2026, or the date of publication of the Treasury decision adopting these rules as final regulations in the Fed- eral Register .

(G) Amendment to paragraph (c)(1) (vi)(W)(2) of this section . The amendment to paragraph (c)(1)(vi)(W)( 2 ) of this section ( Example 23 ) to reference paragraph (c)(1)(vi)(T) of this section ( Example 20 ) is proposed to apply to taxable years ending on or after January 16, 2025.

(Filed by the Office of the Federal Register January 14, 2025, 8:45 a.m., and published in the issue of the Federal Register for January 16, 2025, 90 FR 4691)

Douglas W. O’Donnell,

Deputy Commissioner .

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