Rev. Rul. 69-145

Advice has been requested whether a pension plan that determines benefits under the circumstances described below may qualify under section 401(a) of the Internal Revenue Code of 1954.

A life insurance company adopted an unfunded, nonqualified, deferred-payment arrangement for its salesmen. Under the arrangement any salesman of the company may elect, before the beginning of any taxable year, to defer, until retirement, the receipt of five percent of the commissions he earns in that year. In the first year the arrangement was in effect, eighty-five percent of the salesmen elected to participate. The deferred amounts are allocated to the employee's account as nonforfeitable credits. Sales commissions are fixed by an employment contract that applies equally to all salesmen.

In the same year, the company also adopted a pension plan for its salesmen that was intended to qualify under section 401(a) of the Code. Coverage under this plan satisfied the requirements of section 401(a)(3)(B) of the Code. The plan provides that sales commissions will be considered as the base for purposes of computing benefits regardless of the deferment of payment of any part of such commissions.

Section 401(a)(4) of the Code provides that contributions or benefits under a qualified plan may not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. However, section 401(a)(5) provides that a plan will not be considered discriminatory merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation or the basic or regular rate of compensation of such employees. See also Part 5(h) and (i) of Revenue Ruling 65-178, C.B. 1965-2, 94, which provides that whatever basis of compensation is used in computing contributions or benefits under a qualified plan must be consistently and uniformly applicable to all participants.

Revenue Ruling 68-454, C.B. 1968-2, 164, describes an employees' pension and profit-sharing plan where the contributions and benefits provided for rank-and-file employees are based on compensation alone while the contributions and benefits for officer-employees are based on compensation plus nonforfeitable credits made to their accounts under an unfunded, nonqualified arrangement to pay them, at a future date, for services currently rendered. Revenue Ruling 68-454 states that since the unfunded service credits are merely evidence of a promise given by the employer to the employee to make payments of stated amounts at some future date, the credits cannot be recognized as compensation for purposes of determining contributions or benefits under a qualified plan. Thus, the ruling concludes that the basis used to compute contributions and benefits under the plan was not uniformly applicable to all employees but, instead, favored a selected group of officer-employees and was, therefore, discriminatory within the meaning of section 401(a) of the Code.

This case is distinguishable from Revenue Ruling 68-454. Here, as in that Revenue Ruling, the unfunded service credits cannot be recognized as compensation in determining contributions or benefits under the plan. However, in Revenue Ruling 68-454, the use of the nonforfeitable credits in addition to compensation to compute the contributions and benefits for officer-employees and the use of only compensation to compute the contributions and benefits for rank-and-file employees resulted in prohibited discrimination. In this case, on the other hand, there is a uniform base for computing contributions and benefits of all participants in the plan. Furthermore, sales commissions are fixed by a contract that applies equally to all salesmen. Thus, the basis used for computing contributions and benefits does not result in prohibited discrimination since it is consistently and uniformly applied to all participants in the plan.

Accordingly, in this case, the nonforfeitable credits may be used in addition to current compensation for the purpose of computing benefits under a pension plan intended to meet the requirements of section 401(a) of the Code.

Revenue Ruling 68-454 is distinguished.