Rev. Rul. 68-176

Advice has been requested as to the earned income that a self-employed individual may include in determining contributions to be made to a qualified pension plan under the circumstances described below.

A self-employed individual adopted a money-purchase pension plan that meets the requirements of section 401(a) of the Internal Revenue Code of 1954. He practices his profession in his individual capacity. He is also a member of a professional partnership, in which he owns less than a controlling interest. He derives most of his income from services rendered as a member of the partnership. The partnership has not established a retirement plan covering the partners or its employees.

Section 401(d)(11) of the Code provides that under a qualified plan, contributions on behalf of an owner-employee may be made only with respect to the earned income of the owner-employee which is derived from the trade or business with respect to which such plan is established. In addition, section 401(d)(5) of the Code provides that contributions to be made on behalf of an owner-employee may not exceed the amounts that may be deducted under section 404. Under section 404(e)(1) of the Code, the deduction is determined on the basis of the earned income of the self-employed individual derived from the trade or business with respect to which the plan is established.

Section 1.401-10(e)(1) of the Income Tax Regulations provides that for purposes of section 401 of the Code, a sole proprietor is considered to be his own employer, and a partnership is considered to be the employer of each of the partners. Thus, a member of a partnership is not himself an employer who may establish a qualified plan with respect to his services to the partnership. See also Revenue Ruling 67-3, C.B. 1967-1, 94.

Accordingly, it is held that when computing earned income for determining contributions to a qualified pension plan established with respect to a trade or business in which an individual is a sole proprietor, the earned income from his sole proprietorship may be included, but not his share of the earned income of the partnership that did not adopt such a plan.