Rev. Rul. 69-217

Advice has been requested whether a pension plan will fail to qualify under section 401(a) of the Internal Revenue Code of 1954 merely because it permits total voluntary employee contributions equal to ten percent of the employee's aggregate basic compensation for all years since he became a participant under the plan.

A corporation established an employees' pension plan that provided an annual retirement benefit equal to forty percent of the retired employee's average annual compensation plus the additional retirement benefit that can be purchased with the participant's voluntary contributions and the earnings thereon. Voluntary contributions may be made in any year so long as the total of such contributions for all years does not exceed ten percent of the aggregate basic compensation received for all years since the employee became a participant under the plan.

Revenue Ruling 59-185, C.B. 1959-1, 86, states that the tax advantages provided under a qualified employees' plan were not intended by Congress to be extended to unlimited contributions by employees made primarily to escape tax on the increments thereon. However, where the purpose of a voluntary contribution feature in a plan is to encourage savings by participants, such feature is acceptable provided the contributions are kept within reasonable bounds. In this respect, Revenue Ruling 59-185 holds that employee contributions are deemed to be reasonable if they do not exceed ten percent of compensation. It does not, however, delimit the compensation on which employee contributions may be based. Of course, the additional amounts voluntarily contributed by the employees must be used only for the purpose of providing benefits to the individual contributor in addition to the benefits provided by the employer's contributions.

It is held that the pension plan in this case will not fail to qualify, under section 401(a) of the Code, merely because it permits total voluntary employee contributions equal to ten percent of the employee's aggregate basic compensation for all years since he became a participant thereunder.