Rev. Rul. 69-399

Advice has been requested whether, under the circumstances described below, a voluntary contribution by a partner, under a qualified pension plan, is an "excess contribution" as defined in section 401(e) of the Internal Revenue Code of 1954.

A partnership maintains an employees' pension plan that meets the requirements for qualification under section 401 of the Code. The plan, which provides benefits for all employees including owner-employees as defined in section 401(c)(3) of the Code, is funded through the purchase of retirement annuity contracts. The employer contribution is computed in accordance with the "three-year averaging" provisions of section 401(e)(3) of the Code applicable to annuity plans funded on a level premium basis. The plan contains a provision permitting each participant to make voluntary contributions to purchase a term insurance policy on his life in an amount not to exceed $1,000 for each $10 of monthly retirement income.

Section 401(e) of the Code provides that, except with regard to employer contributions under plans using the three-year averaging provisions of section 401(e)(3), the amount of any contribution allocable to the purchase of life insurance shall not be taken into account when considering whether an excess contribution has been made on behalf of an owner-employee.

Section 1.401-13(c) of the Income Tax Regulations describes the application of the three-year averaging provisions in computing employer contributions on behalf of an owner-employee where such contributions are applied to pay premiums on annuity, endowment, or life insurance contracts. It provides that the term "excess contribution" does not include any amount so applied if total employer contributions, including amounts allocable to the purchase of life, accident, health, or other insurance, do not exceed $2,500.

Section 1.401-13(c) of the regulations is applicable to employer contributions only. Accordingly, although the plan in this case uses the three-year averaging provisions in computing employer contributions, employee contributions on behalf of the owner-employee need not be limited to $2,500 where such contributions are allocable to the purchase of life insurance.

Based on the foregoing, it is held that, in this case, the voluntary employee contribution allocable to the purchase of life insurance in an amount not to exceed $1,000 for each $10 of monthly retirement income is not an excess contribution as defined in section 401(e) of the Code.