Rev. Rul. 70-580

Advice has been requested whether, under the circumstances described below, a profit-sharing plan meets the requirements of section 401(a) of the Internal Revenue Code of 1954.

A corporation established a qualified pension plan for the exclusive benefit of the corporation's hourly-paid employees. The pension plan provides that the employer will contribute eight percent of each participant's annual compensation. The highest-paid pension plan participant earned $7 500 per year when the plan was established.

On the same date that the pension plan was established, the corporation established a profit-sharing plan intended to qualify under section 401(a) of the Code for the benefit of its salaried employees. This plan provides that the employer will contribute, out of profits, ten percent of each participant's annual compensation. The plan further provides that distributions will only be made upon retirement, death, or other separation from service. The only three participants in the profit-sharing plan earn annual compensation of $15,600, $23,400, and $31,200, respectively.

Coverage under the profit-sharing plan, standing alone, did not meet the requirements of section 401(a)(3) of the Code. As a result, the corporation designated both plans as constituting one plan for qualification purposes and requested that contributions under the Social Security Act, as amended through December 30, 1969, be taken into account in determining whether the two plans, considered as a unit, meet the requirements of section 401(a) of the Code.

Section 1.401-3(f) of the Income Tax Regulations provides that an employer may designate several trusts or plans as constituting one plan intended to qualify under section 401(a)(3) of the Code, in which case all of such trusts or plans, taken as a whole, may meet the requirements of that section. The fact that such combination of trusts and plans fails to qualify as one plan does not prevent such of the trusts and plans as qualify from meeting the requirements of section 401(a) of the Code.

Section 401(a)(4) of the Code provides that contributions or benefits under a qualified plan must not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Section 1.401-3(e) of the regulations establishes the general basis for the integration of pension, annuity, profit-sharing, and stock bonus plans with old-age and survivors insurance benefits provided under the Social Security Act. Revenue Ruling 69-4, C.B. 1969-1, 118, provides additional guidelines for the integration of such plans with such benefits.

In determining whether contributions or benefits result in prohibited discrimination in this case, it is proper to take into account contributions and benefits under the Social Security Act since neither plan contains provisions that conflict with the requirements for integrated plans as set forth in sections 13 and 14 of Revenue Ruling 69-4. This is true even though the plans being considered are not of the excess benefit, stepped-up, or offset type described in section 1.401-3(e) of the regulations and Revenue Ruling 69-4. Furthermore, the test for discrimination in this case is made with respect to contributions since a money purchase pension plan and a profit-sharing plan are involved. See Rev. Rul. 70-183, C.B. 1970-1, 103. When contributions under the Social Security Act are considered together with the contributions under the two plans, the resulting contribution on behalf of the participants in each plan is as set out below:

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