Rev. Rul. 72-302

Advice has been requested whether a pension plan that does not include owner-employees qualifies under section 401 of the Internal Revenue Code of 1954 if it permits self-employed individuals to elect to vary the amounts to be contributed on their behalf on a year-to-year basis.

A partnership established a plan intended to be a money purchase pension plan that would qualify under section 401 of the Code. The plan is designed to benefit all common-law employees and all partners who are not owner-employees within the meaning of section 401(c)(3) of the Code. It provides that the employer shall contribute 10 percent of compensation for each common-law employee and such percentage, from zero to 10 percent of compensation, for each partner as he shall specify in writing to the employer prior to the end of each taxable year.

Section 1.401-1(b)(1)(i) of the Income Tax Regulations provides that a plan designed to provide benefits for employees or their beneficiaries to be paid upon retirement or over a period of years after retirement will, for the purposes of section 401(a) of the Code, be considered a pension plan if the employer contributions under the plan can be determined actuarially on the basis of definitely determinable benefits, or, as in the case of money purchase pension plans, such contributions are fixed without being geared to profits.

In this case, a self-employed individual has the right to elect not to participate in the plan for a particular year by having no contributions made on his behalf for that year; also, he may have the contributions on his behalf varied on a year-to-year basis. Therefore, with respect to self-employed individuals the contributions under the plan are not fixed, as required by section 1.401-1(b)(1)(i) of the regulations in the case of a qualified money purchase pension plan.

Accordingly, it is held that this plan does not qualify under section 401 of the Code.