Rev. Rul. 72-58

Advice has been requested regarding the determination of whether employee contributions under a pension, profit-sharing, or stock bonus plan are burdensome within the meaning of section 1.401-3(d) of the Income Tax Regulations.

Section 1.401-3(d) of the regulations provides that if a contributory plan is offered to all employees, but the contributions required of the employee-participants are so burdensome so as to make the plan acceptable only to the highly paid employees, the classification will be considered discriminatory in favor of such highly paid employees.

If a plan requires, for example, employee contributions of ten percent of compensation, it will be necessary to determine whether lower paid employees are being kept out of the plan because of such requirement. If it is found that lower paid employees are not participating because of such requirement, the classification may be held to discriminate in favor of a group enumerated in section 401(a)(3)(B) of the Internal Revenue Code of 1954. Generally, however, employee contributions of six percent or less are not deemed to be burdensome.

In cases where the plan provides for optional rates of contributions by employees, and employer contributions or the benefits are geared to the employee contributions in such a way that a higher rate of employee contributions will result in larger benefits from employer contributions, the employee contributions may similarly be found to be burdensome and to result in discrimination in contravention of section 401(a)(4) of the Code, but generally only if the highest rate of employee contribution permitted is in excess of six percent of compensation.

Accordingly, the test is whether the contribution provisions operate to deprive lower paid employees of benefits at least as high in proportion to compensation as are provided for higher paid employees, after taking into account differentials permitted under the requirements for integration with social security benefits. See Revenue Ruling 71-446, C.B. 1971-2, 187, for guides to integration with social security benefits. See also Revenue Ruling 70-580, C.B. 1970-1, 91, relating to taking social security benefits into account in testing for prohibited discrimination under plans that do not contain specific provisions for complying with the integration guides.