Rev. Rul. 72-3

Advice has been requested whether a pension plan qualifies under section 401(a) of the Internal Revenue Code of 1954 if it provides the benefit described below.

The plan provides that upon attainment of normal retirement age, each participant will receive a pension in the amount of 200 percent of the highest average basic salary he earned during any three consecutive years of service with the employer.

Section 401(a) of the Code provides for the qualification of a pension plan that meets the requirements of that section.

The legislative history underlying the enactment of sections 401 through 404 of the Code indicates that Congress did not contemplate the qualification of a pension plan under which the pension benefit for a participant exceeds the highest average salary the participant earned covering any reasonable period of service with the employer establishing the plan.

A pension is in the nature of compensation for previous services, for which full and adequate compensation was not received at the time of rendition of the services. McFarlane v. Hotz, 401 Ill. 506, 82 N.E. 2d 650, at 656 (1948). A pension is a "substitute for earning power," Schlaefer v. Schlaefer, 112 F. 2d 177, at 188 (1940); Letterman v. City of Tacoma, 53 Wash. 2d 294, 333 P. 2d 650, at 653 (1958). A benefit which (except for increases for cost of living allowances) exceeds current compensation is not a substitute for such compensation and is not a pension.

The benefit for each participant under the plan in this case is 200 percent of the participant's highest average basic salary paid during any three consecutive years of service. Under these circumstances, the plan does not carry out the Congressional intent with regard to qualified pension plans.

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