Rev. Rul. 73-449

Advice has been requested whether a provision in the plan for the allocation of contributions, under the circumstances described below, will adversely affect the qualification of the plan under section 401(a) of the Internal Revenue Code of 1954.

A corporation established a profit-sharing plan in 1973 for all of its employees who had at least two years of service. Under the plan the employer contributions are to be allocated on the basis of each employee's annual compensation. Annual compensation is defined as regular salary and bonuses, but excludes commissions and overtime pay. The sum of the compensation received by the rank-and-file employees for the years 1970, 1971, and 1972 consisted of the following percentages: regular salary, 60 percent; bonuses, 5 percent; commissions, 25 percent; and overtime pay, 10 percent. The sum of the compensation for those years received by the employees who are officers, shareholders, supervisors, or highly compensated breaks down as follows: regular salary, 50 percent; bonuses, 5 percent; commissions, 45 percent; and overtime pay, none.

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

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

Section 401(a)(5) of the Code provides that a plan will not be considered discriminatory merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of such employees.

The plan in this case is not necessarily discriminatory just because employer contributions are allocated on the basis of less than total compensation. The test for discrimination may be made on the basis of the relationship between the compensation on which the allocations are made and total compensation. Under the terms of the plan allocations are based on regular salary and bonuses which for the years 1970, 1971, and 1972 constituted 65 percent of the total compensation of the rank-and-file employees and 55 percent of the total compensation of employees who are officers, shareholders, supervisors, or highly compensated. Since the allocation under the facts stated actually favors the rank-and-file employees, the plan is not discriminatory for the purposes of section 401(a)(4) of the Code.

Accordingly, the allocation of compensation will not adversely affect the qualification of the plan under 401(a) of the Code.