Rev. Rul. 73-383

Advice has been requested whether, under the circumstances described below, an employees' money purchase pension plan qualifies under section 401(a) of the Internal Revenue Code of 1954.

The plan requires the trustee to provide each participant with as much life insurance protection as can be purchased with 49 percent of the amount contributed for him each year by the employer. Only ordinary life insurance policies are to be used for this purpose. However, under the plan, employees over age 35 may specify a lesser percentage of their share of the employer's contribution that can be used to purchase ordinary life insurance policies on their behalf. The life insurance policies are distributed to each participant upon his termination of employment; upon his death, the proceeds of the policies are paid to his designated beneficiary.

An analysis of the plan participants at the time the plan was established discloses that all those over age 35 are officers, shareholders, supervisors or highly compensated, while all of the rank-and-file employees are below that age.

Section 401(a) of the Code provides that a qualified plan must be for the exclusive benefit of employees or their beneficiaries. Section 1.401-1(b)(3) of the Income Tax Regulations provides that a plan is not for the exclusive benefit of employees, in general, if by any device whatever, it discriminates in either eligibility requirements, contributions or benefits in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Rev. Rul. 70-370, 1970-2 C.B. 84, provides that where amounts to be distributed to participants under a profit-sharing trust are measured by investments that have been earmarked for their respective accounts, the trustee must invest each participant's interest proportionately unless additional provisions are included in the plan to prevent the prohibited discrimination. One acceptable provision would give all participants the right to direct the trustee to select the type of investment with respect to their individual shares. Although Rev. Rul. 70-370 sets out principles with respect to earmarked investments under a profit-sharing plan, they are equally applicable to any type of plan, including a stock bonus or money purchase plan, where distributions depend on the amounts stated or ascertainable and credited to participants' accounts.

In this case, ordinary life insurance policies may be purchased for all employee-participants and earmarked for their account. However, only employees over age 35 (all of whom are officers, shareholders, supervisors, or highly compensated) may elect the percentage of their share of employer contributions that can be used to purchase such policies. As a result, they have greater investment flexibility with respect to their funds than other employees. Thus, the plan discriminates in favor of employees who are officers, shareholders, supervisors, and highly compensated.

Accordingly, this plan does not qualify under section 401(a) of the Code.