Rev. Rul. 74-385

Advice has been requested whether the pension plan described below may qualify under section 401(a) of the Internal Revenue Code of 1954.

A corporation established a pension plan intended to qualify under section 401(a) of the Code. The plan provides for an annual pension benefit equal to fifty percent of the aggregate amount of each participant's contributions under the plan. The plan further provides that each participant must contribute to the plan at the rate of two percent of his annual earnings, and, in his discretion, may contribute an additional one or two percent of such earnings. A participant may elect to change the rate of his voluntary contributions only once a year. A participant may also elect to discontinue all his contributions to the plan. However, in that event he would not be eligible to again participate for one 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 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 the case of a defined benefit pension plan, the "definitely determinable benefit" requirement of section 1.401-1(b)(1)(i) of the regulations has been satisfied where the benefits for each participant can be computed in accordance with an express formula contained in the plan. See Rev. Rul. 71-24, 1971-1 C.B. 114.

Thus, the Internal Revenue Service concludes that if, in the case of a defined benefit pension plan, the benefits on behalf of each participant are determined in accordance with a stipulated formula that is not subject to the discretion of the employer, the requirements of that section of the regulations are satisfied. Consistent with this conclusion is Rev. Rul. 72-58, 1972-1 C.B. 111, which discusses pension, profit-sharing, and stock bonus plans that provide optional rates of contributions by employees with employer contributions geared to these optional contributions and indicates that those plans may qualify in the absence of discrimination prohibited by section 401(a)(3) and (4) of the Code.

This plan contains an express formula under which the benefits to be provided are determined with reference to the amounts elected to be contributed by each participant. Furthermore, the level of benefits to be provided is not within the discretion of the employer. Under these circumstances, the benefit formula satisfies the requirement of section 1.401-1(b)(1)(i) of the regulations.

Accordingly, the plan described herein may qualify as a defined benefit pension plan under section 401(a) of the Code if all the other requirements for qualification are satisfied.

The same degree of definiteness is required for the contributions under a money purchase pension plan as that required for the benefits under a defined benefit pension plan. Thus, in a money purchase pension plan, if the contributions on behalf of each participant are made in accordance with a stipulated formula that is not subject to the discretion of the employer, the requirements of section 1.401-1(b)(1)(i) of the regulations are satisfied. Rev. Rul. 73-206, 1973-1 C.B. 192, which considers a money purchase pension plan providing for employee contributions based on a stipulated formula with employer contributions geared to those contributions and reaches a contrary conclusion, is hereby revoked.

The Service recognizes that Rev. Rul. 59-185, 1959-1 C.B. 86, and Rev. Rul. 69-217, 1969-1 C.B. 115, may have been interpreted to imply that employer contributions cannot be geared to optional employee contributions. These Revenue Rulings are hereby clarified to remove any such implication.

¹ Also released as Technical Information Release No. 1297, dated July 18, 1974.