Rev. Rul. 76-464

Section 1. Purpose

The purpose of this Revenue Ruling is to provide guidelines for determining whether the benefits of a target benefit plan discriminate in favor of employees who are officers, shareholders, or highly compensated.

Sec. 2. Background Information

Section 401(a)(4) of the Internal Revenue Code of 1954 provides that contributions or benefits shall not discriminate in favor of employees who are officers, shareholders, or highly compensated.

Sec. 3. Definitions

For purposes of this revenue ruling, the following definitions are applicable.

.01 Target Benefit plan--A target benefit plan is a money purchase pension plan in which:

(1) the plan indicates a stated benefit commencing at the plan's normal retirement date,

(2) contributions necessary to fund the benefit described in paragraph (1) with respect to a participant are determined under the individual level premium funding method using actuarial assumptions or factors stated in the plan,

(3) the contributions determined in paragraph (2), and any forfeitures reducing those contributions, are allocated and separately accounted for with respect to each such participant, and

(4) the benefits provided under the plan are provided solely from the amounts allocated in paragraph (3), employee contributions, and any income, expenses, and gains, reduced by any losses.

A plan will not fail to be a target benefit plan merely because the amount determined in paragraph (3) is limited in order to satisfy the requirements of section 415 of the Code. Nor will a plan fail to be a target benefit plan merely because the amount determined in paragraph (3) is offset by employee contributions.

.02 Targeted Benefit--The benefit described in section 3.01(1).

.03 Anticipated Benefit--A benefit that would be provided under the target benefit plan if the contributions allocated in section 3.01(3) earned not less than 5% nor more than 6% interest compounded annually until the normal retirement date. In the case of a target benefit plan whose benefits are provided in part by insurance contracts, the anticipated benefit is equal to the sum of the benefits provided by the insurance contract and benefits provided in the preceding sentence from the portion of contributions not allocated to insurance contracts.

.04 Pre-Retirement Interest Rate--The rate of interest compounded annually that is embodied in the actuarial assumptions or facts described in section 3.01(2) for the period before the normal retirement date.

.05 Prohibited Group--Employees who are officers, shareholders, or highly compensated.

.06 Rank and File Employees--Employees other than those who are officers, shareholders, or highly compensated.

Sec. 4. General Rules

.01 The benefits under a target benefit plan will discriminate in favor of the prohibited group unless the anticipated benefits do not discriminate in favor of the prohibited group. Such a plan, however, would satisfy section 401(a)(4) of the Code if contributions do not discriminate in favor of the prohibited group.

.02 If the pre-retirement interest rate of a plan is not less than 5% nor more than 6%, the anticipated benefit is equal to the targeted benefit and, therefore, in applying section 4.01, the targeted benefit may be used in lieu of the anticipated benefit.

.03 If the pre-retirement interest rate is less than 5%, the anticipated benefit will exceed the targeted benefit in a manner disproportionately favoring the class of employees whose contributions described in section 3.01(2) began at younger ages. Thus, the anticipated benefits of such a plan could discriminate in favor of the prohibited group, even if the targeted benefits do not discriminate in favor of the prohibited group if the class of employees described in the previous sentence consists primarily of the prohibited group. Such a plan, however, would satisfy section 401(a)(4) of the Code if the contributions do not discriminate in favor of the prohibited group.

.04 If the pre-retirement interest rate exceeds 6% the anticipated benefits will be less than the targeted benefit. The anticipated benefits relative to the targeted benefit will favor the class of employees whose contributions described in section 3.01(2) began at older ages. Thus, the anticipated benefits of such a plan could discriminate in favor of the prohibited group, even if the targeted benefits do not discriminate in favor of the prohibited if the class of employees described in the previous sentence consists primarily of prohibited group employees. Such a plan, however, would satisfy section 401(a)(4) of the Code if the contributions do not discriminate in favor of the prohibited group.

Sec. 5. Transitional Rule

In the case of a target benefit plan in existence on November 5, 1976, whose pre-retirement interest rate exceeds 6% or is less than 5%, such plan may, for purposes of section 4.01, use the targeted benefit in lieu of the anticipated benefit if the pre-retirement interest rate is changed to an interest rate nor exceeding 6% and not less than 5% with respect to new benefits or additional benefits created by changes in compensation, plan provisions, or any other reason.

Sec. 6. Effective Date

This Revenue Ruling applies to plans to which section 415 of the Code applies effective for years beginning after December 31, 1975.

¹ Also released as IR-1691, dated November 5, 1976.