Rev. Rul. 80-307

The purpose of this revenue ruling is to restate the position of Rev. Rul. 72-58, 1972-1 C.B. 111, in view of the amendment of section 401(a) of the Internal Revenue Code by the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

The issue in Rev. Rul. 72-58 is whether mandatory employee contributions under a qualified plan may result in discrimination within the meaning of section 410(b)(1) or 401(a)(4) of the Code under the circumstances described below.

Section 410(b)(1) of the Code requires that a qualified plan cover either a certain percentage of an employer's employees or a classification of employees that does not discriminate in favor of employees who are officers, shareholders, or highly compensated.

If a mandatory employee contribution plan is offered to all employees, but the contributions required of the employee-participants are burdensome, some of the lower paid employees may not participate because of such requirement. In such event the plan may not meet the coverage requirements of section 410(b)(1) of the Code.

Section 401(a)(4) of the Code requires that a qualified plan must provide either benefits or contributions which do not discriminate in favor of employees who are officers, shareholders, or highly compensated.

In cases where the plan provides for optional rates of contributions by employees, and employer contributions or the benefits are geared to the employee contributions in such a way that a higher rate of employee contributions will result in larger benefits from employer contributions, the employee contributions may similarly result in discrimination within the meaning of section 401(a)(4) of the Code, because the employer-derived benefits favor those who are highly compensated.

Accordingly, mandatory employee contributions may operate either to deny participation to lower paid employees or to deprive lower paid employees of benefits at least as high in proportion to compensation as are provided for higher paid employees, after taking into account differentials permitted under the requirements for integration with social security benefits. Thus, mandatory employee contributions may result in discrimination within the meaning of sections 410(b)(1) or 401(a)(4) of the Code.

Although Rev. Rul. 72-58 provided that, generally, discrimination would not result if the rate of mandatory employee contributions did not exceed six percent of compensation, discrimination may result even in that case.

The principles stated herein also apply to a plan described in section 410(c) of the Code.

Rev. Rul. 72-58 is superseded because the position stated therein is restated under current law in this revenue ruling.