Rev. Rul. 81-74

The purpose of this revenue ruling is to restate the position in Rev. Rul. 73-449, 1973-2 C.B. 138, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

The issue is whether the allocation of contributions adversely affects the qualification of the plan under section 401(a) of the Internal Revenue Code under the circumstances described below.

A corporation established a profit-sharing plan in 1978 for all of its employees. 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 1978 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 1978 received by the only employee who is an officer, shareholder, or a highly compensated employee 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) provides that either contributions or benefits provided under a plan must not discriminate in favor of officers, shareholders, 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 1978, constituted 65 percent of the total compensation of the rank-and-file employees and 55 percent of the total compensation of the employee who is an officer, shareholder, or highly compensated. Since the allocation under the facts stated actually favors the rank-and-file employees, the plan is not discriminatory in 1978 within the meaning of section 401(a)(4) of the Code.

Accordingly, the allocation of contributions in this situation did not adversely affect the qualification of the plan in 1978 under section 401(a) of the Code.

Rev. Rul. 73-449 is superseded because the position stated therein is restated under current law in this revenue ruling.