Rev. Rul. 81-49

The purpose of this revenue ruling is to restate the position of Rev. Rul. 71-330, 1971-2 C.B. 204, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

Rev. Rul. 71-330 deals with whether a pension plan may qualify under section 401(a) of the Internal Revenue Code if past service benefits are computed in the manner described below.

The plan provides a past service benefit of one percent of compensation per year of service for employees who were employed before the effective date of the plan. The compensation to be used in computing past service benefits is the average compensation for the three-year period immediately preceding the establishment of the plan.

Section 401(a)(4) of the Code provides that in order for an employees' pension plan to qualify under section 401, contributions or benefits provided under the plan must not discriminate in favor of employees who are officers, shareholders, or highly compensated.

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 either in eligibility requirements, contributions, or benefits in favor of employees who are officers, shareholders, or highly compensated. Section 1.401-1(b)(3) of the regulations also points out that the law is concerned not only with the form of a plan but also with its effects in operation.

However, where plan benefits are based on an average compensation covering a period of at least three years the use of that averaging period in and of itself will not be considered to result in discrimination in operation.

Accordingly, the method of computing past service benefits in this plan does not prevent it from qualifying under section 401(a) of the Code.

Rev. Rul. 71-330 is superseded because the principles stated therein are restated in this revenue ruling.