Rev. Rul. 81-5

The purpose of this revenue ruling is to restate the position in Rev. Rul. 70-183, 1970-1 C.B. 104, 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 in Rev. Rul. 70-183 is whether a profit-sharing plan, when considered together with a pension plan, will meet the requirements of section 401(a)(4) of the Internal Revenue Code under the circumstances described below.

On January 1, 1977, a corporate employer with eight employees established a qualified defined benefit pension plan for the benefit of its hourly paid nonunion employees. The maximum annual benefit provided under the plan is a life annuity of $100 per year of future service, payable at normal retirement age 65. In 1977, six hourly paid employees participated in the plan. The employer contributions for purposes of section 401(a)(4) of the Code for 1977 were 3 percent of each participant's annual compensation. The pension plan participants earned between $7,500 and $10,000 in that year.

On January 1, 1977, the employer also established a profit-sharing plan for the benefit of its salaried employees. The plan provides that contributions will be made out of profits in an amount to be determined annually by the board of directors. During 1977, contributions equal to 15 percent of compensation were made on behalf of the plan's two participants, each of whom was a 50 percent stockholder. Each profit-sharing plan participant earned $25,000 in 1977.

Computations furnished by the employer with regard to the profit-sharing plan indicated that the contribution made in 1977 will provide each participant a life annuity of $750 per annum at age 65, a benefit of three percent of 1977 compensation.

Because coverage under the profit-sharing plan, standing alone, did not meet the requirements of section 410(b)(1) of the Code, the employer designated both the pension and profit-sharing plans as constituting one plan for qualification purposes.

In this case, the pension and profit-sharing plans, taken as a whole, met the coverage requirements of section 410(b)(1) of the Code during 1977.

Section 401(a)(4) of the Code provides that a plan will not satisfy section 401(a) unless the contributions or benefits under the plan do not discriminate in favor of employees who are officers, shareholders, or highly compensated.

Section 1.410(b)-1(d)(3)(i) of the Income Tax Regulations provides that an employer may designate two or more plans of the employer as constituting a single plan in order to satisfy the requirements of section 410(b)(1) of the Code.

Rev. Rul. 66-15, 1966-1 C.B. 83, held that a profit-sharing plan for employees in whose favor discrimination is prohibited will not qualify merely because the employer makes contributions to a pension plan for hourly rated, nonunion employees if the contributions, or the benefits to be derived from the contributions, to the profit-sharing plan are discriminatory when compared to the contributions, or the benefits to be derived from the contributions, to the pension plan.

Under section 401(a)(4) of the Code, it is not necessary that both contributions and benefits be nondiscriminatory under a qualified plan. Therefore, if it can be shown that either the contributions or the benefits of both the profit-sharing and the defined benefit plans, when considered together, are non-discriminatory, then section 401(a)(4) is satisfied.

In this case, contributions on behalf of participants in the pension plan equalled 3 percent of compensation, whereas contributions on behalf of participants in the profit-sharing plan equalled 15 percent of compensation during 1977. Thus, there was discrimination in contributions during 1977 within the meaning of section 401(a)(4) of the Code. This discrimination would not be eliminated by considering employer contributions for social security benefits.

With respect to benefits, the employer's computations indicate that each participant under the profit-sharing plan will receive an annual benefit of 3 percent of 1977 compensation. Under the defined benefit pension plan, the maximum benefit is a life annuity at age 65 of $100 per year of service. Since the lowest paid pension plan participant earned $7,500 in 1977, that individual's projected benefit per year of service is 1.33 percent of compensation. No other method of comparison (even if employer-provided social security benefits are considered) shows that the benefits do not discriminate. Thus, during this year, there was also discrimination in benefits within the meaning of section 401(a)(4) of the Code.

Accordingly, the profit-sharing plan, considered as one plan in combination with the pension plan, in this case did not satisfy the requirements of section 401(a)(4) of the Code for 1977.

Rev. Rul. 70-183 is superseded because the position stated therein is restated under current law in this revenue ruling.