Rev. Rul. 68-592

Advice has been requested whether a plan that provides for employer contributions of a fixed percentage of total compensation may qualify as a pension plan under section 401(a) of the Internal Revenue Code of 1954 where it requires contributions to be allocated to employees' accounts on the basis of their length of service as well as their compensation.

An employer established an employees' retirement plan intended to qualify as a money purchase pension plan under section 401(a) of the Code. The employer's annual contribution to the plan is a fixed 15 percent of the total compensation of all the participants. This contribution is allocated to individual accounts maintained for each participant. A participant's allocable share is determined by dividing his units by the total units of all participants and applying this percentage to the contribution. Two units are awarded for each 100 dollars of annual salary and one unit for each month of service with the employer.

Section 1.401-1(b)(1)(i) of the Income Tax Regulations states that a pension plan, within the meaning of section 401(a) of the Code, is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement. Retirement benefits generally are measured by, and based on, such factors as years of service and compensation received by the employees. Such a plan will be considered a pension plan if the contributions made by the employer under the plan can be determined actuarially on the basis of definitely determinable benefits, or if, as in the case of money purchase pension plans, such contributions are fixed without being geared to profits.

Variations in contributions or benefits may be provided so long as the plan, viewed as a whole for the benefit of employees in general, with all its attendant circumstances, does not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. See Part 5(b) of Rev. Rul. 65-178, C.B. 1965-2, 94, at 119.

Contributions in this case are fixed without being geared to profits. Furthermore, the contributions are allocated to employees' accounts in accordance with a definite formula that takes into account each employee's compensation and length of service. Thus, each employee's share of these contributions is definitely determinable.

The allocation of employer contributions on the basis of the employees' length of service as well as their compensation is common under profit-sharing plans but not under pension plans. However, no provision of 401(a) of the Code or the regulations thereunder prevents such a method of allocation under a money purchase pension plan that otherwise meets the requirements of section 401(a).

Accordingly, the instant plan will not fail to qualify as a pension plan under section 401(a) of the Code merely because contributions are allocated to employees' accounts on the basis of their length of service as well as their compensation.