Rev. Rul. 68-245

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in PS No. 3, dated July 29, 1944.

An employer established a money purchase pension plan intended to qualify under section 401(a) of the Internal Revenue Code of 1954. The plan provides for incidental life insurance protection for employees who are insurable. One participant is not insurable and the same amount is contributed for him that is contributed for a participant who is insurable. The uninsurable participant, thus, receives a larger annuity upon retirement but is deprived of current life insurance protection.

Section 401(a)(4) of the Code provides that the contributions or benefits provided under a qualified plan must not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Section 1.72-16(b)(2) of the Income Tax Regulations provides that, if amounts that were allowed as a deduction under section 404 of the Code or earnings of the trust are applied toward the purchase of life insurance contracts under a qualified plan, the cost of the life insurance protection under such contract shall be included in the gross income of the participant for the taxable year or years in which the contributions or earnings are so applied.

Under the stated facts there is no discrimination in regard to contributions. The cost to the employer is the same whether a particular employee is insurable or not. It may be argued that discrimination results against an insurable employee because he is taxed currently on contributions used to pay for life insurance protection. However, the factor which results in a distinction as to benefits between the insurable and uninsurable employee is fortuitous and is not within the control of either the employee or the employee.

Accordingly, it is held that the plan in this case is not discriminatory, within the meaning of section 401(a)(4) of the Code, merely because the contributions made for annuity benefits for an uninsured participant are equal to the contributions made for combined life insurance protection and annuity benefits for insurable participants.

PS No. 3 is hereby superseded, since the position set forth therein is incorporated in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.