Rev. Rul. 69-251

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in Mimeograph 5677, C.B. 1944, 320. This ruling relates to whether a pension plan containing the provisions described below for adjusting retirement benefits when compensation is increased will be considered discriminatory.

A pension plan intended to qualify under section 401(a) of the Internal Revenue Code of 1954 provides that a participant's retirement benefit shall be increased to reflect any increase in his compensation after he becomes a participant. The plan further provides that such increases in a participant's benefits will be made only when the cumulative increase in the amount of his compensation is large enough to call for an increase in benefits of not less than $120 per year and that no increase will be made in any participant's benefits after he has reached age 60.

A plan will not qualify under section 401(a) of the Code if contributions or benefits discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Where retirement benefits under a pension or annuity plan are based on compensation at the time the plan is established and certain highly-compensated employees are within a few years of retirement, their benefits will ordinarily be based on the highest compensation, while lower-paid employees who entered the service of the employer shortly before the plan was established will ordinarily receive benefits based on the lowest compensation. To eliminate discrimination, a consistent and uniform application should prevail as between both groups. Thus, where compensation within a few years before retirement, which includes salary increments since original employment, is to be used for the highly-compensated employees, similar compensation should be used for the lower-paid employees. Therefore, provision must generally be made in the plan for increases in benefits when the compensation is increased.

A plan that contains a provision for increasing benefits when compensation is increased will not be considered discriminatory merely because it provides that no increase in compensation after attainment of a specified age will be taken into account in determining the retirement benefits if such provision applies alike to all participants, including those who have already attained the specified age at the time the plan becomes effective.

Furthermore, such a plan will not be considered discriminatory merely because it provides that, either for administrative convenience or because suitable insurance or annuity contracts are not available from a particular insurer, the amount of retirement benefits will not be increased until the cumulative increase in amount of basic compensation is large enough to call for an increase in the retirement benefit of not less than a specified minimum amount not exceeding $120 per year if such provision applies alike to all participants. Nor will a plan with such a provision be considered discriminatory merely because the limitations on retirement benefits under such provision would be less likely to affect highly compensated employees than others.

The plan in this case contains the required provision for increasing benefits when compensation is increased. The plan limitations on such increases in benefits apply alike to all participants, including those who had already attained age 60 when they became participants.

Accordingly, the plan will not be considered discriminatory merely because it contains these provisions.

Mimeograph 5677 is hereby superseded, since the position stated therein is restated under the current law in this Revenue Ruling.

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