Rev. Rul. 71-331

Advice has been requested whether a money purchase pension plan is discriminatory in operation within the purview of section 401(a)(4) of the Internal Revenue Code of 1954 under the facts described below.

The plan provides that all employees are participants. The corporate-employer's yearly contribution for each employee is 20 percent of that employee's salary for the current year or his salary for the first year of his employment, whichever is larger.

During the year 1970, there were two participants under the plan, an officer-shareholder and a rank-and-file employee. The officer-shareholder's salary was $50,000 for the year and the employer contributed $14,000 on his behalf under the plan (based on his first year's salary of $70,000). The other employee's salary was $5,000 for the year (as was his starting salary) and the employer contributed $1,000 on his behalf under the plan.

Section 401(a)(4) of the Code provides that a plan may not qualify if contributions and benefits provided under the plan discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. Section 401(a)(5) of the Code provides that a plan will not be considered discriminatory within the meaning of section 401(a)(4) merely because contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation of such employees.

Provision must generally be made in a qualified plan for increases in benefits (or contributions) when compensation is increased. See Rev. Rul. 69-251, C.B. 1969-1, 127. There is no similar requirement for decreases in benefits or contributions when compensation is decreased. However, whatever basis is used in determining contributions or benefits must not result in prohibited discrimination.

Under the plan, the employer contributed 28 percent of the officer-employee's 1970 compensation; whereas, the employer contributed only 20 percent of the rank-and-file employee's 1970 compensation. The employer's contributions on behalf of its employees under the plan did not bear a uniform relationship to the total compensation, or the basic or regular rate of compensation of such employees in that year.

Accordingly, it is held that the plan was discriminatory in operation in the year 1970.