Rev. Rul. 71-113

Advice has been requested whether a profit-sharing plan that contains the contribution formula described below meets the requirements of section 401(d) of the Internal Revenue Code of 1954, relating to the contribution that can be made on behalf of an owner-employee under a profit-sharing plan that is integrated with contributions or benefits under the Social Security Act.

The plan provides that the employer contributions on behalf of employees who are not owner-employees are to be reduced by the amount determined by multiplying the employee's wages under section 3121(a)(1) of the Code by the rate of tax imposed under section 3111(a). The plan also provides that the employer shall contribute for the benefit of an owner-employee an amount which is the lesser of (1) the owner-employee's earned income, multiplied by a percentage equal to the rate of tax imposed by section 3111(a) of the Code and reduced by the amount of self-employment tax as defined in section 1401(a) or (2) $2,500.

Section 401(d)(5) of the Code provides that the contributions on behalf of an owner-employee under a qualified plan may not exceed the amounts that may be deducted under section 404 (the lesser of 10 percent of his earned income or $2,500). Section 401(d)(6) of the Code provides in effect that, if the plan is to be integrated with contributions or benefits under the Social Security Act, self-employment taxes paid by an owner-employee are to be taken into account as contributions by the employer on behalf of the owner-employee. See also section 1.401-12(h) and (i) of the Income Tax Regulations.

If self-employment taxes paid by the owner-employee are to be taken into account under an integrated plan, then the total of such taxes plus the employer contribution made under the plan for the owner-employee for the year must not exceed the lesser of 10 percent of his earned income or $2,500. In this case, the self-employment taxes paid plus the employer's contribution can exceed that limitation. For example,

Assume the owner-employee had earned income of $100,000 in 1970. The employer contribution on behalf of such owner-employee is computed (under the plan contribution formula) as follows:

 a. $100,000 X 4.2% (section 3111(a) rate for 1970) ____ $4,200.00

Accordingly, it is held that the contribution formula in this case does not meet the requirements of section 401(d) of the Code.