Rev. Rul. 81-139

The purpose of this revenue ruling is to restate the position in Rev. Rul. 71-113, 1971-1 C.B. 127, in view of the enactment of the Employee Retirement Income Security Act of 1974. Pub. L. 93-406, 1974-3 C.B. 1.

Rev. Rul. 71-113 involved the question of whether an integrated defined contribution plan with the contribution formula describe below meets the requirements of section 401(d) of the Internal Revenue Code.

The plan provides for employer contributions of 15 percent of compensation on behalf of employees who are not owner-employees. However, such contributions 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) 15 percent of the owner-employee's earned income (up to a maximum of $100,000) reduced by the amount of self-employment tax as defined in section 1401(a); or (2) $7,500. The plan also provides that in no case may the plan contributions for owner-employees exceed one-third of the total contributions under the plan.

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 15 percent of earned income or $7,500). 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) 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 15 percent of the owner-employee's earned income or $7,500. In this case, the self-employment taxes paid plus the employer's contribution can exceed that limitation.

For example, assume an owner-employee has earned income of $100,000 in 1979. The employer contribution on behalf of such owner-employee is computed (under the plan contribution formula) as follows:

a. $100,000 X 15% _______________________________________ $15,000.00

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

Rev. Rul. 71-113 is superseded because the position stated therein is restated under current law.