Rev. Rul. 83-110

SECTION 1. PURPOSE

This revenue ruling provides rules for complying with section 401(1) of the Internal Revenue Code relating to the coordination of defined contribution plans with the Old-Age, Survivors, and Disability Insurance under the Social Security Act (OASDI).

SEC. 2. BACKGROUND INFORMATION

Section 249 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 1982-2 C. B. 462, 523, added section 401 (1) of the Code. Section 401(1) states that, notwithstanding section 401 (a)(5) of the Code, the coordination of a defined contribution plan with the OASDI will not satisfy section 401(a)(4) of the Code if the sum of contributions under the plan plus the amounts the employer contributes under OASDI is a higher percentage of compensation for officers, shareholders or highly compensated employees than for other employees.

SEC. 3. APPLICABILITY AND GENERAL RULES

.01 Applicability-Section 401(1) of the Code applies to the following plans regardless of whether the discrimination requirements of section 401 (a)(4) are being tested with respect to contributions or with respect to benefits. Section 401 (1) applies:

(1) to any integrated defined contribution plan (including any integrated target benefit plan);

(2) to any nonintegrated defined contribution plan (including a target benefit plan) which must be considered in combination with employer contributions to OASDI in order to satisfy the nondiscrimination requirements of section 401(a)(4); or

(3) to any combination of plans involving at least one defined contribution plan (including a target benefit plan) that must be considered in combination with employer contributions to OASDI in order to satisfy the nondiscrimination requirements of section 401 (a)(4).

.02 General Rules for Testing Whether Contributions Discriminate-

In testing whether contributions are discriminatory, the OASDI contributions considered made by the employer equal the product obtained by multiplying (1) by (2) below.

(1) Generally, this amount is the remuneration paid during the year by the employer to the employee that constitutes wages within the meaning of section 3121(a) of the Code (without regard to section 3121(a)(1)) and that does not exceed the contribution base applicable under OASDI at the beginning of the year. In the case of an individual described in section 401(c)(1), this amount is the earned income, as defined in section 401(c)(2), that does not exceed such contribution base.

(2) This amount is the rate of tax under section 3111(a) relating to OASDI tax at the beginning of the plan year. The rate of tax was to be 5.401o for 1984 when TEFRA was enacted (subsequently changed to 5.7% for 1984).

.03 General Rules for Testing Whether Benefits Discriminate --

In testing whether benefits are discriminatory when considered in conjunction with employer-provided benefits under OASDI, the amount of OASDI benefits considered to be provided by the employer may be determined using the rules set forth in section 6 of Rev. Rul. 81-202, 1981-2 C.B. 93, 95. That section provides that employer-provided benefits under OASDI may be imputed under several approaches which are based on the integration limits, (e.g., 37 percent of a participant's highest five year average compensation up to covered compensation or 83 ' percent of the participant's primary insurance amount under OASDI). However, these amounts must be reduced to 7/9 of the amounts indicated in that section. The 7/9 factor is approximately equal to the ratio of the initially scheduled 5.4% OASDI rate for 1984 to the 70/0 rate described in sections 14 and 15 of Rev. Rul. 71-446, 1971-2 C.B. 187, 194. In the case of individuals who are retiring in the near future, the rates of employer contributions to OASDI for many of the prior years were considerably below 5.4'70. However, because of the difficulty Of determining for each individual the appropriate average contribution rate and the extent to which accrued integration prior to the effective date of section 401(l) of the Code should be preserved, the 7/9th factor is adopted. This factor is generally somewhat higher than the true factor should be. Accordingly, it is anticipated that the 7/9th factor will not immediately change in proportion to changes in the employer contribution rate in section 3111(a).

.04 Partial Terminations-Because the effect of section 401(1) of the Code is to reduce the discrimination permitted within the employer's qualified plans, a decrease in the rate of future accruals or contributions for highly compensated participants may be mandated by section 401(1) when the benefits or contributions are not increased for other participants. Such a decrease will not be considered to be either a partial termination or a complete discontinuance of contributions within the meaning of section 411(d)(3).

SEC. 4. SPECIFIC RULES FOR DEFINED CONTRIBUTION PLANS OTHER THAN TARGET BENEFIT PLANS

.01 Plans Integrating at a Stated Dollar Amount Not Greater than the Contribution Base Under OASDI-

In the case of a defined contribution plan (other than a target benefit plan) that is being tested for discrimination on the basis of contributions and that provides a marginal rate of contributions to the plan on compensation in excess of a stated dollar amount (not exceeding the contribution base under OASDI for the calendar year within which the plan year begins), the marginal rate of contributions on compensation in excess of that dollar amount cannot exceed the marginal rate on the compensation below such amount by more than the rate of applicable tax under section 3111 (a) at the beginning of the plan year.

.02 Plans Integrating at a Stated Amount Greater Than the Contribution Base Under OASDI-

In the case of the plan described in subsection .01, except that the stated dollar amount for any year exceeds the contribution base applicable under OASDI for the calendar Year within which the plan year begins, the amount of increase of marginal rate permitted is the product of:

(1) the amount described in subsection .01; and

(2) the fraction whose numerator is the contribution base under OASDI at the beginning of the plan year and whose denominator is the stated dollar amount.

SEC. 5. SPECIFIC RULES FOR TARGET BENEFIT DEFINED CONTRIBUTION PLANS

.01 Integration Limits-In the case of a target benefit plan, as defined under Rev. Rul. 76-464, 1976-2 C.B. 115, that is being tested for discrimination on the basis of benefits, the plan will be considered properly integrated if it satisfies the otherwise applicable integration limit multiplied by a 7/9 adjustment factor. In determining the otherwise applicable integration limit, the taxable wage base for any plan year will be considered to be the contribution base under OASDI for the calendar year within which that plan year begins.

.02 Determination of Plan Contributions-

A target benefit plan in which the targeted benefit is reduced because of the reduction in .01 will be deemed to satisfy the integration requirements of section 401(a)(4) if the contribution required for every participant for the first year after the date this ruling is effective equals the product of the contributions that would have been required for that participant had the amendment not been made, multiplied by the ratio of the participant's targeted benefit after the change to the participant's targeted benefit before the change. The contributions required for subsequent years must be determined using the individual level premium funding method, assuming the required contributions computed above were the individual level premium normal cost for that first year.

SEC. 6. SPECIAL RULES RELATING TO COMPARABILITY

When several plans are being tested as a unit and one, but not all, of the plans is a defined contribution plan, the rules described in section 3 must be applied to impute social security for purposes of comparing contributions or benefits with respect to each individual in the defined contribution plan and the defined benefit plan. However, to compare the contributions or benefits of two individuals who are both in a defined benefit plan, the rules described in section 6 of Rev. Rul. 81-202, unadjusted by section 3 of this revenue ruling, may be applied only with respect to testing comparability within the defined benefit plan.

Rev. Rul. 71-446 contains rules under which plans will be considered to properly integrate with OASDI under section 401 (a)(5). Generally, the rules in this revenue ruling are more restrictive than the rules in Rev. Rul. 71446. However, in addition to satisfying this revenue ruling, the plan must continue to satisfy the requirements of section 401 (a)(5) of the Code.

SEC. 7. EFFECTIVE DATE

This revenue ruling applies for plan years beginning after December 31, 1983.

SEC. 8. EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 81-202 is modified.