MONEY PURCHASE PLAN DISCRIMINATES IF CONTRIBUTIONS ARE BASED ON HIGHER OF CURRENT SALARY OR FIRST-YEAR SALARY AND DISPROPORTIONATELY BENEFIT OFFICER-SHAREHOLDER

Rev. Rul. 85-34

PURPOSE

The purpose of this revenue ruling is to restate the position in Rev. Rul. 71-331, 1971-2 C.B. 205, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

ISSUE

Whether the contributions to a money purchase pension plan are discriminatory in operation within the meaning of section 401(a)(4) of Internal Revenue Code under the facts described below.

FACTS

The plan provides that all of the corporate employees are participants. The corporation's yearly contribution for each employee is 15 percent of either that employee's total compensation for the current year or that employee's total compensation for the first year of employment, whichever is larger. The plan also limits contributions in accordance with limits in section 415 of the Code.

During the year 1982, there were two participants in the plan, officer-shareholder and a rank-and-file employee. The officer-shareholder's total compensation for the year was $50,000 and the employer contributed $12,000 on the officer's behalf under the plan because the officer's compensation for the first year's employment was $80,000. The rank-and-file employee's compensation was $10,000 for the year, as was the employee's starting compensation, and the employer contributed $1,500 on the employee's behalf under the plan.

LAW AND ANALYSIS

Section 401(a)(4) of the Code provides that a plan may qualify if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, 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 on behalf of the employees bear a uniform relationship to the total compensation, or the basic or regular rate of compensation of such employees.

For purposes of testing whether the contributions in a money purchase pension plan discriminate in operation, the contributions will be compared to total compensation. See Rev. Rul. 59-13, 1959-1 C.B. 83, as amplified by Rev. Rul. 83-89, 1983-1 C.B. 88.

Although the basis of this plan's contributions may not be considered to be automatically discriminatory, whatever basis is used in determining contributions must be result in prohibited discrimination.

Under this plan, the employer contributed 24 percent of the officer-shareholder's 1982 compensation. However, the employer contributed only 15 percent of the rank-and-file employee's compensation in 1982. The employer's contribution on behalf of the shareholder-officer exceeded the contribution on behalf of the rank-and-file participant when expressed as a percentage of total compensation in that year.

HOLDING

The contributions under this plan were discriminatory in operation in the 1982 year.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 71-331 is superseded because the position stated therein is restated in this Revenue Ruling.