Rev. Rul. 59-185

Advice has been requested regarding the application of Part 4(g) of Revenue Ruling 57-163, C.B. 1957-1, 128, at 141, concerning the limitation on employee contributions to pension, profit-sharing, or stock bonus plans.

An employer established an employees' profit-sharing plan and trust whereby the employer's contributions to the plan were allocated among the participating employees on the basis of annual compensation. Employees may make voluntary contributions to the trust of up to ten percent of their compensation. Employee contributions and earnings thereon are nonforfeitable. Forfeitures of employer contributions, arising from termination of services of employees before becoming eligible for a distribution of such funds from the trust, are allocated among the remaining participants on the basis of years of service.

Section 401(a)(4) of the Internal Revenue Code of 1954 provides that an employees' trust will not qualify for tax exemption, if contributions or benefits discriminate in favor of officers, stockholders, supervisory or highly compensated employees.

In Revenue Ruling 57-163, supra, Part 4(g) states that, as a general rule, employee contributions of six percent or less are not deemed to be burdensome. The ruling illustrates that if, in order to participate in the benefits of a plan, an employee is required to make contributions which are so large as to be burdensome for lower paid employees, the classification will be considered discriminatory in favor of highly paid employees. A requirement of employee contributions in excess of six percent of compensation will be deemed presumptively burdensome and is unacceptable unless the plan in operation indicates that the lower paid employees participate in substantially the same proportion as the higher paid employees.

It is further stated in Revenue Ruling 57-163, supra, that if a plan provides for optional rates of contribution by employees, and employer contributions or the benefits are geared to the employee contributions in such a way that a higher rate of employee contribution will result in larger benefits from employer contributions, the employee contributions may be found to be burdensome and result in discrimination in contributions or benefits under section 401(a) of the Code, but generally only if the highest rate of employee contribution permitted is in excess of six percent of compensation.

The instant case is to be distinguished from the examples given above. Here, the benefits derived by employee-participants from contributions of the company to the trust are not geared to employee contributions. Thus, there is not present in the plan a potential disproportionate allocation of employer contributions by reason of the voluntary contributions.

The tax advantages provided under a qualified employees' plan were not intended by Congress to be extended to unlimited contributions by employees which are made primarily to escape tax on the increments thereon. However, where the purpose of such a feature in a plan is to encourage savings by participants, the Internal Revenue Service permits employee contributions to such plans provided the contributions are kept within reasonable bounds. In this respect, employee contributions are deemed to be reasonable where they are not in excess of ten percent of compensation. Of course, the additional contributions voluntarily contributed by the employees must be used only for the purpose of providing benefits to the individual contributor in addition to the benefits to be provided by the employer's contributions.

Accordingly, it is held that an employees' pension, profit-sharing or stock bonus plan will not fail to qualify under section 401(a) of the Code merely because it provides for voluntary contributions by employees of up to ten percent of their compensation, provided employer contributions or the benefits are not geared to employee contributions.

Part 4(g) of Revenue Ruling 57-163, supra, is hereby amplified.