Rev. Rul. 81-33

1981-1 C.B. 173, 1981-5 I.R.B. 10.

                       Internal Revenue Service
                                 Revenue Ruling

                   DISCRIMINATION; DISABILITY BENEFITS OFFSET

                          Published: February 2, 1981

26 CFR 1.401-4: Discrimination as to contributions or benefits

  Discrimination; disability benefits offset. The benefits under a pension plan that provides disability benefits are discriminatory if the disability benefits are reduced by the benefits paid under a separate nonqualified disability insurance arrangement of the employer that provides benefits that are equal to 75 percent of an employee's compensation, but are limited to $500 monthly; Rev. Rul. 71-578 superseded.

  The purpose of this revenue ruling is to restate the position in Rev. Rul. 71-578, 1971-2 C.B. 207, in view of the amendment of section 401 of the Internal Revenue Code by the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

  The issue in Rev. Rul. 71-578 is whether the benefits under a pension plan are discriminatory within the meaning of section 401(a)(4) of the Code where disability benefits under the plan are reduced by disability benefits provided under a nonqualified disability insurance contract maintained by the employer.

  An employer established a fully integrated pension plan intended to meet the requirements of section 401(a) of the Code.  In addition to normal and early retirement benefits, the plan also provides a benefit payable in case of retirement due to disability before age 65 equal to 50 percent of average annual compensation offset by the maximum amounts permitted under the requirements for integration with social security benefits and further reduced until normal retirement age by any other disability benefits payable under any plan, insurance contract, or arrangement to which the employer has contributed.

  The employer presently maintains a disability insurance contract that provides for disability benefits equal to 75 percent of actual compensation at date of disability, limited to a monthly benefit of $500, and payable until age 65 or until recovery from disability. This contract was not made a part of the pension plan or of any other plan that met the requirement of section 401(a) of the Code.

  In order to qualify under section 401(a) of the Code, a plan must be either a pension, an annuity, a profit-sharing, or a stock bonus plan that sets forth all provisions essential for disqualification.

  Section 401(a)(4) of the Code and section 1.401-4 of the Income Tax Regulations require that in order to qualify under section 401(a) a plan must provide either benefits or contributions that 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 merely because the contributions or benefits under the plan differ because of any retirement benefits created under the state or federal law.

  Section 1.410(b)-1(d)(3)(i) of the regulations provides that an employer may designate two or more plans of the employer as constituting a single plan in order to satisfy the requirements of section 401(a) of the Code.

  In this case as a result of the $500 per month limitation in the disability insurance contract, a greater portion of the disability benefit called for by the pension plan is provided under the plan in the case of the more highly compensated employees than is provided in the case of other employees.

  The disability insurance contract in this case cannot qualify under section 401(a) of the Code because it is neither a pension, an annuity, a profit- sharing, nor a stock bonus plan; nor is it part of such a plan. Furthermore, it is not part of any retirement plan created under state or federal law.  Thus, the disability contract may not be considered in determining whether the pension plan satisfies the requirements of section 401(a).

  Accordingly, the benefits under the pension plan are discriminatory within the meaning of section 401(a)(4) of the Code.

  Rev. Rul. 71-578 is superseded because the position stated therein is restated under current law in this revenue ruling.

Rev. Rul. 81-33, 1981-1 C.B. 173, 1981-5 I.R.B. 10.