Rev. Rul. 81-67
1981-1 C.B. 175, 1981-9 I.R.B. 7.
Internal Revenue Service
Revenue Ruling
SELF-EMPLOYED; DIFFERING CONTRIBUTIONS FOR OWNER-EMPLOYEES AND PARTNERS
Published: March 2, 1981
26 CFR 1.401-12: Requirements for qualification of trusts and plans benefiting owner-employees
Self-employed; differing contributions for owner-employees and partners. A partnership's plan benefitting common law employees and self-employed individuals that provides for annual contributions equal to 15 percent of net earnings of common law employees and owner-employees and 10 percent of net earnings of partners who are not owner-employees fails to qualify under section 401 of the Code. Rev. Rul. 71-393 superseded.
The purpose of this revenue ruling is to restate the position in Rev. Rul. 71-393, 1971-2 C.B. 209, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.
The issue in Rev. Rul. 71-393 is whether the following plan provision meets the requirements of section 401 of the Internal Revenue Code.
The plan provides benefits for common law employees as well as self-employed individuals, some of whom are owner-employees within the meaning of section 401(c)(3) of the Code. It provides for an annual contribution equal to 15 percent of the compensation of each common law employee. It also provides for an annual contribution on behalf of each owner-employee equal to 15 percent of such owner-employee's net earnings from the partnership's business; however, it provides for an annual contribution on behalf of each partner other than an owner-employee of an amount equal to only 10 percent of such partner's net earnings from the business. In no event may the contribution made on behalf of any partner exceed the lesser of 15 percent of annual compensation or $7,500.
Section 401(a)(4) of the Code provides that a plan will not be qualified unless either the contributions or benefits under a plan do not discriminate in favor of officers, shareholders, or highly compensated employees.
Section 401(a)(10) of the Code provides that a plan providing benefits for employees, some or all of whom are owner-employees, will not be qualified unless it satisfies the requirements of both section 401(a) and section 401(d). Section 401(d)(3) provides that a plan benefiting an owner-employee must benefit each employee having three or more years of service within the meaning of section 401(a)(3). For this purpose a self-employed person is an employee. See section 401(c)(1) of the Code.
Furthermore, section 401(d)(10) of the Code states that a plan must not provide contributions or benefits for any owner-employee who controls, or for two or more owner-employees who together control, as an owner-employee or as owner-employees, any other trade or business, unless the employees of each trade or business which such owner-employee or such owner-employees control are included under a plan which meets the requirements of section 401(a) (including paragraph 401(a)(10)) and of section 401(d), and provides contributions and benefits for employees that are not less favorable than contributions and benefits provided for owner-employees under the plan.
Thus, self-employed individuals (who are employees for purposes of section 401(c)(1) of the Code) other than owner-employees, of a trade or business controlled by an owner-employee must receive contributions or benefits at least as favorable as those received by an owner-employee. Similarly, discrimination in contributions or benefits in favor of owner-employees as against other self-employed individuals is prohibited in situations not involving a controlled trade or business.
In this case, the plan discriminates in favor of owner-employees as against other self-employed individuals. Accordingly, the plan does not meet the qualification requirements of section 401 of the Code.
Rev. Rul. 71-393 is superseded because the position stated therein is restated under current law in this revenue ruling.
Rev. Rul. 81-67, 1981-1 C.B. 175, 1981-9 I.R.B. 7.