Rev. Rul. 59-14

Advice has been requested with respect to the qualification under section 401(a) of the Internal Revenue Code of 1954 of an employees' profit-sharing plan and trust which limits coverage to a class of employees who are not entitled to overtime pay.

An employer established an employees' profit-sharing plan and trust which limited the employees eligible for participation to those who are not entitled to overtime pay as set forth under the provisions of the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. 201-219.

Section 13(a)(1) of the Act provides that the overtime pay provisions shall not apply to any employee employed in a bona fide executive, administrative, professional or local retailing capacity, or in the capacity of outside salesman, as such terms are defined and delimited by regulations of the Administrator of the Wage and Hour Division of the Department of Labor.

In order to be classified as a bona fide executive employee, as set forth in the regulations of the Administrator, an individual must be compensated for his services on a salary basis at a rate of not less than $55 per week. In order to be classified as a bona fide administrative or professional employee, an individual must be compensated for his services on a salary or a fee basis at a rate of not less than $75 per week. See section 541.1(f), section 541.2(e) and section 541.3(e) of Part 541 of Title 29 (Labor) of the Code of Federal Regulations. Thus, in general, salaried or clerical employees cannot be exempt from the overtime provisions of the Act if they are compensated at a rate of less than $55 or $75 per week, as the case may be. The Administrator under amended regulations, issued effective February 2, 1959, has increased these rates to $80 and $95, respectively.

Section 401(a) of the Internal Revenue Code of 1954 provides, in part, that a trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust if it benefits such employees as qualify under a classification set up by the employer and found not to be discriminatory in favor of employees who are officers, shareholders, supervisory personnel, or highly compensated employees; and if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, supervisory personnel, or highly compensated employees.

A plan which covers only such employees as qualify under the classification set forth in the instant case will not automatically meet the requirements of either section 401(a)(3)(B) of the Code concerning the classification of employees benefitted, or section 401(a)(4) of the Code concerning contributions or benefits. However, in a particular case, such a classification may be acceptable if the coverage meets the percentage requirements of section 401(a)(3)(A) or is found to be nondiscriminatory within the meaning of section 401(a)(3)(B) and if the contributions or benefits under the plan are nondiscriminatory within the meaning of section 401(a)(4). In determining whether or not such plans are discriminatory, attention will be given to the particular facts and circumstances of each case.

A plan which explicitly covers only salaried or clerical employees earning above a certain minimum amounts of compensation may be considered discriminatory unless it satisfies (in addition to the other requirements for qualification) the requirements for integration with social security benefits set forth in section 1.401-3(e) of the Income Tax Regulations and in Revenue Ruling 56-692, C. B. 1956-2, 287 (which extends certain provisions of Mimeograph 6641, C. B. 1951-1, 41, to plans with a minimum compensation level of $4,200). Similarly, a plan which covers only employees exempt from the overtime provisions of the Fair Labor Standards Act, if such classification has the effect of covering substantially only salaried and clerical employees earning above a certain amount of minimum compensation, is subject to like integration requirements in order to qualify. Furthermore, such classification must be found not to be discriminatory in favor of officers, shareholders, supervisors, or highly compensated employees. Such a classification may be considered to be discriminatory if those covered consist primarily of officers, etc., or if, in any event, there are relatively many salaried or clerical employees earning in excess of such minimum amounts who are not exempt from the overtime provisions of the Fair Labor Standards Act, and for that reason are excluded from the plan.

Accordingly, it is held that a profit-sharing plan which limits coverage to a classification of employees who are exempt from the overtime provisions of the Fair Labor Standards Act will not automatically satisfy the nondiscriminatory requirements of section 401(a)(3)(B) and (4) of the Code.

The considerations set forth in this Revenue Ruling are also applicable to pension, annuity and stock bonus plans which limit coverage to such a classification of employees.