Rev. Rul. 71-150

Advice has been requested whether, under the circumstances described below, the operation of a pension plan resulted in the discrimination prohibited by section 401(a)(4) of the Internal Revenue Code of 1954.

The plan provides that employees becoming participants on the date of the plan's inception will receive immediate vested rights in all contributions made on their behalf. Employees becoming participants after the date of the plan's inception will acquire no vested interest in the fund prior to attaining normal retirement age 65.

On the date of the plan's inception, the officers and supervisors as well as the rank-and-file employees became participants. There has been a constant turnover of the rank-and-file employees both before and after that date. Those employees who were not fully vested forfeited all their benefits under the plan.

Section 401(a)(4) of the Code provides that a plan will not qualify if the contributions or benefits provided under the plan discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. Section 1.401-1(b)(3) of the Income Tax Regulations states that the law is concerned not only with the form of a plan but also with its effects in operation.

Various vesting provisions are in use, ranging from complete and immediate vesting through different forms of graduated vesting (upon completion of stated service or participation requirements, and/or upon reaching a specified age) to no vesting until attainment of normal or stated retirement age. A determination as to satisfactory vesting provisions of necessity depends on the facts in a particular case. Thus, a provision for different vesting requirements for present and future participants is not, of itself, discriminatory within the purview of section 401(a)(4) of the Code. However, the provision of more favorable vesting for participants in whose favor discrimination is prohibited than for other employees results in the discrimination prohibited by section 401(a)(4) of the Code. See Revenue Ruling 65-266, C.B. 1965-2, 138.

In this case, the vesting provision has resulted in discrimination in favor of officers and supervisors when compared to the rank-and-file employees who became participants after the date of the plan's inception.

Accordingly, it is held that the operation of this plan resulted in the discrimination prohibited by section 401(a)(4) of the Code.