Rev. Rul. 74-256

Advice has been requested whether the profit-sharing plan described below satisfies the coverage requirements of section 401(a)(3)(B) of the Internal Revenue Code of 1954.

An employer established a profit-sharing plan that provides benefits for all its full-time salaried and clerical employees with three years of service. The employer has 63 full-time employees each of whom has completed at least three years of service. However, only eight of those employees are participants in the plan. The remaining 55 are ineligible to participate because they are paid on an hourly basis.

The eight participating employees include two who are officer-shareholders. The compensation for each group of full-time employees is set out below.

         Compensation      Total       Excluded

Under section 401(a)(5) of the Code, a plan that is limited to salaried or clerical employees is not necessarily discriminatory within the meaning of section 401(a)(3)(B). See Rev. Rul. 66-12, 1966-1 C.B. 72. Conversely, such a classification is not automatically nondiscriminatory. See Rev. Rul. 66-13, 1966-1 C.B. 73. All of the surrounding circumstances and attendant facts must be taken into account in determining whether the classification is nondiscriminatory. See section 1.401-1(b)(3) of the regulations.

Coverage under the plan in the instant case does not meet the minimum percentage requirement of section 401(a)(3)(A) of the Code. Therefore, if the coverage requirements are to be met, the classification of participants must not discriminate in favor of employees enumerated in section 401(a)(3)(B).

In this case only eight out of 63 employees participate in the profit-sharing plan. Two of the eight participants are officer-shareholders. Three of the eight participants are highly compensated in relation to the excluded employees. See Rev. Rul. 69-398, 1969-2 C.B. 59. The above schedule of employees shows that the plan does not cover employees in all compensation ranges. There are no additional facts indicating that coverage under this plan does not discriminate in favor of members of the employees enumerated in section 401(a)(3)(B) of the Code. The employer's classification results in covering primarily employees in whose favor discrimination is prohibited when viewed in light of these facts and circumstances.

Accordingly, the profit-sharing plan in this case does not satisfy the coverage requirements of section 401(a)(3) of the Code.

This case, like Rev. Rul. 74-255, page 93, this Bulletin, is distinguishable from Rev. Rul. 70-200, 1970-1 C.B. 101, which holds that the coverage requirements of section 401(a)(3)(B) of the Code were satisfied where 22 of the 40 plan participants were members of the group in whose favor discrimination is prohibited. In that case, unlike this case, the compensation of nearly all the participants was substantially the same as that of the excluded employees, and the plan covered employees in all compensation ranges, with those in the middle and lower compensation ranges being covered in more than nominal numbers. Also, in Rev. Rul. 70-200, a greater proportion of the employer's total work force was covered by the plan than that covered in this case.