Rev. Rul. 84-150

PURPOSE

The purpose of this revenue ruling is to restate the position in Rev. Rul. 74-255, 1974-1 C.B. 93, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

ISSUE

Whether the pension plan described below meets the coverage requirements of section 410(b)(1)(B) of the Internal Revenue Code.

FACTS

An employer established a pension plan for the benefit of its salaried and clerical employees. The plan provides that all salaried and clerical employees with at least one year of service are eligible to participate. The employer has 80 employees, each of whom has completed a year of service. However, only seven of these employees are participants in the plan. The remaining 73 employees are ineligible because they are paid on an hourly basis.

The seven participating employees include four who are shareholders. The compensation for each group of employees is set out below.

                         SCHEDULE OF EMPLOYEES

For a plan to qualify under section 401(a) of the Code it must cover either (1) a number of employees that is at least equal to that prescribed under the percentage provisions of section 410(b)(1)(A) of the Code, or (2) as provided in section 410(b)(1)(B), such employees as qualify under a classification of employees that is found by the Secretary of the Treasury not to discriminate in favor of employees who are officers, shareholders, or highly compensated. Thus, a plan that does not meet the percentage tests may still meet the coverage requirements if the classification of employees actually covered does not result in the prohibited discrimination. The classification must be nondiscriminatory both on its fact and in actual operation. See section 1.401-1(b)(3) of the Income Tax Regulations.

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 410(b)(1)(B). Conversely, such a classification is not automatically nondiscriminatory. In determining whether the requirements of section 410(b)(1)(B) are met, all the surrounding facts and circumstances must be taken into account, allowing for a reasonable difference between the ratio of employees who are officers, shareholders, or highly compensated and who are benefited by the plan to all such employees and the ratio of employees (other than officers, shareholders, or highly compensated) of the employer benefited by the plan to all employees (other than officers, shareholders, or highly compensated). See section 1.410(b)-1(d)(2) of the regulations.

In this case, only seven out of 80 total employees participate in the pension plan. Four of the seven participants are shareholders of the employer and therefore fall within the group enumerated in section 410(b)(1)(B) of the Code. 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 the employees enumerated in section 410(b)(1)(B). The employer's classification results in covering primarily employees in whose favor discrimination is prohibited when viewed in light of all the facts and circumstances.

This case is distinguishable from Rev. Rul. 83-58, 1983-1 C.B. 95, which holds that the coverage requirements of section 410(b)(1)(B) of the Code were satisfied where 22 of the 40 plan participants were officers, shareholders or highly compensated. There, a greater proportion of the employer's total work force was covered by the plan than is covered by the plan in this case. Moreover, the compensation of nearly all of the participants described in Rev. Rul. 83-58 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.

HOLDING

The pension plan described above does not satisfy the requirements of section 410(b)(1)(B) of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 74-255 is hereby superseded because the position stated therein is restated under current law in this revenue ruling. Rev. Rul. 83-58 is distinguished.