Rev. Proc. 76-11

Section 1. Purpose.

This Revenue Procedure provides guidelines which will be followed by the Internal Revenue Service for the purposes of an advance determination letter under section 601.201(o) of the regulations (Statement of Procedural Rules), with respect to whether the vesting schedule of an employee plan is likely to result in discrimination in favor of employees who are officers, shareholders, or highly compensated (the "prohibited group"). These guidelines are concerned only with whether a faster vesting rate than would otherwise be required is appropriate for advance determination purposes due to actual or potential discrimination in favor of the prohibited group. This Revenue Procedure modifies Rev. Proc. 75-49, 1975-2 C.B. 584, and is designated part of the ERISA Guidelines previously listed in TIR-1415.

Sec. 2. Background.

.01 In general, a plan which contains a vesting schedule which satisfies the requirements of section 411(a)(2) of the Internal Revenue Code of 1954 shall be treated as satisfying the requirements of section 401(a)(4) of the Code (the general nondiscrimination requirement). Section 411(d)(1)(B) of the Code, however, provides that additional vesting may be required if "there have been, or there is reason to believe there will be, an accrual of benefits or forfeitures tending to discriminate in favor of employees who are officers, shareholders or highly compensated." Rev. Proc. 75-49 was issued by the Service to implement sections 401(a)(4) and 411(d)(1)(B) of the Code on the basis of the guidelines set forth in the Conference Committee report accompanying the Employee Retirement Income Security Act of 1974.

.02 Comments received by the Service suggested that a large number of employers may not be able to show compliance with Rev. Proc. 75-49 without the "4-40 vesting" rate set forth therein. That Revenue Procedure is now being reconsidered by the Service.

.03 Pending completion of reconsideration of Rev. Proc. 75-49, the Service, for purposes of an advance determination letter with respect to the qualified status of an employee plan or trust under section 401(a), 403(a), or 405(a) of the Code (whether or not such plan or trust is subject to section 411(a)(2) of the Code), will determine whether the vesting schedule of a plan is sufficiently rapid to prevent actual or potential discrimination in favor of the prohibited group (i.e., whether there has been, or there is reason to believe there will be, an accrual of benefits or forfeitures tending to discriminate in favor of such employees) on the basis of any one of the three tests in Section 3 below.

Sec. 3. Tests for Advance Determination Letters.

.01 Pending completion of reconsideration of Rev. Proc. 75-49, the Service shall treat the vesting schedule of a plan as satisfying the requirements of section 401(a)(4) of the Code for purposes of issuing a favorable advance determination letter if (a) the plan satisfies the minimum vesting requirements of section 411(a)(2) of the Code (if applicable), and, in addition, (b) any one of the following conditions is satisfied:

(1) the plan complies with the tests contained in Rev. Proc. 75-49, either by (i) adoption of 4-40 vesting, or (ii) satisfaction of the "key employee test" or the "turnover test" (whichever test or tests may be applicable); or

(2) in the case of any plan which had previously been the subject of a favorable advance determination letter which has not been revoked, the percentage of vesting of each participant provided under the plan, as amended, is not less (at every point) than that provided under the vesting schedule of the plan upon which such most recent prior determination letter was based; or

(3) there is a demonstration, to the satisfaction of the Service, on the basis of all the facts and circumstances that there has not been, and that there is no reason to believe there will be, an accrual of benefits or forfeitures tending to discriminate in favor of the prohibited group. .02 In rare and unusual cases (including but not limited to cases where the Service finds that there has been a pattern of abuse under the plan, such as a dismissal of employees before their accrued benefits become nonforfeitable, or actual misuse in operation of the plan), the Service may, in its discretion, not treat a prior outstanding determination letter as providing a basis for satisfying the test set forth in paragraph (2) of section 3.01. Any comments received from interested parties will be considered by the Service in this connection.

.03 Paragraphs (1), (2), and (3) of section 3.01 are independent alternative tests. Thus, the fact that a plan fails to satisfy one of the tests shall not be taken into account in determining whether a plan satisfies any of the other tests.

.04 In the case of any plan which otherwise fails to satisfy any of the tests set forth in this Section 3 (and for which the alternative described in Section 4 below has not been requested), such plan shall not be required by the Service to provide a vesting schedule more rapid than 4-40 vesting as a condition to the issuance of a favorable advance determination letter, except, however, that the Service may require vesting more rapid than 4-40 vesting if there has been a pattern of abuse under the plan or actual misuse of the plan in operation which affects the qualified status of the plan or trust.

Sec. 4. Determinations Without Regard to Discrimination in Vesting.

.01 In addition to the alternatives available to any plan to obtain a favorable advance determination letter on the basis of Section 3 above, pending completion of the reconsideration of Rev. Proc. 75-49 an applicant may request in writing that its application be processed without regard to whether the vesting provisions of the plan satisfy the nondiscrimination requirement of section 401(a)(4) of the Code. However, an advance determination letter issued to such an applicant will contain a caveat to the effect that such letter is not a determination as to whether the vesting provisions of the plan satisfy the nondiscrimination requirements of section 401(a)(4) of the Code.

.02 During the interim period pending the reconsideration of Rev. Proc. 75-49, an applicant which does not request in writing that its application be processed under Section 4.01 above will have its application processed according to the procedures set forth in Section 3 above. At any time prior to the issuance of an advance determination letter, however, the applicant may make or withdraw such request.

.03 Upon publication of final guidelines resulting from the reconsideration of Rev. Proc. 75-49, an applicant to which had been issued an advance determination letter containing the caveat described in this section may request, upon satisfying such guidelines, to have the caveat in its advance determination letter deleted. Such request shall be considered a continuation of the previous request for an advance determination letter, and will, therefore, not require either the filing of a new Application for Determination form or additional notification of interested parties.

Sec. 5. Relationship of this Revenue Procedure to ERISA Guidelines and Special Reliance Procedure.

.01 This Revenue Procedure incorporating the foregoing rules is part of the ERISA Guidelines initially announced by the Service in Technical Information Release No. 1415 (November 5, 1975), and, therefore, may be applied in conjunction with the Special Reliance Procedure announced in Technical Information Release No. 1416 (November 5, 1975).

.02 In this context, the following rules shall be applicable with respect to any application for an advance determination letter (other than an application for an advance determination letter on the basis of Section 4 above):

(1) As is generally the case with respect to rules incorporated within the ERISA Guidelines, the application of this procedure in determining whether the vesting provisions of a plan satisfy the nondiscrimination requirement of section 401(a)(4) of the Code shall remain in effect pending the publication of final regulations or other rules which amend or supplement the ERISA Guidelines (in this case, the publication of final guidelines resulting from the reconsideration of Rev. Proc. 75-49).

(2) With respect to any plan which shall have been submitted to the Service for an advance determination letter prior to the 31st day following the date of publication of the final guidelines resulting from the reconsideration of Rev. Proc. 75-49, the determination as to whether the vesting provisions of such plan satisfy the nondiscrimination requirement of section 401(a)(4) of the Code shall be made on the basis of the rules described in Section 3 above.

(3) If a favorable advance determination letter has been issued with respect to any plan upon satisfaction of the rules of Section 3 above, an amendment of the provisions of such plan, to the extent necessary to conform to the requirements of final guidelines resulting from the reconsideration of Rev. Proc. 75-49, shall in no event be required to be effective prior to the first day of the first plan year commencing after the 30th day following the date of publication of such guidelines, or, in the case of a plan which satisfies all the requirements of the Special Reliance Procedure, the first day of the first plan year commencing after December 31, 1976, if later.

.03 With respect to any plan which is submitted to the Service for an advance determination letter under Section 4 above, a plan will not be considered to fail to satisfy the ERISA Guidelines merely because it follows such procedure. However, as part of its reconsideration of Rev. Proc. 75-49, the Service will consider whether final guidelines published as a result of such reconsideration will require, in the case of any plan which has been issued a determination letter with the caveat described in Section 4 above, retroactive amendments conform to such guidelines.

Sec. 6. Scope of Revenue Procedure.

This Revenue Procedure applies solely for purposes of advance determination letters, and therefore does not apply in the case of a determination with respect to the qualified status of a plan or trust upon an audit of its operations under section 401(a), 403(a), or 405(a) of the Code. This Revenue Procedure also does not apply in determining whether there has been a pattern of abuse under the plan (such as the dismissal of employees before their accrued benefits become nonforfeitable) or actual misuse in the operation of the plan which affects the qualified status of the plan or trust.

Sec. 7. Effect on Other Documents.

Rev. Proc. 75-47, 1975-2 C.B. 581, is hereby amplified. Rev. Proc. 75-49, 1975-2 C.B. 584, is hereby modified, so as to make it operative optionally, in the manner hereinabove indicated.

Sec. 8. Effective Date.

This Revenue Procedure applies to determination letters issued after February 2, 1976.

¹ Also released as TIR-1441, dated February 2, 1976.