Rev. Rul. 55-60

Advice has been requested whether upon bona fide termination of an employees' pension plan, because of adverse business conditions, a variation in the distributive shares of participants in the plan would result in the prohibited discrimination in favor of employees who are officers, shareholders, supervisors, or highly compensated, and adversely affect the qualification of the plan under section 401(a) of the Internal Revenue Code of 1954.

An employer established a pension plan of the unit benefit type for its employees during 1943. Benefits under the plan were provided by means of individual level premium annuity contracts. The plan had been amended during 1944 to include limitations on benefits for the 25 most highly compensated employees in accordance with the provisions of Mimeograph 5717, C. B. 1944, 321, and upon consideration as to its qualification under section 165(a) of the Internal Revenue Code of 1939 was held to satisfy the requirements for such qualification. The benefits under the plan were integrated with the Old Age and Survivors Insurance benefits under the social security program. The plan had been maintained and operated in accordance with its terms until 1954 when it was terminated because of adverse business conditions.

Upon such termination it was found that distribution of the available assets under the plan, in accordance with provisions therefor, would result in the respective participants receiving distributions equal to the following percentages of their total compensation:

                                                     Percentage of

Since the plan had been in operation for more than 10 years, the limitations on benefits for the 25 most highly compensated employees in accordance with Mimeograph 5717, supra, are no longer applicable. Thus, the issue is whether the distribution as indicated above is discriminatory within the purview of section 401(a)(4) of the 1954 Code (section 165(a)(4) of the Internal Revenue Code of 1939) which prohibits discrimination in favor of employees who are officers, shareholders, supervisors, or highly compensated.

It is recognized that in a pension plan of the unit benefit or fixed benefit type contributions for the respective participants will vary in accordance with such factors as age, years of service, and nearness to retirement, and that in integrated plans variances will result when comparisons are made solely on the basis of assets distributable under the plan. This, however, is not discrimination within the statutory sense. The variance in distribution is merely a fortuitous circumstance resulting from the bona fide termination of the plan which could not have been foreseen when the plan was established and which resulted from causes beyond the employer's control.

Accordingly, under the above circumstances, it is held that a variance in the distributive shares of participants upon bona fide termination, because of adverse business conditions, of an employees' pension plan which contains a provision for the limitation of benefits for the 25 most highly compensated employees and which has been in operation for more than 10 years, will not result in the prohibited discrimination in favor of employees who are officers, shareholders, supervisors, or highly compensated, nor adversely affect the qualification of the plan under section 401(a) of the 1954 Code.

Mimeograph 6136, C. B. 1947-1, 58, and P. S. 52, dated August 9, 1945, to the extent inconsistent herewith are hereby modified.