Rev. Rul. 66-12

Advice has been requested whether an employees' pension or profitsharing sharing plan which limits participation to salaried employees and excludes hourly paid employees would, by reason of this fact alone, fail to meet the nondiscriminatory coverage requirement of section 401(a)(3)(B) of the Internal Revenue Code of 1954.

A corporate employer established a pension plan under which participation is limited to full-time salaried employees. Hourly paid employees are excluded and they are not covered under any other plan of deferred compensation. Of a total of 109 full-time employees, 83 are hourly paid and therefore cannot participate. The remaining 26 employees are salaried and covered under the plan. Among these 26 participants, 11 are either officers, shareholders, persons whose principal duties consist in supervising the work of other employees, of highly compensated employees. The compensation of each of the remaining 15 participants is substantially the same as that of the excluded hourly paid employees.

The issue in this case is whether a plan intended to qualify under section 401(a) of the Code may limit coverage solely to salaried employees and still satisfy the nondiscriminatory classification requirement of section 401(a)(3)(B) of the Code.

Section 401(a) of the Code provides, in part, that a trust forming a part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries constitutes a qualified trust provided it meets the further requirements set forth in such section as to, among other things, coverage. Section 401(a)(3) of the code, relating to coverage, provides that the plan must benefit either a number of employees which is at least equal to that determined under the percentage provisions of section 401(a)(3)(A) of the Code, or such employees who qualify under section 401(a)(3)(B) of the Code relating to a classification set up by the employer and found by the Secretary or his delegate not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

Section 1.401-1(b)(3) of the Income Tax Regulations provides, in part, that a plan must benefit the employees in general, although it need not provide benefits for all of the employees. A plan is not for the exclusive benefit of employees in general if it discriminates either in eligibility requirements, contributions, or benefits in favor of employees who are officers, shareholders, supervisors, or highly compensated employees. All the surrounding and attendant circumstances and the details of the plan will be indicative of whether it is a bona fide plan for the exclusive benefit of employees in general.

Section 401(a)(5) of the Code privides, in pertinent part, that a classification shall not be considered discriminatory within the meaning of section 401(a)(3)(B) of the Code merely because it is limited to salaried or clerical employees. Section 401(a)(5) of the Code sets out certain classifications of employees which will not in themselves be considered discriminatory. This section does not stand alone but must be considered in conjunction with section 401(a)(3)(B) of the Code. See section 1.401-3(d) and (e) of the regulations. This position is one of long standing and originated with the Revenue Act of 1942, which inserted paragraph 5 in section 165(a) of the Internal Revenue Code of 1939. Section 401(a)(5) of the 1954 Code. See senate Report No. 1631, 77th Congress, 2d session, C.B. 1942-2, 504, at 606. See also discussion in Revenue Rulings 66-14, page 75, this Bulletin, and 66-13, below.

In this case the employer has adopted a plan intended to qualify under section 401(a) of the Code, with eligibility limited to salaried employees. Since this classification does not result in covering primarily employees in whose behalf discrimination is prohibited, the nondiscriminatory requirement of section 401(a)(3)(B) of the Code is met.

In Revenue Ruling 66-15, page 83, this Bulletin, the salaried classification was found to be discriminatory and therefore the coverage of hourly paid employees under a plan similar or comparable to that of the salaried plan had to be considered. This is not the case here. The salaried classification in the instant case is found to be nondiscriminatory within the meaning of section 401(a)(3)(B) of the Code and, therefore, it is immaterial whether the excluded employees are covered under a similar or comparable plan.

Accordingly, it is held, upon the basis of the above-stated facts, that the pension plan of the employer which limits participation to employees who are compensated on a salary basis satisfies the coverage requirement of section 401(a)(3)(B) of the Code, regardless of whether the excluded employees are covered under a similar or comparable plan.