Rev. Rul. 66-14

Advice has been requested whether an employees' profit-sharing plan which limits participation to salaried employees while excluding hourly rated employees from coverage may qualify under section 401(a) of the Internal Revenue Code of 1954, where the excluded hourly rated employees are unionized.

A corporate employer established a profit-sharing plan fort the benefit of its full-time salaried employees. The employer has 60 employees, 6 of whom are salaried and are plan participants. Of the six covered employees, five are officer-shareholders each of whom earns an annual salary of $26,000. The other participant has an annual salary of $6,160. All employees not included under the plan are hourly paid and are represented by a union. The union has submitted demands for a contract covering hourly paid employees, but such demands have not included establishment of a qualified deferred compensation plan. Earnings of each of the 54 excluded union employees are considerably less than the 5 officer-shareholder employees. The employer contends that he has a strict obligation to bargain in good faith with the duly designated representative of the employees in the bargaining unit over wages, hours, and other conditions of employment, and that he cannot unilaterally include union employees in a profit-sharing plan.

Section 401(a) of the Code provides, in part, that a trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust if it benefits such employees as qualify under a classification set up by the employer and found not to be discriminatory in favor of employees who are officers, shareholders, supervisory personnel, or highly compensated employees.

Section 401(a)(5) of the Code states, in effect, that a classification shall not be considered discriminatory merely because all employees whose annual remuneration constitutes `wages' under section 3121(a)(1) of the Code (for purposes of the Federal Insurance Contributions Act) as excluded from the plan or merely because it is limited to salaried or clerical employees.

Although section 401(a)(5) of the Code sets forth certain classifications, including `salaried or clerical,' that will not in themselves be considered discriminatory, such classifications are not intended to be exclusive nor automatically nondiscriminatory. In other words, no classification is acceptable under section 401(a)(3)(B) of the Code that has the effect of discriminating in favor of the proscribed groups. See also discussion in Revenue Ruling 66-13, page 73, this Bulletin.

The requirements of section 401(a)(3)(B) of the Code cannot be ignored merely because some of the employer's employees are unionized, have the power to collectively bargain for eligibility under the plan and do not choose to do so, or decide against coverage under the plan or a similar plan. None of these situations alter the fact that the employer makes no actual contributions on behalf of such nonsalaried, unionized employees under a qualified plan. In the instant situation only 6 of the employer's 60 employees are covered under the plan and, with one exception, they are officers, shareholders, and highly compensated when compared to the excluded employees. Accordingly, the classification of employees eligible to participate under the profit-sharing plan discriminates in favor of officers, shareholders, supervisors, and highly compensated employees. Consequently, the plan does not meet the coverage requirements of section 401(a) (3)(B) of the Code.