Rev. Rul. 62-139

Advice has been requested as to the extent to which past service with a former employer may be recognized, under a present employer's qualified pension plan, for the purposes of making determinations as to (1) eligibility and benefits thereunder and (2) determining deductibility of contributions to such plan by the present employer.

Section 401(a) of the Internal Revenue Code of 1954 provides, in part, that a trust created or organized in the United States and 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 shall constitute a qualified trust if the trust or plan does not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

Pursuant to a pension plan adopted by one or more employers, the periods of past service of an employee with a former employer, irrespective of the degree of affiliation existing between the present employer and the former employer and notwithstanding the fact that the former employer is not a participant in a group plan with the present employer, may be used for purposes of determining eligibility and benefits thereunder, provided (1) such former employer, if not a participant in a group plan with the present employer, is specified in the plan or trust; (2) all employees of such former employer are treated uniformly; (3) the use of the past service factor does not produce discrimination in favor of officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees; and (2) such past service is not covered by any pension plan under which the rights accrued during such prior service are vested in the employee. It is considered immaterial that such former employer had no pension plan in effect during the period upon which the past service is based.

The allowance of credit for services rendered as an employee of a former employer in a pension plan of the present employer is not deemed compensation for such prior servcice but is considered a unit of measurement as to the reasonableness of the current compensation of the employee for services rendered to the present employer. Hence, the primary test for inclusion of credits pursuant to a qualified pension plan based on the employee's services with any former employer, whether for eligibility or benefit purposes, is whether the application of such past service credits results in discrimination in favor of employees in the prohibited group.

Section 404(a)(1) of the Code provides that contributions of an employer under an exempt employees' pension plan shall be deductible within the limitations specified therein, provided such contributions satisfy the conditions of section 162, relating to trade or business expense, or section 212, relating to expenses for the production of income. However, a conclusion that a plan is within the nondiscrimination requirements of the Code is not necessarily conclusive that all contributions made to the plan by the employer will be within the `ordinary and necessary business expense' and `reasonable compensation' limitations set forth in section 162(a)(1) of the Code.