Rev. Rul. 68-301

Advice has been requested whether a pension plan that meets the coverage requirements of section 401(a)(3)(A) of the Internal Revenue Code of 1954 for a taxable year will be considered discriminatory within the meaning of section 401(a)(4) of the Code, where those employees actually covered under the plan are persons on whose behalf discrimination is prohibited, inasmuch as all low-paid, nonsupervisory employees fail to meet the eligibility requirements set forth in the plan.

The employer, engaged in a seasonal business, established a trusteed pension plan for the benefit of its full-time employees. A full-time employee is defined as one with at least one year of service, whose customary employment is for more than 20 hours a week and more than five months in a calendar year. Four out of a total of 15 employees met such requirements and participated in the plan. All the participants were shareholders and highly compensated employees within the meaning of section 401(a)(3)(B) and (4) of the Code. The plan is of the fixed-benefit type, and provides a normal monthly retirement benefit of 15 percent of average monthly compensation. The employer does not contribute to any other deferred compensation plan on behalf of the excluded employees who do not meet the eligibility requirement set forth in the plan.

Alternative provisions for coverage under a plan intended to qualify under section 401(a) of the Code are set forth in section 401(a)(3)(A) and (B).

In addition, section 1.401-4(a) of the Income Tax Regulations provides that a trust, to qualify under section 401(a) of the Code, must not only meet the coverage requirements of section 401(a)(3) of the Code, but, as provided in section 401(a)(4), it must also be part of a plan under which there is no discrimination in contributions or benefits in favor of officers, shareholders, employees whose principal duties consist in supervising the work of other employees, or highly compensated employees as against other employees, whether within or without the plan.

The phrase `whether within or without the plan' has reference to a situation in which the plan integrates with a government program such as the Social Security Act or the Railroad Retirement Act. In such situations both the employer's plan and the governmental program constitute parts of a single correlated and integrated retirement program. Where, however, a plan qualifies under section 401(a) of the Code without being integrated with a governmental program it is not necessary to provide that comparable treatment be granted employees who are not covered under the plan. In this situation, the prohibition in section 401(a)(4) against discrimination in contributions or benefits applies to discrimination against employees within the plan. It follows that where, as in this case, the coverage requirements of section 401(a)(3) of the Code are met without the necessity of integrating the benefits under the plan with those provided under a governmental program, it is not necessary for comparable benefits to be provided for employees not covered under the plan.

Accordingly, since the pension plan in the instant case meets the coverage requirements of section 401(a)(3)(A) of the Code for the taxable year, it is not discriminatory within the meaning of section 401(a)(4) of the Code merely because it fails to provide benefits for ineligible employees.