Rev. Rul. 70-659

Advice has been requested whether coverage under an employees' profit-sharing plan meets the requirements of section 401(a)(3)(A) or 401(a)(3)(B) of the Internal Revenue Code of 1954 after the amendment described below.

A corporation established a profit-sharing plan under which all employees with at least one year of service were eligible to participate. When the plan was established, the corporation had five employees, each of whom was an officer with one year of service and participated in the plan. Thus the plan met the requirements of section 401(a)(3)(A) of the Code. One year after the plan was established, it was amended to provide that all future employees must have two years of service in order to be eligible to participate. At the time the plan was amended, the corporation had 11 employees, five of whom were the original plan participants and the only employees on whose behalf contributions had been made. Four of the remaining employees had one year of service and the two other employees had less than one year of service.

Section 401(a)(3)(A) of the Code states that a plan must, in order to meet the requirements of that section, cover a number of employees that is at least equal to (1) 70 percent of the employer's employees, or (2) if at least 70 percent of such employees are eligible to participate, 80 percent or more of the eligible employees. In each case, there are excluded from consideration all employees who have been employed not more than a minimum period prescribed by the plan, not exceeding five years.

The "minimum period" of service, as that term is used in section 401(a)(3)(A) of the Code, means the minimum period of service ever required under the terms of a plan. In the instant plan, the minimum period of service is one year (the original service requirement). After excluding the two employees who were not employed for that minimum period, only five of nine employees participated in the plan after the amendment. Accordingly, it is held that coverage under the plan as amended does not meet the requirements of section 401(a)(3)(A) of the Code.

Section 401(a)(3)(B) of the Code provides that a plan not meeting the percentage tests of section 401(a)(3)(A) may still meet the coverage requirements if the classification of employees actually covered does not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

After the amendment, the five officer-employees continued to be the only participants in the plan and thus, the only employees for whom contributions had been made. Furthermore, since the plan participants did not, at the time the plan was established, have the years of service required of future employees after the amendment, the plan fails to meet the requirements of Revenue Ruling 70-75, C.B. 1970-1, 94. Accordingly, it is held that coverage under this profit-sharing plan does not meet the requirements of section 401(a)(3)(B) of the Code.