Rev. Rul. 70-258

Advice has been requested whether a pension plan that otherwise meets the nondiscrimination requirements of section 401(a)(3)(B) and (4) of the Internal Revenue Code of 1954 will fail to meet such requirements merely because it is amended to exclude employees earning below the maximum wage base for social security purposes.

A company established a noncontributory pension plan, under the terms of which participation was restricted to salaried employees. All of the salaried employees of the company were eligible and participating. Hourly-rated employees of the company do not participate in a qualified deferred compensation arrangement. However, the salaried-employee classification was nondiscriminatory within the meaning of section 401(a)(3)(B) of the Code.

The company amended the pension plan to exclude from participation all salaried employees earning below the maximum compensation base for social security purposes. A majority of the salaried employees were thus no longer participating. Some of the hourly-rated employees, not participating in any qualified deferred compensation plan, were earning more than the maximum compensation base for social security purposes. The plan, as amended, meets the requirements for integration with benefits under the Social Security Act.

Section 401(a)(3)(B) of the Code states that a plan may meet the requirements for qualification if it covers such employees as constitute a classification set up by the employer and found 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 401(a)(4) of the Code provides that there must also be no discrimination in contributions or benefits in favor of such employees.

Section 401(a)(5) of the Code provides that a classification shall not be considered discriminatory, within the meaning of section 401(a)(3)(B) and (4), merely because all employees whose total remuneration constitutes "wages" for social security purposes are excluded from the plan. This section, in conjunction with section 401(a)(3)(B), is intended to permit the qualification of plans which supplement the old-age and survivor insurance benefits under the Social Security Act. Thus, a classification which excludes all employees whose entire remuneration constitutes "wages" under section 3121(a)(1) will not be considered discriminatory because of such exclusion, provided the total benefits resulting to each employee under the plan and under the Social Security Act, as to employees covered by the plan, and under the Social Security Act alone, as to employees not covered by the plan, establish an integrated and correlated retirement system satisfying the test of section 401(a) of the Code.

Revenue Ruling 66-12, C.B. 1966-1, 72, provides that where a pension plan with a salaried classification is otherwise found to be nondiscriminatory within the meaning of section 401(a)(3)(B) of the Code, it is immaterial whether the excluded employees are covered under a similar or comparable plan.

The pension plan as amended covers only salaried employees who earn in excess of the maximum compensation base for social security purposes. However, the benefits with respect to such excess compensation are restricted so as not to exceed permissible integration limits.

Prohibited discrimination was not present under the salaried classification prior to amendment of the plan. It follows that such discrimination is not brought about merely because salaried employees earning below the maximum compensation base for social security purposes are excluded from plan participation since the relative or proportionate differences in benefits between employees within such classification are approximately offset by the benefits provided by the Social Security Act.

Accordingly, the instant plan will not fail to qualify merely because it was amended to exclude salaried employees earning below the maximum compensation base for social security purposes since the benefits based on covered compensation integrate with the benefits provided by the Social Security Act. The fact that some hourly-rated employees, earning above the maximum compensation base for social security purposes, do not participate in any plan will not cause the plan to fail to qualify after the amendment since the plan was nondiscriminatory before the amendment.