Rev. Rul. 70-200
Rev. Rul. 70-200; 1970-1 C.B. 101
- Cross-Reference
26 CFR 1.401-3: Requirements as to coverage.
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
Advice has been requested whether the profit-sharing plan described below meets the coverage requirements of section 401(a)(3)(B) of the Internal Revenue Code of 1954.
An employer established a profit-sharing plan for the benefit of its full-time salaried employees. The plan provides that all full-time salaried employees with at least two years of service are eligible to participate. The employer has 150 full-time employees each of whom has completed at least two full years of service. However, only 40 of those employees are participants in the plan, the remaining 110 being ineligible because they are paid on an hourly basis.
The 40 participating employees include 4 who are officers and shareholders, 5 who are shareholders and supervisors, and 13 who are supervisors. Four other participants, designated as supervisors by the employer, are merely nominal supervisors whose principal duties are not of a supervisory nature, and, therefore, are not supervisors within the meaning of section 401(a)(3)(B) of the Code. See Rev. Rul. 68-300, C.B. 1968-1, 159. The compensation for each group of full-time employees is set out below.
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Participants
who are
Group Compensation Total Excluded Partici- officers,
range emplo- emplo- pants sharehold-
yees yees -ers, or
supervisors
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1 $25,001 to $30,000.. 4 0 4 4
2 $20,001 to $25,000.. 0 0 0 0
3 $15,001 to $20,000.. 25 18 7 7
4 $12,501 to $15,000.. 45 37 8 8
5 $10,001 to $12,500.. 50 38 12 3
6 $7,501 to $10,000... 14 11 3 0
7 $5,001 to $7,500.... 9 4 5 0
8 $2,500 to $5,000.... 3 2 1 0
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Total 150 110 40 22
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A plan intended to qualify under section 401(a) of the Code must cover either (1) a number of employees that is at least equal to that determined under the percentage provisions of section 401(a)(3)(A) of the Code, or (2) such employees who qualify under a nondiscriminatory classification within the purview of section 401(a)(3)(B). The latter section provides that a plan intended to qualify must benefit a classification of employees that is found not to discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. Thus, a plan that does not meet the percentage tests may still meet the coverage requirements if the classification of employees actually covered does not result in the prohibited discrimination. The classification must be nondiscriminatory both on its face and in actual operation. See section 1.401-1(b)(3) of the Income Tax Regulations.
Under section 401(a)(5) of the Code, a plan that is limited to salaried or clerical employees is not necessarily discriminatory within the meaning of section 401(a)(3)(B). See Rev. Rul. 66-12, C.B. 1966-1, 72. Conversely, such a classification is not automatically nondiscriminatory. All of the surrounding circumstances and attendant facts must be taken into account in determining whether the classification is nondiscriminatory. See section 1.401-1(b)(3) of the regulations.
The plan in the instant case does not meet the percentage requirements of section 401(a)(3)(A) of the Code. Therefore, if the coverage requirements are to be met, the classification of participants must not discriminate in favor of employees enumerated in section 401(a)(3)(B).
Twenty-two of the 40 plan participants are officer-shareholders, shareholder-supervisors, or supervisors (persons in whose favor discrimination is prohibited). However, the compensation of all but 4 of the 40 participants is substantially the same as that of the excluded hourly-paid employees. Furthermore, the plan in this case covers employees in all compensation ranges; those in the middle and lower brackets are covered in more than nominal numbers: and the classification is not discriminatory in favor of employees in the enumerated groups.
Accordingly, it is held that the profit-sharing plan in this case meets the coverage requirements of section 401(a)(3)(B) of the Code.
- Cross-Reference
26 CFR 1.401-3: Requirements as to coverage.
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
