Rev. Rul. 70-77

Advice has been requested whether an employees' pension plan that contains minimum age and service requirements for eligibility fails to qualify under section 401(a) of the Internal Revenue Code of 1954 because it provides past service benefits under the circumstances described below.

An employees' pension plan provides for immediate participation of all employees as of the time the plan was established. However, employees hired after the plan was established become eligible to participate only when they have reached 25 years of age and have at least five years of service.

The plan provides a retirement benefit of one percent of each participant's average annual compensation multiplied by the number of years of his participation in the plan. In addition, the plan provides that employees who become participants at the time the plan is established will be given credit for each year of past service performed after they have reached 25 years of age and completed five years of service.

All employees who were officers, stockholders, supervisors, or highly compensated were more than 25 years of age and had more than five years of service at the time the plan was established.

Section 401(a)(4) of the Code provides that, in order for a plan to qualify, contributions or benefits must not discriminate in favor of employees who are officers, stockholders, supervisors, or highly compensated.

A plan that contains a minimum age or service requirement for eligibility and provides credits for all prior service of original, but not subsequent, participants will generally be considered discriminatory within the purview of section 401(a)(4) of the Code unless it can be demonstrated that such credits do not result in the prohibited discrimination. However, where there is a one year waiting period for eligibility, but original participants are given credit for all prior service, including the one year waiting period, and new participants do not receive credit based on the one year, such a provision will not, of itself, be considered discriminatory.

Provision may be made, as in this case, for credits on account of past services rendered after attainment of a specified age or completion of minimum service, if applied to original as well as subsequent participants. Such a provision does not give original participants more favorable treatment, with respect to past service benefits, than is accorded to subsequent participants.

Accordingly, it is held that this plan, which contains minimum age and service requirements for eligibility, does not fail to qualify under section 401(a) of the Code because of the provision for past service benefits.