Rev. Rul. 70-76

Advice has been requested whether, under the circumstances described below, (1) two plans, designated as constituting one plan under section 1.401-3(f) of the Income Tax Regulations, may qualify under section 401(a) of the Internal Revenue Code of 1954, and (2) if not, whether either of the plans, standing alone, meets the requirements for qualification.

A corporation with 10 employees established a pension plan (Plan 1) in which all employees were eligible to participate. This plan provides benefits based on compensation not in excess of $15,000. It also provides that benefits thereunder will become fully vested on attainment of normal retirement age 65 or upon termination of, or complete discontinuance of contributions under, the plan. Plan 1 was held to meet the requirements of section 401(a) of the Code.

Subsequently, the corporation established a second pension plan (Plan 2) also intended to meet the requirements of section 401(a) of the Code. Plan 2 provides that benefits thereunder will become fully vested on attainment of normal retirement age 65 or upon termination of, or complete discontinuance of contributions under, the plan. Plan 2 provides that only employees earning compensation in excess of $15,000 are eligible to participate. Four of the 10 employees of the corporation who participate in Plan 1 have compensation in excess of $15,000 and, consequently, also participate in Plan 2. Since the coverage classification in Plan 2, standing alone, does not meet the requirements of section 401(a)(3) of the Code, the corporation designated Plans 1 and 2 as constituting one plan for qualification purposes.

Section 1.401-3(f) of the regulations provides that an employer may designate several trusts or plans as constituting one plan intended to qualify under section 401(a)(3) of the Code, in which case all of such trusts or plans, taken as a whole, may meet the requirements of that section. The fact that such combination of trusts and plans fails to qualify as one plan does not prevent such of the trusts and plans as qualify from meeting the requirements of section 401(a) of the Code.

Section 401(a)(4) of the Code provides that, in addition to meeting the other requirements for qualification under section 401, contributions or benefits under a qualified plan must not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

There is no provision in Plan 1 that benefits thereunder become fully vested upon termination of, or complete discontinuance of contributions under, Plan 2. Thus, the benefits of participants in Plan 2, all of whom are highly compensated, will become fully vested upon termination of, or complete discontinuance of contributions under, Plan 2. However, since there is no requirement that termination of, or discontinuance of contributions under, Plan 2 will result in termination of, or discontinuance of contributions under, Plan 1, such vesting under Plan 2 will not be accompanied by full vesting under Plan 1, which covers the rank-and-file employees. Consequently, the two plans, taken as a whole, do not meet the requirements of section 401(a)(4) of the Code forbidding prohibited discrimination in benefits.

Accordingly, the two plans, taken as a whole, do not qualify under section 401(a) of the Code. Furthermore, as previously indicated, Plan 2, standing alone, does not qualify under section 401(a). However, since Plan 1, standing alone, continues to meet the requirements of section 401(a), its qualification will not be adversely affected by the failure of Plan 2 to qualify.