Rev. Rul. 70-2

Advice has been requested whether, under the circumstances described below, an employees' pension plan meets the coverage requirements of section 401(a)(3)(A) of the Internal Revenue Code of 1954.

A corporation established a pension plan intended to qualify under section 401(a) of the Code. The plan provides that all compensated employees with three years of service who are employed for more than twenty hours per week and for more than five months of the year are eligible to participate. The corporation has ten employees. Only three of these employees have more than three years of service and work for more than twenty hours per week and for more than five months of the year. However, two of these three employees are not included in the plan because they receive no compensation for their services. The sole participant is a fifty percent shareholder in the corporation.

Section 401(a)(3)(A) of the Code provides that a plan will qualify as to coverage if it benefits 70 percent or more of all employees, or 80 percent or more of all eligible employees if 70 percent or more of all employees are eligible, excluding in each case employees who have been employed not more than a minimum period prescribed by the plan, not exceeding five years, employees whose customary employment is for not more than 20 hours in one week, and employees whose customary employment is for not more than five months in any calendar year.

For purposes of meeting the percentage requirements of section 401(a)(3)(A) of the Code, persons who work for more than 20 hours per week for more than five months in any year must be taken into account if they meet the years-of-service requirement, irrespective of the amount, if any, of their compensation. Since only one of the three employees who meet these requirements is a participant, it is held that this plan fails to meet the coverage requirements under section 401(a)(3)(A) of the Code.

Furthermore, the classification in this plan does not meet the requirements of section 401(a)(3)(B) of the Code since the only participant is a fifty percent shareholder.