Rev. Rul. 71-539

Advice has been requested whether the qualification of a pension plan under section 401(a) of the Internal Revenue Code of 1954 was adversely affected by the amendment described below.

A corporation in its first year of existence established a qualified pension plan. The plan covered all salaried employees, including officers, shareholders, supervisors, and highly compensated, and required no prior service for participation. The plan was funded with individual annuity contracts and provided no vesting within the first five years of participation.

After the plan had been in effect for three years, the employer realized that only a few of the participants remained with the corporation for as long as three years and the cost of purchasing individual annuity contracts for those employees who left was quite burdensome. The employer, therefore, amended the plan to provide that all new employees must have five years of service for participation. The plan was also amended to provide that benefits received by officers, shareholders, supervisors, and highly compensated employees, who became participants with less than five years of service, could never be greater than they would have received if they had entered the plan only after they had five years of service.

Section 401(a) provides that a plan may qualify if, among other requirements, it benefits such employees as qualify under a classification that is not discriminatory in favor of employees who are officers, shareholders, supervisors, or highly compensated and the benefits provided under the plan do not discriminate in favor of such employees.

The provision in a plan for different eligibility requirements for present and future employees is not, of itself, discriminatory within the purview of section 401(a) of the Code. However, where employees who are officers, shareholders, supervisors, or highly compensated cannot meet the eligibility requirements for new employees at the time the plan is established, the prohibited discrimination is likely to arise in operation when new employees are added to the employer's work force. See Rev. Rul. 70-75, C.B. 1970-1, 94.

In this case, the restriction on benefits for certain employees with less then five years of service does, in effect, require them to have five years of service and prevents discrimination under section 401(a) of the Code.

Accordingly, it is held that the qualification of the plan under section 401(a) of the Code was not adversely affected by the amendment.