Rev. Rul. 71-438

Advice has been requested whether the pension plan described below must incorporate the early-termination restrictions contained in section 1.401-4(c) of the Income Tax Regulations.

The plan was adopted by the employers in a particular industry for the benefit of their employees who are in bargaining units represented by a labor union. It was also adopted by the union for the benefit of all the union's employees. None of the covered employees, except the union's employees, are among the 25 highest compensated employees of an adopting employer. In the case of the union, all of its employees are covered, including the officers who are among the 25 highest compensated.

The plan provides a normal retirement benefit, at age 65 with ten years of credited service, of two percent of the average five highest consecutive years of compensation times the years of service. The anticipated benefit for the 25 highest compensated employees of the union exceeds $1,500 per year. The 25 highest compensated employees are older than the rank and file employees and their benefits, in case the plan is prematurely terminated, will be greater, expressed as a percentage of salary, than the benefits for the rank and file employees.

Section 1.401-4(c) of the regulations requires a qualified pension plan to contain certain restrictions on distributions if employer contributions under a qualified plan may be used for the benefit of an employee who is among the 25 highest paid employees of the employer at the time the plan is established and their anticipated annual pension under the plan exceeds $1,500. Such restrictions must be expressly incorporated in the plan unless it is reasonably certain at the inception of the plan that such restrictions would not affect the amount of contributions that may be used for the benefit of any employee, or unless the Commissioner of Internal Revenue determines that such provisions are not necessary to prevent the prohibited discrimination that may occur in the event of any early termination of the plan.

Generally, in a union-negotiated pension plan the participants are not among the groups enumerated in section 401(a)(4) of the Code; therefore, the restrictions contained in section 1.401-4(c) of the regulations are not generally necessary to prevent prohibited discrimination in a union plan. However, where a plan of the type described in this case covers an employer's 25 highest-paid employees, the possibility of discrimination arises. This is true even though the union is one of the adopting employers.

Accordingly, it is held that this plan must incorporate the restrictions contained in section 1.401-4(c) of the regulations.