Rev. Rul. 71-263

Advice has been requested whether the plan described below qualifies under section 401 of the Internal Revenue Code of 1954.

The plan covers all employees regardless of the length of their service. However, it provides nonforfeitable rights only to those employees who have at least fifteen years of service and stay on until the normal retirement age of 65. Except for a few executives who are shareholders and officers, the employees are migratory workers who stay on the job for a relatively short time and then move elsewhere.

Section 401(a)(3)(B) of the Code provides that a plan not meeting the percentage tests of section 401(a)(3)(A) may still meet the coverage requirements if the classification of employees actually covered does not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. Section 401(a)(4) of the Code requires that, in order for a plan to qualify, contributions or benefits must not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Section 1.401-1(b)(3) of the Income Tax Regulations provides that all of the surrounding and attendant circumstances and the details of the plan will be indicative of whether it is a bona fide stock bonus, pension, or profit-sharing plan for the exclusive benefit of the employees in general. Further, the law is concerned not only with the form of a plan but also with its effect in operation.

A classification may appear to be satisfactory on paper but if in the actual operation of the plan it discriminates in favor of employees who are highly compensated, etc., the plan will fail to qualify. Both paragraphs (3)(B) and (4) of section 401(a) of the Code (dealing with whether a classification, and contributions or benefits discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated) are considered together in determining whether the qualification requirements are met. Although the coverage provisions in this case meet the statutory requirements, in actual operation only the executive employees will benefit.

Accordingly, it is held that this plan does not qualify under section 401(a) of the Code. The plan might be made to qualify if satisfactory provisions for vesting are incorporated therein. The plan might also be made to qualify by excluding employees who do not have a minimum period of service, as permitted under section 401(a)(3)(A) of the Code.