Rev. Rul. 72-304

Advice has been requested whether, under the circumstances described herein, two plans designated as constituting one plan under section 1.401-3(f) of the Income Tax Regulations, may satisfy the requirements of section 401(a)(3) and (4) of the Internal Revenue Code of 1954.

A corporation contributes to a union negotiated pension plan covering only union employees (Plan 1). It covers 43 employees whose compensation levels range from $6,300 to $14,000 per annum. To be entitled to a normal retirement pension, or disability pension, a union employee must have 15 years of credited service in the industry. He must reach age 65 in order to receive a normal retirement pension, age 55 for an early retirement pension, and age 50 for a disability pension.

An annual pension amounting to 58 percent of compensation is payable upon normal retirement at age 65. On termination of the union plan or complete discontinuance of contributions thereunder, a union employee's accrued benefit becomes fully vested.

The corporation also maintains a separate pension plan which covers only 3 employees who are stockholders (Plan 2). Each of them is paid $45,000 per annum. Benefits under the plan do not exceed 58 percent of compensation and the vesting provisions are the same as under Plan 1. Except for the question that has been raised regarding the provisions governing vesting on discontinuance of the plan or termination of contributions, the benefits under and the provisions of Plan 2 are no more favorable than those under Plan 1.

Since Plan 2 covers only the three most highly compensated employees of the corporation, it does not, standing alone, meet the coverage requirements of section 401(a)(3) of the Code. Therefore, the corporation designated Plans 1 and 2 as constituting one plan for qualification purposes. Both Plan 1 and Plan 2 contain provisions which satisfy the requirements of section 401(a)(7) of the Code with respect to each of the two separate plans.

However, there is no provision in Plan 1 according the rank-and-file employees the same vested interest that the highly compensated employees in Plan 2 will be entitled to if Plan 2 is terminated or contributions to it are discontinued while the corporation continues its contributions under Plan 1. Such vesting is a benefit to affected employees, but this advantage is of necessity accompanied by a detriment to such employees since they will no longer be receiving contributions on their behalf toward their retirement pensions.

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.

Section 401(a)(7) of the Code provides that a trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, upon its termination or complete discontinuance of contributions under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the amounts credited to the employees' accounts are nonforfeitable.

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.

The problem of discriminatory benefits under section 401(a)(4) of the Code would arise if the vesting provision required by section 401(a)(7) of the Code causes a disparity in benefits in favor of the employees covered by Plan 2. That disparity will not occur, however, until some future time and then only if the plan is terminated or contributions are discontinued.

In this case there are no apparent reasons to anticipate or foresee that eventual benefits will be likely to discriminate in favor of the employees in Plan 2 if and when, at some future time, it is terminated, or contributions thereunder are discontinued. Consequently, it is not necessary at their inception for Plan 1 to provide for vesting of benefits on behalf of rank-and-file employees upon discontinuance of contributions under Plan 2, or the termination thereof.

Accordingly, it is held that the two plans, taken as a whole, are considered as one plan which which satisfies the requirements of section 401(a)(3) and (4) of the Code.

Revenue Ruling 70-76, C.B. 1970-1, 102, which contains a contrary conclusion, is hereby revoked.