Rev. Rul. 73-283

Advice has been requested whether the profit-sharing plan described below meets the coverage requirements of section 401(a)(3)(B) of the Internal Revenue Code of 1954.

An employer established a profit-sharing plan for the benefit of its full-time employees who have completed six months of service, excluding members of a union.

The plan covers five full-time employees out of a total of 190 employees. All five are either officers or supervisors and four of them are also shareholders. Ten full-time employees are excluded from the plan because they are members of a union. All ten are employees whose principal duties consist in supervising the work of seasonal or part-time employees. The compensation of these excluded supervisors is higher than the compensation of three of the five covered employees. The remaining 175 employees are ineligible to participate in the plan because they are seasonal or part-time. All seasonal and part-time employees are transient workers who are hired through the union, by the union-member supervisors, as needed. They are employed on a day-to-day basis and paid by the hour. Although the number of these transient employees varies from time to time, none of them, so far, has ever worked for the employer for more than six months. All the excluded seasonal and part-time employees are low paid in comparison to the employees covered by the plan. The excluded employees are not covered by any other plan of deferred compensation to which the employer contributes.

A plan intended to qualify under section 401(a) of the Code must cover either (1) a number of employees that is at least equal to that determined under the percentage provisions of section 401(a)(3(A) of the Code, or (2) such employees who qualify under a nondiscriminatory classification within the purview of section 401(a)(3)(B). The latter section provides that a plan intended to qualify must benefit a classification of employees that is found not to discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. Thus, a plan that does not meet the percentage tests may still meet the coverage requirements if the classification of employees actually covered does not result in the prohibited discrimination. The classification must be nondiscriminatory both on its face and in actual operation. See section 1.401-1(b)(3) of the Income Tax Regulations.

Section 401(a)(3)(A) of the Code provides that, for the purpose of determining whether the percentage coverage tests of that section are met, there are excluded from consideration all 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 any one week, and employees whose customary employment is for not more than five months in any calendar year. Section 401(a)(3)(B) contains no similar provisions for excluding certain employees in testing for satisfactory coverage. Therefore, for the purpose of determining whether a plan covers employees under a nondiscriminatory classification within the meaning of section 401(a)(3(B), seasonal and part-time employees may not be disregarded.

The plan in the instant case does not meet the percentage requirements of section 401(a)(3)(A) of the Code. Therefore, if the coverage requirements are to be met, the classification of participants must not discriminate in favor of employees enumerated in section 401(a)(3)(B).

In this case, all the participants in the plan are officers, shareholders, or supervisors and are highly-compensated relative to the rank-and-file employees.

A profit-sharing plan limited to salaried or clerical employees which results in covering only individuals who are officers, shareholders, supervisors or highly-compensated employees, to the exclusion of lower-paid wage earners, does not meet the coverage requirements of section 401(a)(3)(B) of the Code. See Rev. Rul. 66-13, 1966-1 C.B. 73. The fact that certain supervisors are also excluded from the plan does not mitigate the discrimination that exists in favor of other members of the enumerated groups.

Therefore, the classification in this case results in coverage which discriminates in favor of employees who are officers, shareholders, supervisors, or highly-compensated.

Accordingly, this profit-sharing plan does not meet the coverage requirements of section 401(a)(3)(B) of the Code.