Rev. Rul. 74-255

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

A corporation established a pension plan for the benefit of all full-time salaried and clerical employees. Coverage under the plan is as follows:

 Schedule of Employees

Section 401(a)(5) of the Code provides that a plan will not be considered discriminatory within the meaning of paragraphs (3)(B) or (4) of section 401(a) merely because it is limited to salaried or clerical employees. Conversely, such a classification is not automatically nondiscriminatory. All of the surrounding circumstances and attendant facts must be taken into account in determining whether the classification is discriminatory. See section 1.401-1(b)(3) of the Income Tax Regulations.

The percentage of total employees covered and the percentage of employees in whose favor discrimination is prohibited in relation to total employees participating under a plan are not the sole factors in determining whether a classification meets the nondiscriminatory coverage requirements. See Rev. Rul. 68-244, 1968-1 C.B. 158. However, a plan will fail to qualify if the limitation of coverage to salaried or clerical employees results in covering primarily employees who are officers, shareholders, supervisors or highly compensated, to the exclusion of lower-paid, hourly-rated employees. See Rev. Rul. 66-14, 1966-1 C.B. 75.

In this case, only seven out of 80 total employees participate in the pension plan. Four of the seven participants are shareholders of the employer corporation and therefore fall within the group enumerated in section 401(a)(3)(B) of the Code. The above schedule of employees shows that the plan does not cover employees in all compensation ranges. There are no additional facts indicating that coverage under this plan does not discriminate in favor of the employees enumerated in section 401(a)(3)(B). The employer's classification results in covering primarily employees in whose favor discrimination is prohibited when viewed in light of these facts and circumstances.

Accordingly, this plan does not satisfy the coverage requirements of section 401(a)(3)(B) of the Code.

This case, like Rev. Rul. 74-256, below, is distinguishable from Rev. Rul. 70-200, 1970-1 C.B. 101, which holds that the coverage requirements of section 401(a)(3)(B) of the Code were satisfied where 22 of the 40 plan participants were officers, shareholders or supervisors. There, a greater proportion of the employer's total work force was covered by the plan than is covered by the plan in this case. Moreover, the compensation of nearly all of the participants described in Rev. Rul. 70-200 was substantially the same as that of the excluded employees and the plan covered employees in all compensation ranges, with those in the middle and lower compensation ranges being covered in more than nominal numbers.