Rev. Rul. 74-141

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

An employer established a pension plan under which participation is limited to salaried employees with at least five years of service. The employer has six employees, two of whom are salaried and participate in the plan. Each of the participants owns 50 percent of the outstanding stock of the company. Their annual salaries are $20,000 and $12,000 respectively. The four excluded employees have been employed for more than five years, but are ineligible to participate because they are paid on an hourly basis. Each earns approximately $18,000 per year.

Section 401(a)(3)(B) of the Code provides that a plan may qualify under section 401(a), if the coverage classification set up by the employer does not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

The non-discrimination requirement of section 401(a)(3)(B) of the Code was not intended to permit the qualification of plans which favor the higher paid or stock-holding employees, as against the lower-paid or non-stockholding employees. See H.R. Rep. No. 2333, 77th Cong. 2d Sess. 50 (1942), 1942-2 C.B. 372, 413.

In this case, the eligibility provisions of the plan result in covering the two shareholder-employees, to the exclusion of all other employees. Although each of the excluded employees earns substantially more than the lowest compensated shareholder and only slightly less than the highest compensated shareholder, the plan discriminates in favor of the shareholder group, as against non-stock-holding employees.

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