Rev. Rul. 76-250

Advice has been requested as to (1) whether a defined contribution plan may satisfy the requirements of sections 410 and 411 of the Internal Revenue Code of 1954 if it fails to provide an allocation to any participant with respect to a computation period in which such participant completes at least 1,000 hours of service, and (2) whether the failure to provide such an allocation could cause discrimination within the meaning of section 401(a)(4).

Section 411 of the Code requires that a plan participant must be vested in a percentage of his accrued benefit that is not less than that specified in section 411(a). Section 411(b)(1) requires ratable increases in an employee's accrued benefit based on his completion of years of participation as defined in section 411(b)(3). However, section 411(b)(1) relates to defined benefit plans only. There is no similar requirement for defined contribution plans; in contrast, section 411(a)(7) provides that a participant's accrued benefit under a defined contribution plan is the balance of the employee's account.

A defined contribution plan, therefore, will not fail to satisfy the requirements of sections 410 and 411 of the Code merely because it does not unconditionally provide for an allocation to a participant with respect to a computation period in which he completes 1,000 hours of service. Thus, for example, a defined contribution plan could, without violating the minimum participation or vesting standards of sections 410 and 411 of the Code, require that a participant be employed as of the last day of a computation period in order to receive an allocation.

A participant who completes 1,000 hours of service in a particular year does, however, not cease to be a participant for such year, for the purposes of the minimum participation standards of section 410 of the Code, merely because he separates from service before the end of that year. Section 401(a)(4) of the Code provides that contributions or benefits shall not discriminate in favor of officers, shareholders, or highly compensated employees. In measuring discrimination under section 401(a)(4) of the Code, discrimination is considered only with respect to plan participants. See Rev. Rul. 68-301, 1968-1 C.B. 161.

A plan participant who is denied an allocation for a computation period in which he completed 1,000 hours of service is considered to have received an allocation of zero dollars for the period involved. If such zero dollar allocation results in discrimination in favor of employees who are officers, shareholders, or highly compensated, then such plan will not satisfy the requirements of section 401(a)(4) of the Code.

¹ Also released as IR-1623, dated June 11, 1976.