Rev. Rul. 79-348

The purpose of this Revenue Ruling is to update and restate Rev. Rul. 68-301, 1968-1 C.B. 161, in view of the enactment of section 410(b) of the Internal Revenue Code by the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

Rev. Rul. 68-301 concerns whether a pension plan that meets the coverage requirements of section 401(a)(3)(A) of the Code [now section 410(b)(1)(A)] for a taxable year will be considered discriminatory within the meaning of section 401(a)(4), where those employees actually covered under the plan are persons on whose behalf discrimination is prohibited, inasmuch as all nonprohibited group employees fail to meet the eligibility requirements set forth in the plan.

The employer established a trusteed pension plan for the benefit of its employees who have at least one year of service and who have attained age 25. Four out of a total of 15 employees met such requirements and participated in the plan. All the participants were shareholders and highly compensated employees within the meaning of section 401(a)(4) of the Code. The plan is of the fixed-benefit type, and it provides a normal monthly retirement benefit of 15 percent of average monthly compensation. The employer does not contribute to any other deferred compensation plan on behalf of the employees who do not meet the eligibility requirements set forth in the plan.

Alternative provisions for coverage under a plan intended to qualify under section 401(a) of the Code are set forth in section 410(b)(1)(A) and (B.)

Section 401(a)(4) of the Code provides that in order for a trust to qualify under section 401(a) the contributions or benefits provided under the plan may not discriminate in favor of employees who are officers, shareholders, or highly compensated.

In addition, section 1.401-4(a) of the Income Tax Regulations provides that a trust, to qualify under section 401(a) of the Code, must be part of a plan under which there is no discrimination in contributions or benefits in favor of officers, shareholders, or highly compensated employees as against other employees, whether within or without the plan.

The phrase "whether within or without the plan" has reference to a situation in which (1) the plan integrates with a governmental program such as the Social Security Act or the Railroad Retirement Act, (2) individuals considered outside the plan are excluded from participation because they earn less than the integration level, and (3) the plan does not, by itself, satisfy the coverage requirements of section 410(b)(1) of the Code. In such a situation both the employer's plan and the governmental program constitute parts of a single correlated and integrated retirement program.

In other situations, however, it is not necessary to provide that comparable treatment be granted employees who are not covered under the plan. In these situations, the prohibition in section 401(a)(4) of the Code against discrimination in contributions or benefits applies to discrimination against employees within the plan. It follows that where, as in this case, the coverage requirements of section 410(b)(1) are met it is not necessary for comparable benefits to be provided for employees not covered under the plan.

Accordingly, since the pension plan in the instant case meets the coverage requirements of section 410(b)(1)(A) of the Code for the taxable year, the plan's failure to provide benefits for ineligible employees will not cause the plan to be considered discriminatory within the meaning of section 401(a)(4).

The principles and conclusion stated herein are also applicable to plans described in section 410(c) of the Code.

Rev. Rul. 68-301 is hereby superseded.