Rev. Rul. 81-157

The purpose of this revenue ruling is to restate the position in Rev. Rul. 70-258, 1970-1 C.B. 101, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

The issue in Rev. Rul. 70-258 is whether a pension plan that otherwise meets the nondiscrimination requirements of sections 410(b)(1)(B) and 401(a)(4) of the Internal Revenue Code will fail to meet such requirements merely because it is amended to eliminate future benefit accruals for employees earning below the maximum wage base for social security purposes.

A company established a noncontributory pension plan under the terms of which hourly-rated employees of the company were excluded from participation. All of the salaried employees participated in the plan. The salaried-only classification did not discriminate in favor of employees who were officers, shareholders, or highly compensated.

Several years later, the company amended the pension plan in order to integrate it with social security so that thereafter the company's pension plan provided additional benefit accruals only for the salaried employees earning more than the maximum compensation base for social security purposes, based on compensation in excess of such maximum compensation base. A majority of the salaried employees were thus no longer accruing any additional benefits under the plan. The age and service composition of the employees who are officers, shareholders, or highly compensated is similar to that of other salaried participants. However, all benefits accrued before the amendment were unchanged. Some of the hourly-rated employees, not participating in any qualified deferred compensation plan, were earning more than the maximum compensation base for social security purposes. The plan, as amended, complies with the minimum requirements for the integration of plan benefits with social security benefits and the salaried-only classification does not discriminate in favor of employees who were officers, shareholders, or highly compensated.

Section 410(b)(1)(B) of the Code states that a plan may meet the requirements for qualification if it covers such employees as constitute a classification set up by the employer and found not to be discriminatory in favor of employees who are officers, shareholders, or highly compensated.

Section 401(a)(4) of the Code provides that a plan will not be qualified under section 401(a) if the contributions or benefits provided under the plan discriminate in favor of employees who are officers, shareholders, or highly compensated.

Under section 401(a)(5) of the Code, a classification will not be considered discriminatory, within the meaning of section 410(b)(1)(B), merely because it is limited to salaried employees. Section 401(a)(5) also provides that, for purposes of section 401(a)(4), plan benefits will not be considered discriminatory merely because the benefits are based, within integration limits, on that amount of an employee's compensation in excess of that constituting wages under section 3121(a)(1) (relating to the Federal Insurance Contributions Act).

In this case, the salaried-only classification of the plan, as amended, continues to satisfy the coverage requirements of section 410(b)(1)(B) of the Code as a nondiscriminatory classification.

In determining whether the plan's benefits discriminate, the mere fact that the plan provides no additional benefits for those covered employees whose entire renumeration constitutes wages under section 3121(a)(1) of the Code will not be considered discriminatory under section 401(a)(4), provided that the total benefits resulting to each covered employee under the plan and under the Social Security Act establish an integrated and correlated retirement system which satisfies the minimum requirements for integration of deferred compensation plan benefits with those benefits provided by social security.

In this case, the amended plan does not provide benefits that exceed permissible integration limits.

Accordingly, this plan will not fail to qualify under section 401(a) of the Code merely because it was amended to deprive salaried employees of future benefit accruals if they earn below the maximum compensation base for social security purposes.

This revenue ruling does not consider whether a partial termination may result from the amendment.

Rev. Rul. 70-258 is superseded because the position stated therein is restated under current law in this revenue ruling.