Rev. Rul. 81-42

The purpose of this revenue ruling is to restate the position in Rev. Rul. 59-14, 1959-1 C.B. 84, in view of the enactment of section 410(b) and the amendment of section 401(a) of the Internal Revenue Code by the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

The issue in Rev. Rul. 59-14 is whether an employee benefit plan which limits coverage to a class of employees who are not entitled to overtime pay may be discriminatory within the meaning of sections 410(b)(1)(B) (formerly 401(a)(3)(B)) or 401(a)(4) of the Code.

An employer established an employee benefit plan which limited participation to those employees classified as executive, administrative, or professional and earning above a certain rate of compensation. This was accomplished by limiting participation to employees who were not entitled to overtime pay under the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. 201-219.

Section 410(b) of the Code requires that a plan cover either a certain percentage of an employer's employees or a classification of employees that is not discriminatory in favor of employees who are officers, shareholders or highly compensated.

If a plan covers only a certain classification of employees the plan may not meet the percentage requirements of section 410(b)(1)(A) of the Code. The plan must then cover a classification of employees that is not discriminatory in favor of officers, shareholders, or highly compensated employees within the meaning of section 410(b)(1)(B).

Section 401(a)(4) of the Code requires that a plan must provide either benefits or contributions which do not discriminate in favor of officers, shareholders, or highly compensated employees.

In this case, where the plan limits participation to those employees classified as executive, administrative, or professional and earning above a certain level, the restriction may result in employee participation that does not satisfy the percentage tests of section 410(b)(1)(A) of the Code. Similarly, this eligibility restriction may cause the plan to fail to satisfy the nondiscriminatory classification test of section 410(b)(1)(B) of the Code.

However, even though the plan may, considered alone, fail to satisfy the coverage requirements of section 410(b) of the Code, the employer may, pursuant to section 1.410(b)-1(d)(3) of the Income Tax Regulations, consider several plans in combination to satisfy these requirements. Employer provided retirement benefits created under state or federal law may be considered as another plan for purposes of the preceding sentence.

In a plan, or combination of plans, that is considered to satisfy section 410(b)(1) of the Code, the benefits or contributions must not be discriminatory under section 401(a)(4).

Accordingly, this plan will not automatically satisfy the nondiscrimination requirements of sections 410(b)(1)(B) or 401(a)(4) of the Code.

The principles stated herein also apply to a plan described in section 410(c) of the Code.

Rev. Rul. 59-14 is superseded because the position is restated under current law in this revenue ruling.