Rev. Rul. 83-94

PURPOSE

The purpose of this revenue ruling is to restate Rev. Rul. 69-398, 1969 2 C.B. 58, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93 406, 1974-3 C.B. 1.

ISSUE

Rev. Rul. 69-398 concerns the issue of whether, under the circumstances described below, the coverage classification under a retirement plan meets the requirements of section 410(b)(1)(B) of the Internal Revenue Code.

FACTS

An employer established a retirement plan for the benefit of its salaried employees. Under the plan's eligibility requirements, all salaried employees who have attained age 25 and have completed one year of service may participate. The employer has fourteen employees each of whom meets the plan's age and service re- quirements. However, only six of these employees are participants in the plan. The other employees are excluded because they are paid on an hourly basis. None of the excluded employees is within the categories described in section 410(b)(3) of the Code; that is, none is covered by a collective bargaining agreement, is an airline pilot, or is a nonresident alien.

      The compensation of each of the employees is set out below:

LAW AND ANALYSIS

Section 410(b)(1)(B) of the Code provides that a plan may qualify if it benefits a classification of employees that is found not to discriminate in favor of employees who are officers, shareholders, or highly compensated. The classification must be nondiscriminatory both on its face and in actual operation.

Section 401(a)(5) of the Code specifies certain classifications, such as salaried or clerical, which of themselves are not discriminatory. Thus, a classification is not considered discriminatory solely because it is limited to salaried or clerical employees. Conversely, such a classification is not automatically nondiscriminatory. See Rev. Rul. 79-337, 1979-2 C.B. 189. All of the surrounding circumstances and attendant facts must be taken into account in determining whether the coverage classification is nondiscriminatory within the meaning of section 410(b)(1)(B) of the Code.

Section 1.410(b)-1(d)(1) of the income Tax Regulations states that the classification of an employee as highly compensated is made on the basis of the facts and circumstances of each case, taking into account the level of the employee's compensation and the level of compensation paid to other employees of the employer, whether or not covered by the plan. (Also see Commissioner v. Pepsi-Cola Niagara Bottling Corporation, 399 F. 2d 390 (2d Cir. 1968).). Average compensation levels determined on a local, regional, or national basis are not relevant for this purpose. Further, the classification of an employee as highly compensated is not made solely on the basis of the number or percentage of employees whose compensation exceeds, or is exceeded by, the employee's.

Section 1.410(b)-1(d)(2) of the regulations provides that a determination as to whether a plan discriminates in favor of employees who are officers, shareholders, or highly compensated will be based on the facts and circumstances of each case, allowing a reasonable difference between (1) the ratio of such employees benefited by the plan to all such employees of the employer, and (2) the ratio of employees (other than officers, shareholders, or highly compensated) benefited by the plan to all the employer's employees (other than officers, shareholders, or highly compensated)

Of the six participants in the plan under consideration, each of the five highest paid received substantially more compensation than the excluded employees. The fifth highest paid participant received $3,000 more than the highest-paid excluded employee. Thus, all participants except the one who is the lowest paid are highly compensated in this particular company and are, therefore, members of the group in whose favor discrimination is prohibited.

HOLDING

The coverage classification under this plan does not meet the requirements of section 410(b)(1)(B) of the Code since it results in discrimination in favor of employees who are officers, shareholders, or highly compensated.

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

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 69-398 is superseded be cause the position stated therein is restated under current law in this revenue ruling.