Rev. Rul. 83-58

PURPOSE

The purpose of this Revenue Ruling is to restate the position in Rev. Rul. 66-12, 1966-1 C.B. 72, Rev. Rul. 68-244, 1968-1 C.B. 158 and Rev. Rul. 70-200, 1970-1 C.B. 101, 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.

ISSUE

Does the profit-sharing plan described below satisfy the coverage classification requirements of section 410(b)(1)(B) of the Code?

FACTS

An employer established a profit-sharing plan for the benefit of its salaried employees. The plan provides that all salaried employees with at least a year of service are eligible to participate. The employer has 150 employees each of whom has completed at least a year of service. However, only 40 of those employees are participants in the plan, the remaining 110 being ineligible because they are paid on an hourly basis.

The 40 participating employees include four who are officers and shareholders, and 18 who are shareholders. The compensation for each group of employees is set out below.

                                                          Participants

In order for a plan to qualify under section 401(a) of the Code it must cover either (1) a number of employees that is at least equal to that determined under the percentage provisions of section 410(b)(1)(A) of the Code, or (2) such employees who qualify under a nondiscriminatory classification within the purview of section 410(b)(1)(B). The latter section provides that a qualified plan must benefit a classification of employees that is found not to discriminate in favor of employees who are officers, shareholders, or highly compensated. Thus, a plan that does not meet the percentage tests may still meet the coverage requirements if the classification of employees actually covered does not result in the prohibited discrimination. The classification must be nondiscriminatory both on its face and in actual operation. See section 1.401-1(b)(3) of the Income Tax Regulations.

Under section 401(a)(5) of the Code, a plan that is limited to salaried or clerical employees is not necessarily discriminatory within the meaning of section 410(b)(1)(B). Conversely, such a classification is not automatically nondiscriminatory. In determining whether the requirements of section 410(b)(1)(B) are met, all of the surrounding facts and circumstances must be taken into account, allowing for a reasonable difference between the ratio of employees who are officers, shareholders, or highly compensated and who are benefited by the plan to all such employees and the ratio of employees (other than officers, shareholders, or highly compensated) of the employer benefited by the plan to all employees (other than officers, shareholders, or highly compensated). See section 1.410(b)-1(d)(2) of the regulations.

The plan in the instant case does not meet the percentage requirements of section 410(b)(1)(A) of the Code. Therefore, if the coverage requirements are to be met, the classification of participants must not discriminate in favor of employees who are officers, shareholders, or highly compensated.

Twenty-two of the 40 participants are officer-shareholders or shareholders (persons in whose favor discrimination is prohibited). However, the compensation of all but 4 of the 40 participants is substantially the same as that of the excluded hourly-paid employees. Furthermore, the plan in this case covers employees in all compensation ranges; those in the middle and lower brackets are covered in more than nominal numbers, and the classification is not discriminatory in favor of employees in the enumerated groups.

HOLDING

In this case the profit-sharing plan meets the coverage classification requirements of section 410(b)(1)(B).

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

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 66-12, Rev. Rul. 68-244 and Rev. Rul. 70-200 are superseded because the positions stated therein are restated under current law in this revenue ruling.