INTEGRATED PLAN WILL NOT AUTOMATICALLY FAIL TO QUALIFY UNDER SECTION 401 BECAUSE ALL COMPENSATION OF EACH EMPLOYEE IS 'TOTAL COMPENSATION'

Rev. Rul. 86-51

PURPOSE

The purpose of this revenue ruling is to restate the position in Rev. Rul. 55-276, 1955-1 C.B. 401, under current law.

ISSUE

The issue in Rev. Rul. 55-276 is whether an integrated retirement plan maintained jointly by more than one employer will fail to qualify under section 401(a) of the Internal Revenue Code if all compensation received by each employee from one or more of the participating employers is considered as participating employers is considered as the total compensation for the purpose of determining excess compensation and the benefits under the plan.

FACTS

The X, Y, and Z corporations jointly maintain a single retirement plan that is not a collectively bargained plan. The plan provides for an annual retirement benefit of 30 percent of annual compensation in excess of $7,200. Annual compensation includes compensation paid from X, Y, and Z corporations. Thus, for example, employee A, who is employed by all three corporations, receiving an annual salary of $6,000 from X corporation, $4,000 from Y corporation, and $2,000 from Z corporation is entitled to a benefit based on $4,800 of excess compensation ($12,000 minus $7,200). the X, Y and Z corporations are not affiliated and are not considered as a single employer under section 414(b), (c), or (m) of the Code.

LAW AND ANALYSIS

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

Section 1.401-1(d) of the Income Tax Regulations provides that a plan maintained by several employers will qualify if all the qualification requirements are otherwise satisfied.

In this case, benefits are provided to the employees whose total compensation exceeds the applicable integration level of $7,200. The amount of compensation received by A from a single employer is less than the plan's applicable integration level. Therefore, such employee would accrue no benefit if the plan were maintained by any single employer. Because the plan's provisions take compensation received from all jointly participating employers into consideration as the employee's total compensation, such employee is eligible for benefits.

Similarly, an employee whose compensation from each employer exceeds $7,200 receives a greater benefit from each employer under the jointly maintained plan since the total compensation is reduced only once by the $7,200 integration level and not once by each employer.

Basing integrated plan benefits on amounts in addition to compensation received from an individual employer does not necessarily cause discrimination in favor of officers, shareholders, or highly compensated employees. However, in testing whether a multiple employer plan, such as the plan maintained by X, Y, and Z, satisfies section 401(a)(4), the contributions or benefits provided by each employer are examined separately. In undertaking this examination with respect to an employer, only the compensation from that employer will be taken into account. Thus, for example, if only a few of a particular employer's rank-and-file employees are employed by more than one of the participating employers, the use of total compensation paid by all participating employers to employees who are officers, shareholders, or highly compensated may, in operation, result in discrimination prohibited under section 401(a)(4) of the Code.

HOLDING

In the case, the plan will not fail to qualify under section 401(a) of the Code merely because all compensation received by each employee from the unaffiliated employers that jointly maintain the plan is considered as the total compensation for the purpose of determining excess compensation and the benefits under the plan. However, the basis under which plan benefits are provided may in operation result in failure to satisfy section 401(a)(4).

The principles described above also apply for purposes of testing discrimination under section 401(a)(4).

The principles described above also apply for purposes of testing discrimination under section 410(b) of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 55-276 is superseded.