Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 69-66

1969-1 C.B. 128

Sec. 401

IRS Headnote

The qualification of a self-employed retirement plan is adversely affected by an amendment, made after the equal partner-owners have completed 2 years of service, to remove the provision for immediate participation and substitution of a 2-year service requirement for its new employees.

Full Text

Rev. Rul. 69-66

Advice has been requested whether the qualification of a self-employed individuals' retirement plan was adversely affected by the amendment described below.

A partnership formed to operate a newly established business set up an employees' retirement plan that met the requirements of section 401 of the Internal Revenue Code of 1954. The plan provided for the immediate participation of the partnership's entire work force, which included the two equal partners (owner-employees within the meaning of section 401(c)(3) of the Code) and three newly hired common-law employees. Two years after the plan was established it was amended to require that all future employees must have 2 years of service in order to be eligible to participate under the plan.

Section 1.401-12(e)(2)(iii) of the Income Tax Regulations provides in part that a qualified plan including owner-employees may provide for coverage after a period of service which is shorter than three years, but in no case may the plan require a waiting period for employees which is longer than that required for the owner-employees.

Since the plan in this case was established when the owner-employees had less than two years of service, their accounts will always reflect contributions made between the time they entered the plan and the time they completed two years of service. The common-law employees who were given immediate coverage under the plan will obtain a similar benefit. However, the waiting period for common-law employees hired after the plan was amended will be longer than for the owner-employees. This longer waiting period does not meet the requirements of section 1.401-12(e)(2)(iii) of the regulations.

Accordingly, the qualification of the plan was adversely affected by the amendment.