Rev. Rul. 80-47

1980-1 C.B. 83, 1980-8 I.R.B. 11.

                       Internal Revenue Service
                                 Revenue Ruling

               COVERAGE; PARTICIPATION LIMITED; EMPLOYEE ELECTION

                          Published: February 25, 1980

26 CFR 1.401-1: Qualified pension, profit-sharing and stock bonus plans.

(Also Section 410, 1.410(b)-1.)

  Coverage; participation limited; employee election. A plan will not fail to qualify under section 401(a) of the Code merely because it denies participation to employees who do not authorize salary withholding or take a physical examination to determine elegibility for life insurance, so long as these provisions do not result in discrimination and are applied in a nondiscriminatory manner; Rev. Rul. 71-312 is modified and superseded; Rev. Rul. 74-96 is superseded.

  The purpose of this Revenue Ruling is to update and restate Rev. Rul. 71-312, 1971-2 C.B. 187, and Rev. Rul. 74-96, 1974-1 C.B. 92, in view of the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1.

  The issue in Rev. Rul. 71-312 and Rev. Rul. 74-96 is whether a pension plan will fail to qualify under section 401(a) of the Internal Revenue Code merely because employees are required to take certain specified actions as a condition of participation.

  The plan of a corporation provides that all participants shall contribute a stated percentage of their compensation.  The employee contributions, plus a portion of the employer's contributions, are used to provide incidental life insurance protection on the lives of insurable participants.  The plan also provides that an employee shall become a participant only after signing a prescribed form authorizing salary withholding in accordance with the plan and taking a physical examination to determine eligibility for life insurance coverage.  However, an employee who authorizes salary withholding and takes the physical examination is not barred from participation merely because that person is found to be uninsurable.

  The plan further requires that all employees be informed at the time of their employment of their eligibility to participate in the plan and of the conditions for eligibility.  Any employee who has not complied with the eligibility conditions within 30 days after the date of employment must then be given written notification of eligibility to participate in the plan and of the necessity for signing the prescribed salary withholding form and taking the physical examination.  This written notice must also inform the employee that failure to sign the form or take the examination will prevent participation in the plan.

  The plan further provides that any employee who does not sign the form or take the physical examination within six months after receiving this written notification, in accordance with the terms of the plan, will be barred from participation.

  Section 410(b) of the Code and section 1.410(b)-1 of the Income Tax Regulations provide that a qualified plan must benefit a certain percentage of employees as set forth in section 410(b)(1)(A) or, as provided in section 410(b)(1)(B), if a classification is set up by the employer, it must not discriminate in favor of employees who are officers, shareholders, or highly compensated.

  Thus, the qualification requirements of section 410(b)(1) of the Code may be met even though a plan provides for denial of participation for failure to enter the plan upon becoming eligible, if it can be shown that the provisions do not discriminate in favor of employees who are officers, shareholders, or highly compensated. Further such provisions must be applied in a nondiscriminatory manner.

  Accordingly, this plan does not fail to qualify under section 401(a) of the Code merely because it denies participation to employees who do not authorize salary withholding or take a physical examination, so long as these provisions do not result in discrimination in favor of employees who are officers, shareholders, or highly compensated, and so long as such provisions are applied in a nondiscriminatory manner.

  The same result would also apply with respect to a qualified plan which limits participation to employees who have elected to have amounts withheld from their salaries to purchase annuity contracts on their behalf.

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

  Rev. Rul. 71-312 is modified and superseded. Rev. Rul. 74-96 is superseded because the position stated therein is restated under current law in this Revenue Ruling.

Rev. Rul. 80-47, 1980-1 C.B. 83, 1980-8 I.R.B. 11.