Rev. Rul. 83-58
1983-1 C.B. 95.
Internal Revenue Service
Revenue Ruling
DISCRIMINATION; MINIMUM COVERAGE REQUIREMENT
Published: April 4, 1983
SECTION 410. - -MINIMUM PARTICIPATION STANDARDS, 26 CFR 1.410(b)-1: Minimum coverage requirements
Discrimination; minimum coverage requirement. A profit-sharing plan, under which 22 of 40 participants are officers or shareholders, meets the coverage requirements of section 410(b)(1)(B) of the Code where it covers employees in all compensation ranges and compensation of 36 participants approximates that of the excluded employees. Rev. Ruls. 66-12, 68-244, and 70-200 superseded.
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.
Group Compensation range Total Excluded Participants Participants
employees employees who are
officers, or
shareholders
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1 $50,001 to 60,000 4 0 4 4
2 40,001 to 50,000 0 0 0 0
3 30,001 to 40,000 25 18 7 7
4 25,001 to 30,000 45 37 8 8
5 20,001 to 25,000 50 38 12 3
6 15,001 to 20,000 14 11 3 0
7 10,001 to 15,000 9 4 5 0
8 5,001 to 10,000 3 2 1 0
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Total------------- 150 110 40 22
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LAW AND ANALYSIS
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.
Rev. Rul. 83-58, 1983-1 C.B. 95.