Rev. Rul. 67-213

Rev. Rul. 67-213

Advice has been requested whether any income will be recognized to the participants of an employees' qualified pension plan upon the transfer of their interests from the trust forming a part of the plan to a trust forming part of a qualified stock bonus plan. Advice has also been requested whether the interests so transferred are subject to the limitations and restrictions contained in Revenue Ruling 59-185, C.B. 1959-1, 86, and section 1.401-4(c)(2) of the Income Tax Regulations.

X corporation was merged into M corporation. At the time of the merger, the employees of X were participants in a noncontributory pension plan which qualified under section 401(a) of the Internal Revenue Code of 1954 while the employees of M were participants in a qualified stock bonus plan. After the merger, both plans were amended to permit the pension plan participants to transfer their interests to the stock bonus plan. The pension plan provides for full vesting of employee interests upon termination of the plan or discontinuance of employer contributions thereunder.

Pursuant to the amendments to the plans, each participant under the pension plan could elect either (1) to have his entire interest in the pension plan transferred to the stock bonus plan or (2) to continue to participate in the pension plan and have his entire interest therein used to purchase an annuity which will provide monthly benefits commencing at retirement. The employees' interests transferred to the stock bonus plan remain fully vested. The pension plan will continue in effect until it has satisfied its liabilities to present participants who do not transfer their interests to the stock bonus plan. After that liability has been satisfied, the pension plan will be terminated.

Section 402 of the Code provides, in effect, that contributions made by an employer to a trust described in section 401(a) of the Code are not taxable to the employees on whose behalf they are made until the year or years in which such contributions are distributed or made available to them.

Since, under the terms of the amended pension plan, the funds were transferred to the qualified stock bonus plan without being made available to the participants, no taxable income will be recognized to the participants by reason of such a transfer. See Rev. Rul. 55-368, C.B. 1955-1, 40.

Since the transferred funds are not considered as having been made available to the participants in this case, they continue to be funds derived from employer contributions and do not constitute employee contributions even though they are fully vested. Accordingly, they are not subject to the 10-percent limitation contained in Revenue Ruling 59-185, which limitation is applicable only to voluntary employee contributions.

Section 1.401-6(b) of the regulations states that whether a plan is terminated is generally to be determined with regard to all of the facts and circumstances in a particular case. The term `termination' includes both a partial termination and a complete termination of a plan. A plan is not terminated merely because the employer sells or otherwise disposes of his trade or business if the acquiring employer continues the plan as a separate and distinct plan of its own or consolidates or replaces that plan with a comparable plan.

A comparable plan is not necessarily a plan of the same type but it is one of the same category. Thus, a stock bonus plan is comparable to a profit-sharing plan and an annuity plan is comparable to a pension plan. However, as section 1.381(c)(11)-1(d)(4) of the regulations provides, if the acquiring corporation transfers the funds accumulated under a profit-sharing plan into a pension plan covering the same employees, the profit-sharing plan shall be considered terminated. Conversely, if a pension plan is replaced by a stock bonus plan, the pension plan shall be considered terminated. This is so since the basic attributes of a pension plan and a stock bonus plan lie in different categories. See also sections 1.401-1(b)(1)(iii) and 1.404(a)-3(a) of the regulations.

Since X corporation's stock bonus plan is not comparable to the pension plan which it replaced, the pension plan is considered to have been terminated.

Section 1.401-4(c)(2) of the regulations provides restrictions on the amount of contributions to a qualified plan which may be used for the benefit of certain highly paid employees where the plan is terminated.

Section 1.401-4(c)(1) of the regulations states that these restrictions must be contained in the plan when it is established unless (1) it is reasonably certain at the inception of the plan that such restrictions will not affect the amount of contributions which may be used for the benefit of any employee or (2) the Commissioner determines that such restrictions are not necessary to prevent the prohibited discrimination that may occur in the event of any early termination of the plan.

Thus, the restrictions set forth in section 1.401-4(c)(2) of the regulations must be applied upon the termination of a qualified plan unless the prohibited discrimination is not otherwise likely to result as, for example, where contributions or benefits on behalf of employees will continue, under another qualified plan, on at least as high a level as before.

Accordingly, it will be necessary to apply the restrictions contained in section 1.401-4(c)(2) of the regulations with respect to benefits that may be paid to certain highly paid employees, unless the prohibited discrimination is otherwise unlikely to result.