Rev. Rul. 55-186

Advice has been requested as to whether an employees' profit-sharing plan must contain a provision for granting fully vested rights to participants upon discontinuance of contributions by the employer.

Under the provisions of the employees' profit-sharing plan in the instant case, if the board of directors deems it inadvisable or impossible for the corporation to continue to make contributions under the plan, it shall have the power to discontinue the corporation's contributions by an appropriate resolution. However, should this be done, the other provisions of the plan remain in force and the trust remains in existence. The plan further provides that a participant shall forfeit the amount credited to him in the trust fund in the event of his termination of employment prior to retirement.

Section 401(a)(4) of the Internal Revenue Code of 1954 (sec. 165(a)(4) of the 1939 Code) provides that a trust forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees shall constitute a qualified trust if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

In a profit-sharing plan, unless the participants are vested in their respective interests at the time of discontinuance of contributions, discrimination in favor of employees who are officers, shareholders, supervisors, or highly compensated may result. Such employees would usually be the last to have their services terminated and stand to benefit from the forfeitures arising from severance of employment of other participants.

In a pension plan, forfeitures arising from severance of employment or other reasons must be used to reduce subsequent employer contributions rather than be allocated among remaining participants. However, if contributions are discontinued there is nothing against which to apply the forfeitures.

Accordingly, a plan which is intended to qualify under section 401(a) of the 1954 Code (sec. 165(a) of the 1939 Code) must contain an appropriate provision for the purpose of granting fully vested rights to participants upon discontinuance of contributions by the employer, similar to a case in which actual termination of the plan and trust takes place