Rev. Rul. 56-596

The Internal Revenue Service has reconsidered Revenue Ruling 55-186, C.B. 1955-1, 39, and P.S. No. 57 /1/, dated August 5, 1946, with regard to the granting of fully vested rights to participants in employees' pension, profit-sharing, and stock bonus plans, qualified under section 401(a) of the Internal Revenue Code of 1954 for exemption from tax under section 501(a) of the Code, upon the suspension or discontinuance of employer contributions to such plans.

Revenue Ruling 55-186, supra , holds that a plan which is intended to qualify under section 401(a) of the 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 takes place.

The provisions of Revenue Ruling 55-186, supra , will not be applicable in the case of a suspension of contributions to pension or annuity plans so long as the conditions set forth herein are met. In the case of a pension or annuity plan, the applicability of a prior ruling as to qualification of the plan under section 401(a) of the Code will not be affected by suspension of employer contributions if the benefits to be paid or made available under the plan are not affected at any time by the suspension and if the unfunded past service cost at any time (which includes any unfunded prior normal cost and unfunded interest on any unfunded cost) does not exceed the unfunded past service cost as of the date of establishment of the plan (plus any additional past service or supplemental costs added by amendment). For this purpose, the unfunded past service cost may be determined by methods, factors, and assumptions appropriate as a basis of deductions under section 404(a)(1)(C) of the Code. A ruling as to qualification under section 401(a) of the Code does not, however, apply to a pension or annuity plan if a subsequent suspension of employer contributions affects benefits to be paid or made available thereunder at any time or if the unfunded past service cost at any time exceeds the unfunded past service cost as of the date of establishment of the plan (plus any additional past service or supplemental costs added by amendment). The employer and the trustee are to notify the Commissioner regarding suspensions in such cases in order that a redetermination regarding qualification of the plan under section 401(a) of the Code may be made.

P.S. No. 57, dated August 5, 1946, provides, in part, that any prior ruling with regard to a profit-sharing or stock bonus plan is inapplicable if contributions of the employer are not made in accordance with a definite formula provided in the plan without regard to indefinite conditions. The provisions of P.S. No. 57 will not be applicable to profit-sharing or stock bonus plans. In the case of a profit-sharing plan, contributions must be recurring and substantial. See section 1.401-1(b)(2) of the Income Tax Regulations. At such time as there is a discontinuance of contributions to a profit-sharing plan, the beneficial rights of all participants should be fully vested. See Rev. Rul. 33, Part 5(p), C.B. 1953-1, 267, at page 286. As distinguished from the case of pension or annuity plans the determination of whether a suspension of contributions in the case of a profit-sharing plan constitutes a discontinuance of contributions in a particular case will be made upon the basis of all the relevant facts and circumstances of the case. The employer and the trustee are to notify the Commissioner of Internal Revenue in cases involving suspension or discontinuance of contributions to a profit-sharing plan in order that a redetermination regarding qualification of the plan under section 401(a) of the Code may be made.

In the case of a profit-sharing plan intended to qualify under the provisions of section 401(a) of the Code, if under the plan's terms authority is specifically reserved to discontinue contributions without termination of the trust, the plan must also 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 trust occurs.

Revenue Ruling 55-186, supra , to the extent it applies to pension and annuity plans, and P.S. No. 57, dated August 5, 1946, to the extent it applies to profit-sharing plans, are hereby modified.

1 Not published in the Bulletin.