Rev. Rul. 56-693

Advice has been requested whether an employees' savings plan which permits participants, prior to any severance of their employment or the termination of the plan, to withdraw all or a part of the funds accumulated on their behalf, will meet the requirements of a qualified plan under section 401(a) of the Internal Revenue Code of 1954.

An employer established an employees' savings plan under which the employer agreed to contribute an amount equal to 50 percent of the amount contributed by the employee participants. Contributions by the employees are limited to ten percent of their compensation. Amounts contributed by the employer are not, in any way, limited to profits. Benefits under the plan are determined as the amount of retirement income which the total of all contributions, plus earnings thereon, standing to the credit of the participant will purchase at the time of retirement. Thus, the plan being a money purchase pension plan, it must meet the requirements of section 401(a) of the Code pertaining to a pension plan in order to be considered a qualified plan.

Under the provisions of the plan, participants are entitled to withdraw all or a part of their contributions, at any time, together with a share of the employer's contributions computed on a graduated vesting basis, upon establishing a financial need therefor. This privilege of withdrawal is uniformly applicable to all participants.

Section 1.401-1 of the Income Tax Regulations defines a pension plan as a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determined benefits to his employees over a period of years, usually for life, after retirement. The word `primarily' in the definition of a pension plan was intended to mean that such a plan is not precluded from meeting the applicable requirements for qualification merely because it provides benefits prior to normal retirement, such as for disability or death benefits, which are only incidental to the main purpose of the plan. However, a pension plan which permits the participants, prior to any severance of employment (e.g. retirement, disability, or death) to withdraw all or a part of the funds accumulated on their behalf is inconsistent with the accepted concept of a pension plan which meets all of the requirements of section 401(a) of the Code.

Accordingly, it is held that, although an employees' qualified pension plan may provide benefits prior to normal retirement, such as disability and death benefits, which are only incidental to the main purpose of the plan, an employees' pension plan which permits the participants, prior to any severance of their employment or the termination of the plan, to withdraw all or a part of the funds accumulated on their behalf, in times of a financial need or otherwise, will fail to meet the requirements of section 401(a) of the Code. However, in a plan which can be properly considered as a profit-sharing plan, a similar provision would not necessarily prevent qualification.