Rev. Rul. 68-651

Advice has been requested whether the qualified status of an employees' profit-sharing plan is adversely affected by an amendment to the plan permitting certain employees to make voluntary contributions in the manner described below.

A corporation established a profit-sharing plan and trust that was held to qualify under section 401(a) of the Internal Revenue Code of 1954. All employees were eligible to participate in the plan upon completion of three years of service. Voluntary employee contributions of up to ten percent of compensation were also permitted under the plan. Distributions from the trust were to be made in cash.

The plan was amended to provide that any employee who had completed six months of service may make voluntary contributions to the plan in the same manner as the plan participants. However, such an employee remains ineligible to share in the employer's contributions until he has conpleted three years of continuous service.

A plan will qualify under section 401(a) of the Code if it is a pension, profit-sharing, or stock bonus plan that meets all the applicable requirements of that section.

Section 1.401-1(b)(1)(ii) of the Income Tax Regulations provides that a profit-sharing plan is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan.

In this case the amended plan permits employees with less than three years of service to make contributions thereunder but does not provide for the requisite participation by those employees in the employer's profits. Instead, the plan is now a mere savings plan with respect to those employees.

A pension plan can meet the requirements of section 401(a) of the Code even if only employee contributions are made thereunder. See Rev. Rul. 66-205, C.B. 1966-2, 119. However, a profit-sharing plan cannot meet the requirements of section 401(a) if only employee contributions are made thereunder. See section 1.401-1(b)( 1)(ii) of the regulations requiring that a profit-sharing plan be a plan for the participation by the employees in the employer's profits.

Accordingly, the qualification of this plan is adversely affected by the amendment permitting employees to make voluntary contributions prior to the time they become entitled to participate in the employer's profits.

Furthermore, since neither contributions nor benefits under the plan are definitely determinable and since distributions from the trust are to be in cash, this plan also does not satisfy the definitions of a pension plan or a stock bonus plan. See section 1.401-1(b)(1)(i) and (iii) of the regulations.