Rev. Rul. 68-652
Rev. Rul. 68-652; 1968-2 C.B. 176
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
Superseded by Rev. Rul. 84-155
The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in PS No. 28, dated September 2, 1944, relating to whether the profit- sharing plan of an employer that contains a years-of-service factor in the formula used for allocation of contributions meets the requirements of section 401(a)(4) of the Internal Revenue Code of 1954 and section 1.401-4 of the Income Tax Regulations.
The profit-sharing plan of a corporation, which became effective July 1, 1967, provides for participation of all employees who have completed three full years of service with the corporation. Out of a total of 689 employees, 464 meet the eligibility requirements and participate in the plan. The formula for determining the profits of the corporation to be shared provides for a contribution equal to ten percent of the annual profits. The profits for the fiscal year ended June 30, 1967, amounted to $3,200,000 and, accordingly, $320,000 was paid to the fund. This amount was allocated among the plan participants on the basis of one unit for each full $100 of compensation, limited to a maximum of 200 compensation units, multiplied by the number of full years of completed service, as set forth in the tabulation below.
Units for
each Mean
Number Total $100 of years
of salary compen- of
Group Salary range Median employees (3X4) sation service
/*/
(1) (2) (3) (4) (5) (6) (7)
1 $43,000-$57,000 $50,000 1 $50,000 200 11
2 37,000-42,000 40,000 2 80,000 200 12
3 23,000-37,000 30,000 5 150,000 200 12
4 17,000-23,000 20,000 8 160,000 200 10
5 11,000-17,000 14,000 20 280,000 140 8
6 9,000-11,000 10,000 38 380,000 100 5
7 7,000- 9,000 8,000 80 640,000 80 5
8 5,000- 7,000 6,000 120 720,000 60 4
9 3,000- 5,000 4,000 190 760,000 40 3
Totals......................... 464 3,220,000 1,220 --
(continued below)
Average
Total Group individual
units per Allocation share in share in
employee factor contri- contri- Percentage
Group (6X7) (4X8) butions butions of salary
(1) (8) (9) (10) (11) (12)
1 2,200 2,200 $4,400 $4,400 8.8
2 2,400 4,800 9,600 4,800 12.0
3 2,400 12,000 24,000 4,800 16.0
4 2,000 16,000 32,000 4,000 20.0
5 1,120 22,400 44,800 2,240 16.0
6 500 19,000 38,000 1,000 10.0
7 400 32,000 64,000 800 10.0
8 240 28,800 57,600 480 8.0
9 120 22,800 45,600 240 6.0
Total.... 11,380 160,000 320,000 ----- ---
/*/ Based on maximum of $20,000.00
Section 401(a)(4) of the Code provides that a trust forming part of a profit-sharing plan of an employer will not constitute a qualified trust if the contributions or benefits provided under the plan discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. However, under section 1.401-4(a)(2)(iii) of the regulations, variations in contributions or benefits may be provided so long as the plan, viewed as a whole for the benefit of employees in general, does not discriminate in favor of the employees enumerated above. Thus, contributions or benefits that vary by reason of an allocation formula that takes into consideration years of service, or other factors, are not prohibited unless such formula results in prohibited discrimination.
Limiting the maximum compensation units to 200 results in an effective ceiling of $20,000 on compensation to be taken into account and prevents discrimination in favor of employees whose earnings exceed that amount. That ceiling, however, does not prevent discrimination with respect to employees whose earnings are below $20,000 and who have the least number of years of service. Thus, an employee in Group 9 participates to the extent of six percent of his salary, and the percentage increases until Group 4 is reached, for which 20 percent is provided on a salary of $20,000. The fact that a $50,000 salaried participant derives but 8.8 percent of his compensation does not offset the discrimination that exists in favor of other highly compensated groups.
Accordingly, under the facts stated, the profit-sharing plan of the corporation, containing a years-of-service factor in the formula for the allocation of contributions, does not meet the requirements of section 401(a)(4) of the Code and section 1.401-4 of the regulations.
See Revenue Ruling 68-653, below, and Revenue Ruling 68-654, page 179, which also involve profit-sharing plans with allocation formulas that take into consideration years of service.
PS No. 28 is hereby superseded, since the position stated therein is restated under current law in this Revenue Ruling.
1 Prepared pursuant to Revenue Procedure 67-6, C.B. 1967-1, 576.
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
