Rev. Rul. 69-157

Advice has been requested whether an employee's trust retains its exempt status under the circumstances described below.

A corporation established an employees' profit-sharing plan that met the requirements of section 401(a) of the Internal Revenue Code of 1954 and a related trust that was exempt under section 501(a). Subsequently, the corporation sold all of its operating and business assets to an unrelated purchaser and terminated the employment of all of its employees.

Contributions under the plan were discontinued. Pursuant to the terms of the plan, the interests of the participants became fully vested. During the first week of July, all participants made an irrevocable election to either receive their interests immediately in one lump sum at the end of the year or defer their interests until age 65, the stated age under the plan. Some employees chose to defer payment of their benefits until their retirement dates under the plan. The discontinuance of contributions and the distributions to employees who elected to receive their interests at the end of the year did not result in discrimination in favor of the employees who were officers, shareholders, supervisors, or highly compensated.

Section 401(a) of the Code provides than an employees' trust will be qualified only if it is part of a pension, profit-sharing, or stock bonus plan that meets the requirements of that section. Thus, if a plan has been terminated, the trust that formed a part thereof cannot thereafter continue in a qualified status. Whether a plan is in fact terminated depends upon all the facts and circumstances in a particular case. See section 1.401-6(b)(1) of the Income Tax Regulations.

A plan is not considered terminated in fact where, except for the failure to make further contributions, the plan continues in effect until all the assets of the trust have been distributed to participants in accordance with the terms of the plan. See, in this connection, Revenue Ruling 56-596, C.B. 1956-2, 288, which indicates that the terms of a qualified plan may specifically reserve authority to discontinue contributions without termination of the trust.

In the instant case, the trust, from its inception, formed part of the qualified plan established and maintained by the employer. Contributions under the plan have been discontinued but the trust is being retained to make distributions in accordance with the terms of the plan. The plan is not considered terminated and retains its qualified status. Based on all the circumstances in this case, it is held that the trust did not lose its exempt status.