Rev. Rul. 68-302

The purpose of this Revenue Ruling is to update and restate under the current statute and regulations the position set forth in PS No. 22, dated September 2, 1944, relating to vesting requirements in a stock bonus, pension, or profit-sharing plan intended to qualify under section 401(a) of the Internal Revenue Code of 1954.

Section 401(a)(7) of the Code provides in pertinent part, that a trust shall not constitute a qualified trust under section 401(a) unless the plan of which such trust is a part provides that, upon its termination or upon complete discontinuance of contributions under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the amounts credited to the employees' accounts are nonforfeitable.

Section 401(d)(2)(A) of the Code requires that a qualified pension or profit-sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees must provide that the employee's rights to or derived from the contributions under the plan are nonforfeitable at the time the contributions are paid to or under the plan.

Except for the circumstances mentioned in section 401(a)(7) and 401(d)(2)(A) of the Code, the Code and Income Tax Regulations do not require vesting of a participant's interest under a qualified plan prior to the time the employee reaches the normal or stated retirement age. A plan will not be held to qualify if it fails to provide that an employee who has reached the normal retirement age (in the case of a pension or annuity plan) or the stated age or other specified event has transpired (in the case of a profit-sharing or stock bonus plan), and has satisfied any reasonable and uniformly applicable requirements as to length of service or participation is vested in the contributions made or benefits payable under the plan. Part 5(c)(2) of Rev. Rul. 65-178, C.B. 1965-2, 94.

However, the law is concerned not only with form of a plan but also with its effects in operation. Section 1.401-1(b)(3) of the regulations. Thus, the operation of a plan's vesting provisions may result in the failure of the plan to qualify. See, for example, Part 4(i) of Rev. Rul. 65-178. In this regard, section 401(a)(4) of the Code provides that a plan will not qualify if the contributions or benefits provided thereunder discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. Thus, if forfeitures which result because of a lack of vesting inure principally to the benefit of such employees the plan does not qualify.

No one method can be set forth as a definite cure-all to prevent such prohibited discrimination. A provision that benefits be fully vested after a reasonable waiting period is but one such method. Other provisions may be more appropriate remedies in certain cases. For example, a service requirement for eligibility long enough to exclude temporary employees may be satisfactory. Each case must be considered on its own merits to determine whether the facts and method provided are sufficient to prevent prohibited discrimination.

PS No. 22 is hereby superseded since the position set forth therein is incorporated in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.