Rev. Rul. 68-137

Advice has been requested whether an employees' pension plan meets the requirements for qualification under section 401(a) of the Internal Revenue Code of 1954, during the first year of the plan, where the plan does not initially contain a specific provision requiring that employees' rights to benefits become nonforfeitable upon the discontinuance of contributions.

An employer established an employees' pension plan and trust to which it made the contribution required for the first year to bring the plan into existence. The plan provided that employee contributions be fully vested in the event of termination of the plan and met all the other requirements for qualification under section 401(a) of the Code, except that it did not contain a specific provision requiring that, in the event of a complete discontinuance of employer contributions, employees' rights to accrued benefits, to the extent them funded, become nonforfeitable. Such a requirement was added to the plan by amendment in the second year of its operation.

Section 401(a)(7) of the Code provides that a trust shall not constitute a qualified trust unless the plan of which such trust is a part provides that, upon its termination or upon the 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 employee's accounts are nonforfeitable.

Section 1.401-6(c)(2) of the Income Tax Regulations provides that, in the case of a pension plan, a suspension of contributions will not constitute a discontinuance if the benefits to be paid or made available under the plan are not affected at any time by the suspension, and the unfunded past service cost at any time does not exceed the unfunded past service cost as of the date of establishment of the plan, plus any additional past service or supplemental costs added by amendment.

The plan in the instant case specifically provided for full vesting upon termination of the plan. Further, the plan required a contribution for the first year, if it was to come into existence, and such a contribution was actually made for the first year. Once the plan came into existence, it was not possible for a discontinuance of contributions to occur until the second year of the plan. Thus, despite the absence of a specific provision, the plan in its entirety met the requirements of section 401(a)(7) of the Code, for the first year of its existence since it was impossible for the forfeiture of employee benefits to occur as a result of a discontinuance of contributions during that year. This was not true for any plan year subsequent to the first. However, before the end of the second year, the plan was amended to specifically require that employee benefits be made nonforfeitable upon discontinuance of contributions.

Accordingly, the initial failure of the instant plan to specifically require that employees' benefits be made nonforfeitable upon the discontinuance of contributions does not prevent the plan from qualifying, under section 401(a) of the Code, during the first year of its existence.