Rev. Rul. 68-653
Rev. Rul. 68-653; 1968-2 C.B. 177
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Superseded by Rev.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 I.T. 3685, C.B. 1944, 324, relating to whether a profit-sharing plan providing for the allocation of contributions under a formula that takes into consideration years of service 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.
Under the profit-sharing plan of the employer company, which became effective January 1, 1967, all employees who have completed three years of service are eligible to participate. The company has 216 employees, of which number 134 are covered by the plan. Contributions are made by the company only to the extent of 10 percent of its annual profits or 15 percent of the total compensation of all participants in the plan, whichever is lesser. The annual profits for the calendar year 1967 amounted to $2,000,000 and the total compensation of all participants was $1,000,000. Accordingly, $150,000 was contributed for that year. Under the allocation formula, the latter amount was allocated among the participants on the basis of one unit for each $100 of compensation and one unit for each year of completed service, in accordance with the following tabulation:
Units
Num- for Mean
ber of Total each years
Group Salary range Median em- salary /*/ $100 of of
ploy- com- serv-
ees pensa- ice
tion
(1) (2) (3) (4) (5) (6) (7)
1 $45,000-55,000 $50,000 1 $50,000 500 40
2 35,000-45,000 40,000 1 40,000 400 32
3 25,000-35,000 30,000 1 30,000 300 30
4 15,000-25,000 20,000 3 60,000 600 20
5 13,000-15,000 14,000 0 ------- ----- --
6 11,000-13,000 12,000 10 120,000 1,200 14
7 9,000-11,000 10,000 13 130,000 1,300 12
8 7,000- 9,000 8,000 20 160,000 1,600 10
9 5,000- 7,000 6,000 35 210,000 2,100 8
10 3,000- 5,000 4,000 50 200,000 2,000 6
Totals......................... 134 1,000,000 10,000 --
(continued below)
Aver-
Units Group age Per-
for share indi- cent-
Group years Total in con- vidual age of
of units tribu- share in salary
service tion contri-
bution
(1) (8) (9) (10) (11) (12)
1 40 540 $7,207.68 $7,207.68 14.415
2 32 432 5,766.16 5,766.16 14.415
3 30 330 4,404.70 4,404.70 14.682
4 60 660 8,809.40 2,936.46 14.682
5 --- ----- --------- -------- ------
6 140 1,340 17,885.74 1,788.58 14.905
7 156 1,456 19,434.08 1,494.92 14.949
8 200 1,800 24,025.62 1,201.28 15.016
9 280 2,380 31,767.22 907.64 15.127
10 300 2,300 30,699.40 613.98 15.350
Totals.... 1,238 11,238 150,000.00 -------- ------
/*/ Salary at median point multiplied by number of employees.
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 which 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.
In this case, such discrimination is not present since employees in the lowest salary group with a minimum of three years of service participate to the extent of 15.35 percent of salary, and as the salaries increase the percentages decrease, with the result that the highest paid employee, having 40 years of service, participates to the extent of 14.415 percent of salary.
Accordingly, under the facts stated, the profit-sharing plan providing for an allocation of contributions under a formula that takes into consideration years of service, meets the requirements of section 401(a)(4) of the Code and section 1.401-4 of the regulations.
See Revenue Ruling 68-654, below, and Revenue Ruling 68-652, page 176, which also involve profit-sharing plans with allocation formulas that take into consideration years of service.
I.T. 3685 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.r
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