Rev. Rul. 70-316

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in Revenue Ruling 55-629, C.B. 1955-2, 558.

The questions presented are (1) whether a corporation may adopt the qualified plan of its parent corporation when it has no employees who are eligible to participate, (2) whether, once it has qualified, the plan of a subsidiary corporation may continue to meet the requirements of section 401(a) of the Internal Revenue Code of 1954 after the subsidiary ceases to have employees, active or retired, who participate or receive benefits thereunder, and (3) whether the parent corporation may take a deduction under section 404(a)(1)(C) of the Code for contributions to complete the funding of prior service benefits for a former employee-participant who transferred to a subsidiary corporation that has adopted the parent's plan.

A corporation with several subsidiaries established a pension plan that meets the requirements of section 401 of the Code. The plan provides that the funding of benefits based on past and future service shall begin when an employee becomes a participant thereunder. The plan states that subsidiary corporations may adopt the plan and that an employee who changes employment from one employer to another, within the group of employers that has adopted the plan, will not be considered to have interrupted his employment for purposes of meeting the eligibility requirements and receiving benefits thereunder. The plan further provides that, where an employee changes employment from one such employer to another, the employer who first begins funding the employee's past service benefits will continue to fund such benefits after the employee has transferred employment.

One of the subsidiaries that adopted the plan had no employees at that time who were eligible to participate thereunder. Another subsidiary adopted the plan at a time when it had eligible employees; however, all eligible employees subsequently terminated their services with that subsidiary without becoming entitled to benefits under the plan.

The parent corporation claims deductions under section 404(a)(1)(C) of the Code for its contributions to continue the funding of prior service benefits on behalf of a former rank-and-file employee who participated in the parent's plan and then transferred employment to a subsidiary corporation that has adopted the parent corporation's plan.

Section 401(a)(1) of the Code provides that a trust may qualify under that section only if it forms part of a plan for the exclusive benefit of an employer's employees or their beneficiaries and if contributions are made to the trust for the purpose of distributing to such employees or their beneficiaries the corpus and income of the trust fund.

Section 401(a)(3) of the Code provides that a trust meeting the requirements of that section must be part of a plan that benefits either a specified percentage of all of the employer's employees or such of the employer's employees as qualify under a classification set up by the employer and found not to be discriminatory in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Section 401(a)(4) of the Code requires that, in order for a plan to qualify, contributions or benefits must not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

If past service pension credits are provided under a trusteed pension plan, section 404(a)(1)(C) of the Code allows, as a deduction for the taxable year when paid, employer contributions representing the normal cost of the plan plus an amount not in excess of 10 percent of the cost which would be required to completely fund or purchase such pension credits as of the date when they are included in the plan.

While an employer may take the necessary action to adopt a pension plan for employees long before such employer has employees eligible to participate thereunder, an employer cannot have in effect a plan that meets all the requirements of sections 401(a)(1) and 401(a)(3) of the Code until and unless such employer has one or more employees who not only satisfy the plan's eligibility requirements but also participate or receive benefits thereunder. Furthermore, while an employees' trust may be qualified under section 401(a) of the Code and exempt under section 501(a) even though several corporations make contributions thereto, the provisions relating to qualification under section 401(a) are applicable to each employer separately. See Rev. Rul. 69-250, C.B. 1969-1, 116. In addition, a plan is considered terminated in fact when the employer ceases to have employees and the trust assets have been distributed to all participants eligible to receive benefits in accordance with the terms of the plan. See Rev. Rul. 69-157, C.B. 1969-1, 115.

The plan in the instant case permits the employer who first begins to fund a particular employee's past service benefit to continue such funding even though the employee has transferred employment to another employer within the group. In this case, the operation of this provision does not result in the discrimination prohibited under section 401(a)(4) of the Code because the only employee affected by the provision is a rank-and-file employee. Furthermore, section 404(a)(1)(C) of the Code allows as a deduction employer contributions used to fund pension credits representing past service benefits as of the date when they are included in the plan. This plan effectively provides that pension credits representing past service benefits are included in the plan at such time as an employee becomes a participant thereunder.

In view of the foregoing, it is held that the plan of the subsidiary that had no employees eligible to participate when the plan was adopted does not meet the requirements of section 401(a) of the Code. It is further held that the plan of the subsidiary whose employees all had terminated their services without becoming eligible for benefits does not continue to meet the requirements of section 401(a) of the Code. It is also held that the parent corporation may deduct, under section 404(a)(1)(C) of the Code, the amount of its contribution to complete the funding of prior service benefits on behalf of a former rank-and-file employee who participated in the parent's plan and then transferred employment to a subsidiary corporation that has adopted the parent corporation's plan.

Revenue Ruling 55-629 is hereby superseded since the position stated therein is restated under current law in this Revenue Ruling.