Rev. Rul. 71-148

Advice has been requested whether a profit-sharing plan adopted by an affiliated group of corporations will qualify under section 401(a) of the Internal Revenue Code of 1954, if it allocates forfeitures as described below. A corporation with ten subsidiaries, all operating in the same locality, established a profit-sharing plan intended to meet the requirements of section 401(a) of the Code. Each subsidiary adopted the plan and all regular employees of the corporations with at least one year of service are covered by the plan.

The plan's contribution formula requires a contribution of twenty percent of the consolidated net profits, not to exceed eight percent of all the participants' compensation. Employers' contributions are made by the employers that have profits and are allocated on the basis of each employer's share of the total gross receipts. The plan also provides for graduated vesting of participants' interests and for the reallocation of forfeitures arising from the termination of an employee's employment, under the same formula employers' contributions are allocated.

Due to the varying manpower needs of the corporations, employees are moved about from one corporation to another as the needs of the corporations require, usually on a daily basis. None of the corporations keep specific records with respect to the origin of forfeited amounts, or other records that could be used for that purpose. No amount of trust corpus or income, whether contribution or forfeiture has ever been returned to the employers, or used for the benefit of anyone other than the employees or their beneficiaries, nor has this method of reallocation produced discrimination within the meaning of section 401(a)(4) of the Code.

Section 401(a)(2) of the Code provides that a plan will not qualify unless under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to the employer's employees and their beneficiaries under the trust, for any part of the corpus or income to be used for, or diverted to, purposes other than for the exclusive benefit of the employees or their beneficiaries.

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. However, the provisions relating to qualification under section 401(a), as well as the provisions relating to deductions under section 404(a), are applicable to each employer separately. See Rev. Rul. 69-250, C.B. 1969-1, 116.

Revenue Ruling 70-532, C.B. 1970-2, 95, holds that, unless section 404(a)(3)(B) of the Code (relating to make-up contributions on behalf of loss members of an affiliated group) is applicable, the only method of allocating contributions among employers that will be acceptable as a basis for deductions under section 404(a)(3) is one that will actually reflect the contributions by each employer for the benefit of his own employees. The Revenue Ruling states that this requires allocating contributions among employers by the same formula that is used in the plan for distributing contributions among the employees covered. However, the Revenue Ruling adds that where it is not feasible to determine the actual share of each individual employee's compensation paid by one or more related employers, as in the case where the employees are continually shifted between two or more employers, some other method of allocating contributions may be acceptable. For example, the Revenue Ruling states, allocation of the total of all employers' contributions may be made on the basis of each employer's share of the total gross receipts.

The principle stated in Revenue Ruling 70-532 is also applicable to the situation involved in this case. The employees who are moved about render services to the employers participating in the plan and it is not feasible to ascertain the origin of forfeited amounts. Hence, forfeitures may be reallocated under some method that is reasonable, is consistently followed, and does not produce the discrimination prohibited by section 401(a)(4) of the Code. The method of reallocation provided in the plan meets those requirements under the circumstances present in this case.

Accordingly, it is held that the method of reallocating forfeitures will not adversely affect the continued qualification of the profit-sharing plan under section 401 of the Code.

This case is distinguishable from Revenue Ruling 69-570, C.B. 1969-2, 91, in which there was no indication that any participants ever performed services for more than one member of the affiliated group.