Rev. Rul. 71-94

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in Revenue Ruling 60-2, C.B. 1960-1, 164. The question presented is whether a profit-sharing plan that contains the provisions described below meets the requirements of section 401(a)(7) of the Internal Revenue Code of 1954, relating to complete discontinuance of employer contributions.

The plan provides as follows: (a) the board of directors of the employer-corporation shall determine each year the amount of employer contributions to be made for such year; (b) if such board shall fail to make a determination, a contribution shall be made by the employer in accordance with a schedule of percentages which vary in proportion to the net-profit bracket into which the employer's profits fall for the year; (c) employer contributions will be considered completely discontinued if at any time the aggregate of all contributions previously made drops below an amount equal to three percent of the aggregate of the covered compensation of participants since the inception of the plan; and (d) if a complete discontinuance, as defined in (c), is found to exist and the board fails to authorize a contribution sufficient to satisfy the minimum limitation of three percent of covered compensation, then the amounts credited to the participants' accounts are to become nonforfeitable.

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 the termination of the plan 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 rights of each employee to the amounts credited to his account at that time are nonforfeitable.

As pointed out in section 1.401-6(c)(1) of the Income Tax Regulations a complete discontinuance of contributions may occur although some amounts are contributed by the employer under the plan if such amounts are not substantial enough to reflect the intent on the part of the employer to continue to maintain the plan. A complete discontinuance of contributions is in effect a termination of a qualified plan, except that the formal steps to accomplish that result have not been taken. On the other hand, a suspension of contributions under the plan is a temporary cessation of contributions that may, or may not, ripen into a discontinuance.

Section 1.401-6(c)(2) of the regulations sets forth the conditions under which a suspension of contributions under a pension plan constitutes a complete discontinuance. However, no similar specific guidance is provided with respect to profit-sharing plans. In determining whether a discontinuance of contributions has occurred under a profit-sharing plan, there should be taken into consideration all factors of whatever character or degree, in addition to the actual provisions of the plan itself, that may be recognized as properly bearing upon, or of assistance in determining answers to, the following questions: (1) whether the employer may merely be calling a complete discontinuance of contributions a suspension of such contributions in order to avoid the requirements of giving all employees nonforfeitable rights as required under section 401(a)(7) of the Code, or for any other reason; (2) whether contributions are recurring and substantial; (3) whether there is any reasonable probability that the lack of contributions will continue indefinitely; and (4) whether, as of the end of any year for which no substantial contribution has been made, the lack of giving nonforfeitable rights to employees whose services have already terminated has produced the prohibited discrimination in favor of continuing participants. In determining whether a suspension of contributions has ripened into a complete discontinuance for the purpose of requiring nonforfeitability of rights as required by section 401(a)(7) of the Code, a conclusion cannot be based solely on the relationship between aggregate employer contributions and aggregate covered compensation during the prior operation of the plan.

Under the plan in this case nonforfeitability will occur only when the aggregate contributions drop below an amount equal to three percent of aggregate covered compensation. Such conditions might not arise for a period of years after contributions have actually been completely discontinued if, for example, contributions made prior to suspension have been made at a substantially higher rate.

Accordingly, it is held that this profit-sharing plan does not meet the requirements of section 401(a)(7) of the Code.

In cases involving a suspension or complete discontinuance of contributions under a pension, profit-sharing, or stock bonus plan, the employer and the trustee are to notify the appropriate District Director of the Internal Revenue Service in order that a redetermination regarding qualification of the plan under section 401(a) of the Code may be made.

Revenue Ruling 60-2 is hereby superseded, since the position stated therein has been incorporated into this Revenue Ruling.