Rev. Rul. 72-367

Advice has been requested whether a profit-sharing plan may qualify under section 401(a) of the Internal Revenue Code of 1954 if it contains the provisions described below.

The plan requires each participant to contribute each month an amount equal to two percent of his earnings for the month. The plan also provides that each participant may make additional contributions each month in any amount up to four percent of his earnings for the month. Under the plan the employer is to contribute each month, out of its current or accumulated earnings or profits, an amount equal to the total amounts contributed by the participants. The plan further provides that a participant may withdraw his own contributions to the trust, plus the increment earned thereon, at any time. However, withdrawals of employee contributions and earnings thereon are considered to be made in the order in which the employee contributions were made. Furthermore, upon any such withdrawal, made, prior to the time the participant terminates his employment, he forfeits the employer contributions, plus the increments earned thereon, that were geared to the withdrawn employee contributions.

Section 1.401-1(b)(1)(ii) of the Income Tax Regulations provides that a profit-sharing plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death or severance of employment.

A qualified profit-sharing plan may not contain a provision that permits a participant to withdraw his own contributions to which the employer contributions are geared prior to the occurrence of an event of the type described in section 1.401-1(b)(1)(ii) of the regulations. See Rev. Rul. 72-275, C.B. 1972-1, 109. However, such a plan may contain a provision that permits a participant to withdraw such contributions in a time of financial need. See Rev. Rul. 56-693, C.B. 1956-2, 282. The willingness of a participant to forfeit the geared employer contributions in order to withdraw his own contributions in this case will be evidence of financial need.

Accordingly, it is held that the withdrawal provision in this case does not cause the plan to fail to qualify under section 401(a) of the Code.