Rev. Rul. 72-275

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

In accordance with the plan, each participant must contribute an amount each month equal to two percent of his current compensation. A participant may make additional contributions each month in an amount equal to one, two, or three percent of his compensation. The employer contributes each month for each participant, out of profits, an amount equal to the participant's required and optional contributions. A participant may withdraw all or any part of his own contributions at any time, without penalty and without affecting the employer contributions and earnings allocated to his account. However, a participant's share of employer contributions and trust earnings may be withdrawn only upon termination of the participant's employment.

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. Revenue Ruling 71-295, C.B. 1971-2, 184, holds that the term "fixed number of years" means at least two years.

Where the employer contributions under a profit-sharing plan are not geared to the optional employee contributions permitted under the plan, the optional employee contributions are not considered as part of the funds accumulated under the plan for the purpose of section 1.401-1(b)(1)(ii) of the regulations. Optional employee contributions to which the employer contributions are geared, however, are part of the funds accumulated under the plan. Allowing employer contributions to be allocated on the basis of employee contributions that may be withdrawn immediately after they are made would permit manipulation of the allocation and contravene the requirement in section 1.401-1(b)(1)(ii) of the regulations for a definite predetermined allocation formula.

Accordingly, it is held that the plan does not qualify under section 401(a) of the Code.