Rev. Rul. 77-200

Advice has been requested whether, and under what circumstances, a qualified pension, profit-sharing, or stock bonus plan may permit reversions of employer contributions.

Section 401(a)(2) of the Internal Revenue Code of 1954 generally requires a trust instrument forming part of a pension, profit-sharing, or stock bonus plan to prohibit the diversion of corpus or income for purposes other than the exclusive benefit of the employees or their beneficiaries. Section 403(c)(1) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1, contains a similar prohibition against diversion of the assets of a plan.

Section 403(c)(2) of ERISA, for which there is no parallel provision of the Internal Revenue Code, provides that the general prohibition against diversion does not preclude the return of a contribution made by an employer to a plan if: (1) the contribution is made by reason of a mistake of fact (section 403(c)(2)(A)); (2) the contribution is conditioned on qualification of the plan under the Internal Revenue Code and the plan does not so qualify (section 403(c)(2)(B)); or (3) the contribution is conditioned on its deductibility under section 404 of the Code (section 403(c)(2)(C)). The return to the employer of the amount involved must be made within one year of the mistaken payment of the contribution, the date of denial of qualification, or disallowance of the deduction, as the case may be.

Before ERISA, the Internal Revenue Service ruled that a plan may provide for the return of employer contributions on the failure of the plan to qualify initially. See Revenue Ruling 60-276, 1960-2 C.B. 150. Also, in those instances where an excess contribution was attributable to a mistake of fact, the Service has, in proper cases, allowed the excess amount to be returned to the employer.

Language providing for a return of contributions in the circumstances specified in section 403(c)(2)(A) or (C) of ERISA may now be included in a plan intended to qualify under the Internal Revenue Code. Provisions incorporating such language may be effective as of a date no earlier than the date section 403(c)(2) of ERISA is effective. Plans which are amended only to include language essentially equivalent to the language of section 403(c)(2) of ERISA will not fail to satisfy section 401(a)(2) of the Code solely as the result of such an amendment.

The determination of whether a reversion, due to a mistake of fact or the disallowance of a deduction, will adversely affect the qualification of an existing plan will continue to be made on a case by case basis. In general, such reversions will be permissible only if the surrounding facts and circumstances indicate that the contribution of the amount that subsequently reverts to the employer is attributable to a good faith mistake of fact or a good faith mistake in determining the deductibility of the contribution. A reversion under such circumstances will not be treated as a forfeiture in violation of section 411(a) of the Code, even if a resulting adjustment is made to the account of a participant that is partly or entirely nonforfeitable.

The amount which may be returned to the employer is the excess of (1) the amount contributed over (2) the amount that would have been contributed had there not occurred a mistake of fact or a mistake in determining the deduction. Earnings attributable to the excess contribution may not be returned to the employer, but losses attributable thereto must reduce the amount to be so returned. Furthermore, if the withdrawal of the amount attributable to the mistaken contribution would cause the balance of the individual account of any participant to be reduced to less than the balance which would have been in the account had the mistaken amount not been contributed, then the amount to be returned to the employer would have to be limited so as to avoid such reduction.

In the case of new plans, a provision permitting the reversion of the entire assets of the plan on the failure of the plan to qualify initially under the Internal Revenue Code will continue to be allowed as provided in Revenue Ruling 60-276.

¹ Also released as News Release IR-1813, dated May 12, 1977.