PROFIT-SHARING PLANS MUST PROVIDE FOR NONFORFEITURE OF EMPLOYER CONTRIBUTIONS IN EVENT OF COMPLETE CESSATION OF CONTRIBUTIONS.

Rev. Rul. 89-53

PURPOSE

The purpose of this revenue ruling is to revoke Rev. Rul. 68- 137, 1968-1 C.B. 164, in view of the amendment of section 401(b) of the Internal Revenue Code by the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1.

ISSUE

Does a profit-sharing plan fail to meet the requirements for qualification under section 401(a) of the Code, during the first plan year, because the plan does not initially contain a specific provision requiring that employees' rights to benefits become nonforfeitable upon the complete discontinuance of contributions?

FACTS

An employer established a profit-sharing plan and trust to which it made a contribution for the first plan year. Under the plan, a contribution was required as a precondition of the plan's existence. The plan provided that employer contributions would be nonforfeitable in the event of termination or partial termination of the plan. The plan met all the other requirements for qualification under section 401(a) of the Code, except that it did not contain a specific provision requiring that, in the event of a complete discontinuance of employer contributions, employees' rights to accrued benefits become nonforfeitable. Such a requirement was added to the plan by an amendment that was adopted and made effective for the second plan year.

LAW AND ANALYSIS

Under the holding of Rev. Rul. 68-137, the plan in the present case would not fail to qualify under section 401(a) of the Code. In Rev. Rul. 68-137, a contribution was required as a precondition of the plan's existence, and such a contribution was actually made for the first plan year. Consequently, a discontinuance of contributions could not occur in the first year. Absent this holding, the plan could not have qualified under section 401(a) for the first plan year because section 401(b)(which provides for the retroactive effect of certain plan amendments) had limited applicability prior to ERISA.

Section 401(b) of the Code, as amendment by ERISA, provides that a stock bonus, pension, profit-sharing, or annuity plan shall be considered to satisfy the requirements of section 401(a) for the period beginning with the date on which it was put into effect, or for the period beginning with the earlier of the date on which their was adopted or put into effect any amendment which caused the plan to fail to satisfy such requirements and ending with the time prescribed by law for filing the return of the employer for his taxable year in which such plan or amendment was adopted, including extensions thereof, or such later time as the Secretary may designate, if all provisions of the plan which are necessary to satisfy all qualification requirements are in effect by the end of such period and have been made effective for the whole of such period.

Section 411(d)(3) of the Code provides that a trust shall not constitute a qualified trust under section 401(a) unless the plan of which such trust is a part provides that, upon its termination or partial termination, or in the case of a plan to which section 412 does not apply, upon complete discontinuance of contributions under the plan, the rights of all affected employees to benefits accrued to the date of such termination, partial termination, or discontinuance, to the extent funded as of such date, or the amounts credited to the employees' accounts, are nonforfeitable.

Section 412(h)(1) of the Code provides that section 412 shall not apply to any profit-sharing or stock bonus plan. Consequently, profit-sharing plans are subject to the requirement that employees' rights to their account balances become nonforfeitable upon complete discontinuance of contributions.

Section 411(d)(3) of the Code and section 1.411(d)-2(a) of the Income Tax Regulations require that, in order to qualify under section 401(a), certain plans, including profit-sharing plans, must provide for nonforfeitability of the amounts credited to the employees' accounts upon complete discontinuance of contributions. Section 411(d)(3) neither states nor implies that such a provision is unnecessary for plan qualification if, in actual plan operation, a complete discontinuance of contributions does not or could not occur.

HOLDING

The profit-sharing plan in the present case did not qualify under section 401(a) of the Code for its first plan year because it did not then contain the required provision that employees' accrued benefits become nonforfeitable upon complete discontinuance of contributions. This result obtains whether or not a contribution under the plan is required as a condition of the plan's existence.

However, if a plan amendment effective for the first plan year, adding the required provisions is made within the remedial amendment period provided under section 401(b) of the Code and section 1.401(b)-1 of the regulations, the plan will qualify under section 401(a) from the date of its adoption.

PROSPECTIVE APPLICATION

Pursuant to section 7805(b) of the Code, this revenue ruling will be effective, in the case of plans in existence on or before May 10, 1989, for a plan's second year of existence. For plans that come into existence after May 10, 1989, this revenue ruling will be immediately effective.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 68-137 is revoked.

DRAFTING INFORMATION

The principal author of this revenue ruling is Carol Gold of the Employee Plans Technical and Actuarial Division. For more information concerning this revenue ruling, call the Employee Plans Technical and Actuarial Division's Taxpayer Assistance number, (202) 566-6783 (not a toll-free number), Monday through Friday between the hours of 1:30 p.m. and 4:00 p.m., Eastern Standard Time. Ms. Gold may be reached at (202) 343-0729 (also not a toll-free number).