Rev. Rul. 57-587

Advice has been requested whether an employees' trust, which is part of a plan described in section 401(a) and exempt from income tax under section 501(a) of the Internal Revenue Code of 1954, may continue to qualify for such exemption when, as a result of withdrawals of all or a portion of their interests by some employees, the plan becomes one which is operated primarily for the benefit of employees who are officers, shareholders, supervisory personnel, or highly compensated employees.

Section 401(a) of the Code provides that a trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees shall constitute a qualified trust if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

The right of withdrawal of participants' interests, in spite of restrictions imposed by the terms of the plan, as described in Revenue Rulings 55-423, 55-424, and 55-425, C.B. 1955-1, 41, 42, and 43, respectively, may cause the plan to become one operated primarily for the benefit of officers, shareholders, supervisory personnel, or highly compensated employees, if withdrawals are made in disproportionately greater amounts by the lower paid employees, with the result that the plan funds are held and taxation thereon is deferred largely for the benefit of the group or groups mentioned in section 401(a)(3)(B) and (4) of the Code.

Accordingly, it is held that although participants' undistributed interests in a qualified employees' trust may not be made available to them by reason of a restricted right of withdrawal, the plan itself may eventually be disqualified in the event that, as a result of withdrawals of all or a portion of their interests by employees, the plan becomes one which is operated primarily for the benefit of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

See Revenue Ruling 56-693, C.B. 1956-2, 282, as to the effects of the existence of restricted rights of withdrawals in pension plans.