Rev. Rul. 80-155

The purpose of this revenue ruling is to restate the position in Rev. Rul. 70-125, 1970-1 C.B. 87, and Rev. Rul. 71-27, 1971-1 C.B. 121, in view of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

The issue in Rev. Rul. 70-125 is whether a defined contribution plan that contains a definite formula for crediting the employer's contributions to the participants' accounts but with no specific provision for allocation of trust earnings to participants' accounts or for the periodic valuation of trust investments is a qualified plan under section 401(a) of the Internal Revenue Code.

The issue in Rev. Rul. 71-27 is whether a plan provision allowing interim valuations in addition to an annual valuation will result in a plan's disqualification.

Section 414(i) of the Code states that a defined contribution plan is a plan that provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account.

Section 1.401-1(b)(1)(ii) of the Income Tax Regulations states 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. Section 1.401-1(b)(1)(iii) states that, for purposes of allocating and distributing the stock of the employer, a stock bonus plan is subject to the same requirements as a profit-sharing plan.

A pension plan of the money purchase type provides for fixed contributions that are not geared to profits. See section 1.401-1(b)(1)(i) of the regulations. Contributions under such a pension plan are accumulated under the plan and, along with the earnings thereon, distributed to participants in accordance with the terms of the plan.

Because profit-sharing, stock bonus and pension plans of the money purchase type (i.e., defined contribution plans) are required to provide for distributions in accordance with amounts stated or ascertainable and credited to participants, the funds under such a trust must be allocated to participants' accounts in accordance with a definite formula (although certain exceptions are allowed, such as the use of a suspense account in accordance with the requirements of section 415 of the Code).

Furthermore, if the amounts to be allocated or distributed to a particular participant are to be ascertainable, such plans must provide for a valuation of investments held by the trust, at least once a year, on a specified inventory date, in accordance with a method consistently followed and uniformly applied. The fair market value on the inventory date is to be used for this purpose. The respective accounts of participants are to be adjusted in accordance with the valuation.

In the case of a plan in which trust earnings, unrealized changes in the value of trust investments, and losses realized on the sale of trust assets may be valued and allocated to participants' accounts at infrequent or irregular intervals or different valuation methods may be used for different participants, the plan does not provide a definite formula for allocating and distributing the funds, as required by the regulations.

Accordingly, such a plan does not qualify under section 401(a) of the Code.

However, a plan provision allowing interim valuations at the trustee's discretion in addition to a consistent annual valuation does not disqualify the plan so long as the use of the interim valuations does not result in discrimination prohibited by section 401(a)(4) of the Code.

Rev. Ruls. 70-125 and 71-27 are superseded because the positions stated therein are restated under current law.