Rev. Rul. 69-25

Section 1. Purpose

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in PS No. 7, dated July 29, 1944, and PS No. 52, dated August 9, 1945, as modified by Revenue Ruling 55-60, C.B. 1955-1, 39.

Sec. 2. Background

.01 PS No. 7 and PS No. 52 related to the application of section 29.165-1(a) of Regulations 111 (corresponding to section 1.401-1(b)(2) of the Income Tax Regulations) dealing with the abandonment of a plan within a few years after its adoption.

.02 Section 1.401-1(b)(2) of the regulations provides that the term "plan" implies a permanent, as distinguished from a temporary, program. Thus, although the employer may reserve the right to change or terminate the plan, and to discontinue contributions thereunder, the abandonment of a plan for any reason other than business necessity within a few years after it has taken effect will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. Especially will this be true if, for example, a pension plan is abandoned soon after pensions have been fully funded for persons in favor of whom discrimination is prohibited under section 401(a) of the Internal Revenue Code of 1954. The permanency of the plan will be indicated by all of the surrounding facts and circumstances, including the likelihood of the employer's ability to continue contributions as provided under the plan.

.03 Section 1.401-1(b)(2) of the regulations further provides that, in the case of a profit-sharing plan, other than a profit-sharing plan that covers employees and owner-employees (see section 401(d)(2)(B) of the Code), it is not necessary that the employer contribute every year or that he contribute the same amount or contribute in accordance with the same ratio every year. However, merely making a single or occasional contribution out of profits for employees does not establish a profit-sharing plan. To be a profit-sharing plan there must be recurring and substantial contributions out of profits for the benefit of employees. In the event a plan is abandoned, the employer should promptly notify the district director, stating the circumstances which led to the discontinuance of the plan.

Sec. 3. Presumption With Respect to Qualification

.01 When a newly established plan is first considered for a determination letter by the Internal Revenue Service under the provisions of section 601.201(o) of the Statement of Procedural Rules, C.B. 1963-1, 448, the presumption is that the plan is being established in good faith as a permanent program, unless there is clear evidence to the contrary in the facts and circumstances surrounding the adoption of the plan. Therefore, in most cases the issue of intended permanence is resolved in favor of the taxpayer at the time of the adoption of the plan.

.02 However, if within a few years the employer decides to abandon the plan and there have been no unforeseeable developments in his business which make it impossible to continue the plan, this must be taken as evidence that the employer did not intend the plan as a permanent program from the time of its inception. Thus, when a plan is discontinued within a few years after its adoption for any cause other than business necessity, the original presumption of intended permanence must be replaced by a presumption that the employer did not intend the plan as a permanent program from the beginning. In the absence of evidence rebutting this presumption, such a plan would then be disqualified retroactively as not being a permanent plan for the exclusive benefit of employees in general.

.03 When a plan is abandoned within a few years after its adoption, the presumption that it was not a bona fide permanent program for the exclusive benefit of employees in general may be overcome by showing that the abandonment was due to business necessity that could not reasonably have been foreseen when the plan was adopted. The term "business necessity" has reference to adverse business conditions, not within the control of the employer, under which it is not possible to continue the plan. Bankruptcy or insolvency would ordinarily be prima facie evidence of such business necessity. Discontinuance of the business of the employer may also constitute such business necessity. Whether or not abandonment of the plan is deemed to be due to business necessity will depend upon the facts and circumstances of the individual case.

.04 The presumption as to the lack of a bona fide permanent program in the case of a plan that is terminated within a few years may be overcome in certain situations in which the business is sold or transferred to a successor, and the successor immediately terminates the plan, even though such termination may not be due strictly to business necessity, as interpreted above. For example, a company having a plan may be acquired as a subsidiary by another company that has its own plan. The parent company may prefer to terminate the subsidiary's plan and extend its own plan to the employees of the subsidiary. Such a termination would not, of itself, result in disqualification. Even though the parent company does not have a plan, if the employees of the new subsidiary are closely associated in their operation with the employees of the parent company and the latter cannot afford a plan for all its employees, the parent company may find it necessary to terminate the plan for the subsidiary.

.05 The exception mentioned in section 3.04 would not apply, however, where a subsequent sale or transfer of the business and the consequent termination of the plan might have been anticipated at the time the plan was adopted. Nor would the exception apply in the case where the successor to the business was closely associated with the previous ownership or management. The same result would be obtained where the plan is merely a device for distribution of non-taxable dividends to shareholders.

.06 If a plan has already been discontinued at the time of its submission for a determination letter, and such discontinuance was not disclosed at the time, this will be prima facie evidence that the plan was not a bona fide program.

Sec. 4. Lack of Permanent Plan and Discrimination in Operation Distinguished

.01 All of the foregoing is concerned with the provision that a plan will not qualify unless it is a bona fide permanent program for the exclusive benefit of the employees. This is separate and apart from the requirement regarding nondiscrimination. The presumption of a lack of bona fides and permanency is even stronger and more difficult to overcome if the plan is also discriminatory in operation. Even where the matter of intended permanency is not in question, if a plan is terminated for any reason and such termination results in substantial discrimination in favor of employees who are officers, shareholders, supervisors, or highly compensated, the plan will not qualify under section 401(a) of the Code for the period during which its operation was discriminatory.

.02 The fact that a plan includes provisions conforming to section 1.401-4(c) of the regulations, relating to restrictions on early termination of plans, does not preclude a finding that the plan was in fact discriminatory in operation, nor is it evidence that the plan was a bona fide permanent program.

.03 Pro forma compliance with section 1.401-4(c) of the regulations does not assure the employer that a plan will automatically be considered as non-discriminatory and as a permanent program for the exclusive benefit of employees in general, even if it is terminated within a few years and has in fact operated in a discriminatory manner or as a device for the distribution of non-taxable dividends to shareholders. However, insofar as compliance with section 1.401-4(c) does in fact result in eliminating or limiting discrimination upon early termination, the employer has assurance, to that extent, that the plan will not be found discriminatory and there will be a corresponding elimination or limitation of the additional evidence needed to establish that the plan was not intended as a permanent program for employees in general.

.04 Thus, the restrictions provided in section 1.401-4(c) of the regulations are intended to limit possible discrimination in cases where early termination is due to bona fide business necessity and resulting from unforeseeable developments, as well as in cases where the intended permanence of the plan is in question. In the former type of case, specific or general provisions conforming to the regulations might limit discrimination sufficiently to avoid retroactive disqualification. In the latter type of case, such provisions might not be sufficient. In many instances, it is impossible to decide definitely which type of case is involved and the inclusion of these restrictive provisions will not necessarily show that early termination was not contemplated.

.05 It should be noted that all of the foregoing applies, with appropriate modification, to cases in which plans are amended to reduce benefits or employer contributions (that is, partial terminations) as well as to complete terminations.

Sec. 5. Effect on Other Documents

PS No. 7 and PS No. 52 are hereby superseded since the positions set forth therein are incorporated in this Revenue Ruling.

¹ Prepared pursuant to Revenue Procedure 67-6, C.B. 1967-1, 576.