Rev. Rul. 69-502

Advice has been requested whether the two plans described below meet the requirements for qualification, as a profit-sharing plan and as a pension plan, under section 401(a) of the Internal Revenue Code of 1954.

A corporation established a plan, intended to qualify as a profit-sharing plan under section 401(a) of the Code, under which contributions are to be made out of profits for the benefit of all employees. The corporation also established for the same employees, a second plan, intended to qualify as a pension plan under section 401(a) of the Code, providing a monthly retirement benefit after age 65 equal to 50 percent of each employee's average annual compensation, offset by the actuarial value of any amounts to which the employee might be entitled under the first plan. The specific question is whether the provision for offsetting benefits under the second plan by amounts received under the first affects the qualification of the plans.

With respect to the first plan described above, section 1.401-1(b)(3) of the Income Tax Regulations provides that a qualified plan must benefit the employees in general even though it need not provide benefits for all of the employees. That section also provides that a profit-sharing plan is not for the exclusive benefit of the employees in general if the funds therein may be used to relieve the employer from contributing to a pension plan operating concurrently and covering the same employees.

Since the funds held in an employee's account under the first plan will be used to reduce the employee's benefits under the second plan, the employer will be relieved from contributing to the second plan to the extent of those funds. Thus, the first plan is not for the exclusive benefit of the employees in general within the meaning of section 1.401-1(b)(3) of the regulations. Accordingly, it is held that this plan does not meet the requirements for qualification under section 401(a) of the Code.

With respect to the second plan, section 1.401-1(b)(1) of the regulations provides that a pension plan, within the meaning of section 401(a) of the Code, is a plan established and maintained by the employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement. The determination of the amount of retirement benefits and the contributions to provide such benefits are not dependent on profits.

The amount of benefits payable out of the funds held under the second plan is contingent upon the amount available under the first plan. This, in turn, depends upon the amount of the employer's profits and the employer's willingness to make contributions from those profits. Under these circumstances, the benefits an employee will receive under the second plan are not definitely determinable as required by section 1.401-1(b)(1) of the regulations. Therefore, it is also held that the second plan does not meet the requirements for qualification as a pension plan under section 401(a) of the Code.

Pursuant to the authority contained in section 7805(b) of the Code, plans with respect to which favorable determination letters have been issued will not be treated as nonqualified plans, solely by reason of the position stated in this Revenue Ruling, provided that the plans are appropriately amended to eliminate the offset feature before the end of the first taxable year beginning after October 6, 1969, the date of the publication of this Revenue Ruling. Furthermore, union-negotiated plans with respect to which favorable determination letters have been issued will not be considered nonqualified plans, solely by reason of the position stated in this Revenue Ruling, if the plans are appropriately amended to eliminate the offset feature by the later of (1) the end of the first taxable year beginning after October 6, 1969, or (2) six months after the expiration of the applicable collective bargaining agreement in effect on October 6, 1969. Except for union-negotiated plans, such amendments must be made effective for all purposes not later than the first day of the taxable year of the employer beginning after October 6, 1969. In the case of union-negotiated plans, the amendments must be made effective not later than the first day of the first taxable year beginning after the later of (1) October 6, 1969, or (2) the date of the expiration of the applicable collective bargaining agreement.