Rev. Rul. 74-56

Advice has been requested whether, under the circumstances described below, a profit-sharing plan may qualify under section 401(a) of the Internal Revenue Code of 1954.

The plan provides that each participant may make contributions each month in any amount up to six percent of his earnings for that month. Under the plan, the employer is to contribute each month, out of its current or accumulated earnings or profits, an amount equal to the total amounts contributed by the participants, and these contributions are to be allocated to each participant's account in proportion to his own contributions. The plan further provides that a participant may withdraw his own contributions to the trust under the plan at any time, but, if he makes such a withdrawal, his right to make future contributions to the trust is suspended for six months. No employee or employer contributions may ever be made with respect to any such six-month period of suspension.

Rev. Rul. 72-367, 1972-2 C.B. 219, involves a profit-sharing plan that requires each participant to contribute each month an amount equal to two percent of his earnings for the month. The plan also provides that each participant may make additional contributions each month in any amount up to four percent of his earnings for the month. Under the plan, the employer is to contribute each month, out of its current or accumulated earnings or profits, an amount equal to the total amounts contributed by the participants. The plan further provides that a participant may withdraw his own contributions to the trust, plus the increments earned thereon, at any time. Upon any such withdrawal made prior to the time the participant terminates his employment, however, he forfeits the employer contributions, plus the increments earned thereon, that were geared to the withdrawn employee contributions.

Rev. Rul. 72-367 states that optional employee contributions to which employer contributions are geared are a part of the funds accumulated under the plan within the meaning of section 1.401-1(b)(1)(ii) of the Income Tax Regulations. It states further that the willingness of a participant to forfeit the geared employer contributions in order to withdraw his own contributions is evidence of financial need within the meaning of Rev. Rul. 56-693, 1956-2 C.B. 282. It accordingly holds that the withdrawal provision does not cause the plan to fail to qualify under section 401(a) of the Code.

Section 1.401-1(b)(1)(ii) of the regulations provides that a profit-sharing plan must provide a definite predetermined formula for allocating the contributions made to the plan among prior occurrence of some event such after a fixed number of years, the at- the funds accumulated under the plan tainment of a stated age, or upon the the participants and for distributing as layoff, illness, disability, retirement, death, or severance of employment.

Rev. Rul. 74-55, page 89, this Bulletin, modifying Rev. Rul. 72-275, 1972-1 C.B. 109, concludes that the term "funds accumulated under the plan", as used in section 1.401-1(b)(1)(ii) of the regulations, does not include employee contributions. It also concludes that a profit-sharing plan containing a withdrawal provision that could reasonably be expected to result in the manipulation of the allocation in contravention of the definite predetermined allocation formula requirement of section 1.401-1(b)(1)(ii) will not qualify under section 401(a) of the Code.

The withdrawal provision in this plan imposes a substantial limitation on the right of a participant to withdraw his own contributions. The withdrawal provision, therefore, cannot reasonably be expected to result in the manipulation of the allocation in contravention of the definite predetermined allocation formula requirement of section 1.401-1(b)(1)(ii) of the regulations.

Likewise, the withdrawal provision included in the plan underlying Rev. Rul. 72-367 imposes a substantial limitation on the right of a participant to withdraw his own contributions and, therefore, cannot reasonably be expected to result in the manipulation of the allocation in contravention of the definite predetermined allocation formula requirement of section 1.401-1(b)(1)(ii) of the regulations.

Accordingly, neither the withdrawal provision in this plan nor the one in the plan underlying Rev. Rul. 72-367 will cause either of the respective plans to fail to qualify under section 401(a) of the Code.

Rev. Rul. 72-367 is hereby modified to remove therefrom the premise that employee contributions are a part of the funds accumulated under the plan within the meaning of section 1.401-1(b)(1)(ii) of the regulations, and the premise that the willingness of a participant to forfeit geared employer contributions is evidence of financial need within the meaning of Rev. Rul. 56-693.

¹ Also released as Technical Information Release No. 1270, dated January 10, 1974.