Rev. Rul. 63-108

Advice has been requested whether the pension and profit-sharing plans of the M corporation meet the requirements for qualification under section 401(a) of the Internal Revenue Code of 1954.

The corporation was organized by X to handle contracts requiring his personal services. It hires people to assist X in a subordinate capacity in fulfilling contractual commitments and rehires some, but in all cases for a single contract term. X is the only employee who is engaged on a continuous basis regardless of the duration of contract periods. The corporation is paid pursuant to contract for the services rendered. It pays the compensation of assistants and all operating expenses and pays X a fixed annual salary.

The M corporation established a pension plan and also a profit-sharing plan covering all full-time employees who are engaged on a continuous basis. X is the only employee who meets the coverage requirements and, under the company's method of operations, none of the others will ever be eligible to participate. This is because the other employees, although they may be full-time employees when a contract term is for an extended period, are not hired on a continuous basis but rather on a single contract basis.

The pension plan is of the money-purchase type under which the M corporation contributes 10 percent of a participant's compensation. The profit-sharing plan provides for employer contributions equal to 15 percent of compensation of covered employees payable, however, only to the extent of available current or accumulated profits. Neither plan requires employee contributions, but a participant under the profit-sharing plan may make voluntary contributions to an extent not in excess of 10 percent of compensation.

The issue is whether in view of the situation the plans are in fact qualified even if it is assumed that they satisfy the specific numbered requirements of section 401(a) relating to plans. This ruling does not pass upon the question whether the instant plans meet these requirements.

Section 401(a) of the Code provides that a trust forming part of a stock bonus, pension, or profit-sharing plan of an employer `for the exclusive benefit of his employees or their beneficiaries' shall constitute a qualified trust under section 401 of the Code if the enumerated requirements in such section are met. Therefore, to qualify under section 401 of the Code, a pension or profit-sharing plan must not only meet the specific coverage and nondiscrimination requirements listed in section 401(a) of the Code but also must be a plan `for the exclusive benefit of his (the employer's) employees or their beneficiaries.'

Section 1.401-1(b)(3) of the Income Tax Regulations provides in part as follows:

The plan must benefit the employees in general, although it need not provide benefits for all of the employees. Among the employees to be benefited may be persons who are officers and shareholders. However, a plan is not for the exclusive benefit of employees in general if, by any device whatever, it discriminates either in eligibility requirements, contributions, or benefits in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or the highly compensated employees. See section 401(a)(3), (4), and (5). * * * All of the surrounding and attendant circumstances and the details of the plan will be indicative of whether it is a bona fide stock bonus, pension, or profit-sharing plan for the exclusive benefit of employees in general. The law is concerned not only with the form of a plan but also with its effects in operation. For example, section 401(a)(5) specifies certain provisions which of themselves are not discriminatory. However, this does not mean that a plan containing these provisions may not be discriminatory in actual operation.

The eligibility requirements for participation in the plans in the instant case, when viewed in the context of the corporation's method of hiring employees, are designed to preclude employees other than the sole stockholder from deriving any benefits from these plans. This result is substantiated by the effects of the plans in operation.

Accordingly, it is held under the facts of this case that the pension and profit-sharing plans of the M corporation have been established for the exclusive benefit of its sole stockholder and not for the benefit of employees in general and, therefore, do not qualify under section 401(a) of the Code.

See I.T. 4020, C.B. 1950-2, 61; Rev. Rul. 55-81, C.B. 1955-1, 392; and Rev. Rul. 61-157, Parts 2(e)(3) and 4(a), C.B. 1961-2, pages 71 and 80.