Rev. Rul. 69-35

Advice has been requested whether the profit-sharing plan adopted by both a parent corporation and its wholly-owned subsidiary may qualify under section 401(a) of the Internal Revenue Code of 1954 under the circumstances described below. In resolving this question, the specific issues are (1) whether the plan satisfies the requirement, in section 401(a)(1) of the Code, that contributions under a qualified plan be made by the employer, the employees, or both, or by another employer who is entitled to deduct his contributions under section 404(a)(3)(B) of the Code, and (2) whether the provision in the plan relating to allocation of contributions will permit a prohibited diversion within the meaning of section 401(a)(2) of the Code.

The parent corporation and its wholly-owned subsidiary each adopted a common trusteed profit-sharing plan. The plan provides that the amount of the contributions of each corporation will be determined annually by its board of directors. The plan also provides that the contributions so determined will first be aggregated and then be allocated to the accounts of the individual plan participants in the same proportion that each participant's compensation bears to the total compensation of all participating employees of both corporations. Thus, it is possible that part of the contribution made by one corporation will be allocated to the accounts of the employees of the other corporation. However, once the funds are allocated to the employees' individual accounts they may not be reallocated to the other employees' accounts.

Section 401(a)(1) 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 if, among other conditions, contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contribution under section 404(a)(3)(B).

Revenue Ruling 63-46, C.B. 1963-1, 85, which deals with the qualification of a pension plan funded largely by the transfer to the trust of shares of stock constituting the corpus of a fund created by a third party, states that section 401(a)(1) of the Code does not require that contributions be made only by the employer or by the employees. Thus, the immediate source of the contribution to the pension trust will not adversely affect the qualified status of the plan and trust, even though such contribution was made by third parties. See Rev. Rul. 68-223, C.B. 1968-1, 154.

Section 401(a)(2) of the Code requires that, in the case of a qualified trust, the trust instrument must make it impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be used for, or diverted to, purposes other than for the exclusive benefit of an employer's employees or their beneficiaries.

In this case, the plan provides for each corporation to make a separate contribution to the trust. The portion of each employer's contribution that is made for the exclusive benefit of its own employees is determined at the time the allocation is made to the individual accounts of plan participants. However, there is no diversion of trust assets since, under the facts stated, the funds, once allocated to the employees' individual accounts, may not be reallocated to other employees' accounts.

Accordingly, the plan in this case will not fail to qualify under section 401(a) of the Code merely because it provides that contributions made by one employer may be allocated to the accounts of the other employer's employees. However, amounts contributed under this plan by the corporation that is not the employer of those benefiting from the contribution are not deductible under section 404 of the Code unless they constitute "make-up" contributions within the purview of section 404(a)(3)(B), and then only to the extent therein provided.