Rev. Rul. 68-654
Rev. Rul. 68-654; 1968-2 C.B. 179
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
Superseded by Rev. Rul. 84-155
The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3686, C.B. 1944, 326, relating to whether a profit-sharing plan that contains a years-of-service formula for the distribution of contributions meets the requirements of section 401(a)(4) of the Internal Revenue Code of 1954 and section 1.401-4 of the Income Tax Regulations.
The profit-sharing plan of an employer provides for participation of all employees who have completed two full years of service with the employer. Out of a total of 369 employees, 241 are eligible to participate in the plan. Under the formula for determining the profits of the company to be shared, $200,000 was paid into the fund for the calendar year 1967. The allocation formula provides for an allocation on the basis of each participant's salary, weighted by his years of service, over total weighted salary of all participants. The allocation is shown by the following tabulation:
Num- Mean
ber of Total years
Group Salary range Median em- salary /*/ of
ploy- service
ees
(1) (2) (3) (4) (5) (6)
1 $27,000-53,000 $40,000 1 $40,000 30
2 13,000-27,000 20,000 5 100,000 25
3 7,000-13,000 10,000 50 500,000 11
4 5,000- 7,000 6,000 60 360,000 5
5 3,000- 5,000 4,000 125 500,000 2
Totals.............................. 241 1,500,000 --
(continued below)
Allocation Group Average
factor Share individual Percentage
(Weighed in Con- share of of salary
Group Salary) tribution contribution
(1) (7) (8) (9) (10)
1 $1,200,000 $20,000.00 $20,000.00 50.0
2 2,500,000 41,666.66 8,333.33 41.66
3 5,500,000 91,666.66 1,333.33 18.33
4 1,800,000 30,000.00 500.00 8.33
5 1,000,000 16,666.66 133.33 3.33
Totals.... $12,000,000 $200,000.00 -------- ----
/*/ Salary at median point multiplied by number of employees.
Section 401(a)(4) of the Code provides that a trust forming part of a profit-sharing plan of an employer will not constitute a qualified trust if the contributions or benefits provided under the plan discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. However, under section 1.401-4(A)(2)(iii) of the regulations, variations in contributions or benefits are permitted so long as the plan, viewed as a whole for the benefit of the employees in general, does not discriminate in favor of the employees enumerated above. Thus, contributions or benefits which vary by reason of an allocation formula that takes into consideration years of service, or other factors, are not prohibited unless such formula results in prohibited discrimination.
In this case, discrimination is present since the employees in the lowest salary group are credited with an amount that is equal to 3.33 percent of salary, and the percentages increase for each higher salary group until the highest group is reached in which 50 percent is provided for a single participant.
Accordingly, under the facts stated, the profit-sharing plan of the employer, containing a years-of-service factor in the formula for the allocation of contributions, does not meet the requirements of section 401(a)(4) of the Code and section 1.401-4 of the regulations.
See Revenue Ruling 68-653, page 177, and Revenue Ruling 678-652, page 176, which also involve profit-sharing plans with allocation formulas that take into consideration years of service.
I.T. 3686 is hereby superseded, since the position stated therein is restated under current law in this Revenue Ruling.
1 Prepared pursuant to Revenue Procedure 67-6, C.B. 1967-1 576.
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
