Rev. Rul. 69-570

Advice has been requested whether a profit-sharing plan adopted by an affiliated group of corporations may qualify under section 401(a) of the Internal Revenue Code of 1954, if it provides for allocating forfeitures under the method described below.

A corporation that has four subsidiaries established a profit-sharing plan and related trust intended to meet the requirements of section 401(a) of the Code. Each subsidiary adopted the plan. All regular employees of the corporations with at least one year of service are covered by the plan. The five corporations are an affiliated group within the purview of section 1504 of the Code and file a consolidated income tax return. The plan's contribution formula requires a contribution of 25 percent of the consolidated net profits, not to exceed ten percent of all the participants' basic compensation. The plan also provides for graduated vesting of participants' interests and requires that amounts forfeited as the result of a termination of employment before a participant is fully vested be reallocated to the remaining participants on the basis of their account balances, regardless of whether the participants benefiting therefrom are employed by the corporation that employed the terminated employees.

Section 401(a)(2) of the Code provides that a plan will not qualify unless under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to the employer's 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 the employees or their beneficiaries.

An employees' trust may be qualified under section 401(a) of the Code and exempt under section 501(a) even though several corporations make contributions thereto. However, the provisions relating to qualification under section 401(a) of the Code, as well as the provisions relating to deductions under section 404(a), are applicable to each employer separately. See Rev. Rul. 69-250, C.B. 1969-1, 116. Since amounts contributed for, and allocated to, employees of one employer may (in the event of their forfeiture) be used for the benefit of the employees of another employer, the plan and trust in this case do not meet the requirement, with respect to each employer, that the corpus or income not be used for purposes other than for the exclusive benefit of his employees.

Accordingly, it is held that this profit-sharing plan does not qualify under section 401(a) of the Code.