Rev. Rul. 69-295

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in PS No. 37, dated October 7, 1944, relating to the use of funds held by a profit-sharing trust to meet the costs of a qualified pension plan.

An employer maintained a qualified profit-sharing plan and a qualified pension plan covering the same employees. Contributions to the pension plan were suspended. The profit-sharing plan was then amended to permit an employee to authorize the transfer, to the trust forming part of the pension plan, of any part of his vested interest under the profit-sharing plan necessary to make up a deficiency in his benefits under the pension plan.

Section 1.401-1(b)(3) of the Income Tax Regulations provides that a plan must benefit the employees in general. A profit-sharing or stock bonus plan is not for the exclusive benefit of employees in general if the funds therein may be used to relieve the employer from contributing to a pension plan operating concurrently and covering the same employees. All of the surrounding and attendant circumstances and the details of the plan will be indicative of whether it is a bona fide plan for the exclusive benefit of employees in general.

A profit-sharing or stock bonus plan that permits the funds therein to be used to meet the costs of a pension or annuity plan operated concurrently and covering the same employees, if and when the employer suspends contributions to the latter plan, is generally called a "feeder" plan. As provided in section 1.401-1(b)(3) of the regulations, such a plan is not for the exclusive benefit of the employees or their beneficiaries because it relieves the employer from contributing to the pension or annuity plan.

A qualified profit-sharing plan may, however, permit the withdrawal of funds held therein, under appropriate circumstances, prior to the severance of the employee's employment or the termination of the plan. See Rev. Rul. 56-693, C.B. 1956-2, 282, as modified by Rev. Rul. 60-323, C.B. 1960-2, 148. Furthermore, a qualified pension plan may permit employees to make contributions thereunder. See Rev. Rul. 66-205, C.B. 1966-2, 119. Therefore, an employee who has a vested right under a profit-sharing plan may, if the plan so provides, authorize a transfer of all or a part of his vested interest in order to make up a deficiency in the employer's contribution under the pension or annuity plan. The effect of such a transfer is the operation of a contributory pension plan in that the contributions are tantamount to individual employee contributions under the pension plan.

Accordingly, it is held that the qualification of the profit-sharing plan in this case was not affected by the amendment to permit funds held thereunder to be transferred to the qualified pension plan. However, any funds transferred pursuant to the amendment will be includible in the employees' gross income to the same extent as if such funds had been distributed directly to the employees and will be treated as employee contributions under the pension plan.

PS No. 37 is hereby superseded since the position stated therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.