Rev. Rul. 70-578

Advice has been requested whether each of the two plans described below may meet the requirements for qualification under section 401(a) of the Code in the light of Revenue Ruling 69-502, C.B. 1969-2, 89.

For many years an employer maintained a qualified profit-sharing plan that provided for contributions out of profits on behalf of all employees. In 1969, the employer established a pension plan, intended to qualify under section 401(a) of the Code, covering the same employees as the profit-sharing plan. The pension plan provides that each participant thereunder will receive a monthly retirement benefit, commencing at age 65, equal to 50 percent of his monthly career average compensation, reduced, however, by an amount of deferred monthly retirement benefit that is actuarially equivalent to the amount standing to the participant's credit under the profit-sharing plan at the time the pension plan is established.

The profit-sharing plan continued in effect after the pension plan was established and it is expected that the employer will continue to make annual contributions out of profits. However, contributions made under the profit-sharing plan after the pension plan was established and trust earnings credited after that time will not reduce or otherwise affect the benefits to be received under the pension plan.

In Revenue Ruling 69-502, the pension benefits were reduced by the benefits purchasable, at the time of retirement, with the contributions made for the participant under a profit-sharing plan being maintained for the same employees as the pension plan. That Revenue Ruling holds that the pension plan fails to qualify because the benefits to be provided thereunder are not definitely determinable and that the profit-sharing plan fails to qualify because the funds held thereunder will be used to relieve the employer from contributing to the pension plan.

The plans in this case are distinguishable from those described in Revenue Ruling 69-502. Although the two plans in this case are maintained concurrently for the same employees, contributions made under the profit-sharing plan during the period that both plans are maintained and trust earnings credited during that period will not reduce, or otherwise affect, the employer's liability to make contributions under the pension plan. The profit-sharing funds do not relieve the employer from making contributions to the pension plan because, from the inception of the pension plan, there was no possibility that the employer might have to make contributions to the pension plan with respect to the reduction. Furthermore, the amount of this reduction in the pension benefit was known at the time the pension plan went into effect and, thus, the employer's obligation to provide pension benefits was definitely determinable.

Accordingly, it is held that the plans in this case will not fail to qualify merely because the monthly pension benefit that would otherwise have been provided under the pension plan is reduced by an amount of deferred monthly retirement benefit that is actuarially equivalent to the amount standing to a participant's credit under the profit-sharing plan at the time the pension plan is established.