Rev. Rul. 70-371

Advice has been requested whether each of the two plans described below meet the requirements for qualification (one as a pension plan, the other as a profit-sharing plan) under section 401(a) of the Internal Revenue Code of 1954.

A corporation established a plan, intended to qualify as a money purchase pension plan under section 401(a) of the Code, providing for annual contributions of 10 percent of compensation for all employees. The corporation also established a second plan, intended to qualify as a profit-sharing plan under section 401(a) of the Code, under which contributions are to be made out of profits for the benefit of all employees. The second plan requires the employer to make annual contributions equal to the lesser of 12 percent of the employer's net earnings or 20 percent of the participants' compensation reduced, however, by the amount of contributions made under the pension plan.

The specific question is whether, in light of Revenue Ruling 69-502, C.B. 1969-2, 89, the provision for offsetting contributions under the second plan by amounts contributed under the first plan prevents either plan from qualifying.

In Revenue Ruling 69-502, the pension benefits were reduced by the benefits purchasable with the contributions made for the participant under the profit-sharing plan. That Revenue Ruling holds that the pension plan fails to qualify because the benefits to be provided thereunder are not definitely determinable and 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 since, in this case, the offset is in the profit-sharing plan rather than in the pension plan. Contributions under the pension plan are fixed, without being geared to profits, as section 1.401-1(b)(1)(i) of the regulations requires for money purchase pension plans, and contributions under the profit-sharing plan will not reduce the employer's contributions under the pension plan.

Accordingly, it is held that the provision for offsetting contributions under the profit-sharing plan by amounts contributed under the pension plan does not prevent either plan from qualifying.