Rev. Rul. 71-540

Advice has been requested whether a profit-sharing plan that grants discretion to the trustee to determine the option under which distributions will be made results in the discrimination prohibited by section 401(a)(4) of the Internal Revenue Code of 1954.

The plan provides that when a participant reaches age 65 his entire interest thereunder shall be distributed to him in the form of (1) an immediate lump-sum payment, or (2) ten substantially equal annual installments. If the distribution is made in ten installments, the aggregate of the installment payments will equal the amount that would otherwise have been paid as a lump-sum plus the actual increments, or minus the losses, on the balance to the participant's credit from the time he reaches age 65 until all installments have been paid. For this purpose, the plan defines "actual increments" to mean ordinary income on investments (including dividends and interest), net gains from sale of capital assets, and net unrealized appreciation on trust investments. The plan also defines "losses" to mean net losses from sale of capital assets and net unrealized depreciation on trust investments.

In all cases, the determination of which mode of distribution shall be selected is within the sole discretion of the trustee of the trust forming part of the profit-sharing plan, subject only to the employee's prior designation of investments if installment payments are selected.

Section 401(a)(4) of the Code provides that a plan will not qualify under section 401 unless there is no discrimination in contributions or benefits in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Since a qualified profit-sharing plan is required to provide for distributions in accordance with amounts stated or ascertainable and credited to participants, all funds under such a plan must be allocated to participants in accordance with a definite formula. Furthermore, such plans must provide for a valuation of trust investments at least once a year, and the respective accounts of the participants must be adjusted to reflect their share of trust earnings, unrealized changes in the value of trust investments, and losses realized on the sale of trust assets. See Rev. Rul. 70-125, C.B. 1970-1, 87.

Discretion may be provided for in a profit-sharing plan permitting the trustee to determine whether lump-sum or periodic distributions are to be made in particular cases. The amounts distributable must be fully vested in the employee and, if periodic distributions are to be made to some as against lump-sum payments to others, the distributions must reflect the actual increments and losses on the participant's account.

Accordingly, it is held that this profit-sharing plan does not result in the discrimination prohibited by section 401(a)(4) of the Code merely because it grants discretion to the trustee to determine the option under which distributions are to be made.