Rev. Rul. 71-503

Advice has been requested whether a profit-sharing plan meets the requirements of section 401(a)(4) of the Internal Revenue Code of 1954 under the circumstances described below.

A corporation established a trusteed fixed benefit pension plan for the benefit of its hourly-rated employees pursuant to a collective bargaining agreement. Under the plan, the employer is required to contribute for each participant five percent of the participant's annual compensation. The plan provides that the contributions made on behalf of a participant will not vest until attainment of normal retirement age 65. The highest paid pension plan participant earns $12,000 a year. The corporation has a history of high turnover of its hourly-rated employees.

The employer also established a profit-sharing plan for the benefit of its salaried employees, each of whom earns over $25,000 a year. Under this plan the employer is required to contribute for each participant, out of profits, five percent of his annual compensation. This plan provides for immediate vesting of all contributions.

Section 401(a)(4) of the Code provides that contributions or benefits under a qualified plan must not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

Revenue Ruling 66-15, C.B. 1966-1, 83, holds that a profit-sharing plan for employees in whose favor discrimination is prohibited will not qualify merely because the employer makes contributions to a pension plan for hourly rated employees if the contributions, or the benefits to be derived from the contributions, to the profit-sharing plan are discriminatory when compared to the contributions, or the benefits to be derived from the contributions, to the pension plan.

Revenue Ruling 70-183, C.B. 1970-1, 103, holds that unlike plans (a pension plan and a profit-sharing plan, as in this case) will be considered comparable, and the plan for the highly paid employees nondiscriminatory within the meaning of section 401(a)(4) of the Code, if it can be shown that the benefits or the contributions are nondiscriminatory.

Contributions that are nonforfeitable when made are more beneficial to participants than contributions in which the participant's interest will be subject to forfeiture over an extended period of time. This is also true of the expected benefits in such cases, particularly where, as in this case, there is a high rate of turnover. See Revenue Ruling 71-150, C.B. 1971-1, 123, and Revenue Ruling 65-266, C.B. 1965-2, 138, which indicate that providing more favorable vesting for participants in whose favor discrimination is prohibited than for other employees results in the discrimination prohibited by section 401(a)(4) of the Code.

Accordingly, it is held that the profit-sharing plan does not meet the requirements of section 401(a)(4) of the Code.