Rev. Rul. 80-16

Advice has been requested whether a profit-sharing plan includes a "qualified cash or deferred arrangement" within the meaning of section 401(k) of the Internal Revenue Code, under the circumstances described below.

In 1973 the M corporation established a profit-sharing plan and trust that qualified under section 401(a) of the Code. The portion of the company's profits to be shared is allocated among participants in proportion to their annual compensation. Prior to the close of the calendar year, each eligible employee is required to make an irrevocable election whether to take the employee's share of the current year's profits (1) in cash, (2) at a future date under the terms of the profit-sharing plan, or (3) one-half in cash and one-half deferred. After the close of the year, a cash payment is made to all employee participants who elect to receive cash, and the balance is contributed to the trust for the benefit of employee participants who elect to have their shares deferred.

The M corporation amended the plan effective for 1980. Under the plan, as amended, amounts accumulated by the trust which are attributable to or derived from employer contributions made for plan years beginning after December 31, 1979, and which are attributable to the employee's election described above are held in accounts subject to the restrictions on distributions and forfeitability required by section 401(k)(2)(B) and (C) of the Code. However, the amended plan provides that amounts attributable to contributions made for plan years beginning before January 1, 1980, are maintained in separate accounts which are not subject to the restrictions of section 401(k)(2)(B) and (C).

Section 401(k) of the Code, effective for plan years beginning after December 31, 1979, provides certain special rules for a qualified profit-sharing plan that contains a "qualified cash or deferred arrangement". To be a "qualified cash or deferred arrangement" under section 401(k)(2), such an arrangement must, in accordance with section 401(k)(2)(A), provide an election for covered employees to have the employer make payments as contributions either to the trust or directly to the employee in cash, and contain the restrictions on distributions and forfeitability enumerated in section 401(k)(2)(B) and (C).

For plan years beginning after 1979, a profit-sharing plan and trust containing a cash or deferred arrangement will not be required to impose the restrictions of section 401(k)(2)(B) and (C) of the Code on any participant's separate account that is attributable to plan years beginning before 1980 in order to satisfy the requirements of section 401(k).

In this case the plan contains an arrangement that satisfies the requirements of section 401(k)(2)(A). Further, it satisfies section 401(k)(2)(B) and (C) because the amounts attributable to pre-1980 contributions which are not subject to the restrictions of section 401(k)(2)(B) and (C) are held in separate accounts.

Accordingly, this profit-sharing plan includes a "qualified cash or deferred arrangement" within the meaning of section 401(k)(2) of the Code.

Rev. Rul. 56-497, 1956-2 C.B. 284, held that a cash or deferred profit-sharing arrangement could qualify as a profit-sharing trust under section 401(a) of the Code. Rev. Rul. 63-180, 1963-2 C.B. 189, and Rev. Rul. 68-89, 1968-1 C.B. 402 provided guidelines as to the income tax and estate tax treatment of cash or deferred profit-sharing plans.

In view of the enactment of section 401(k) of the Code, Rev. Rul. 56-497, Rev. Rul. 63-180, and Rev. Rul. 68-89 are obsoleted for plan years beginning after December 31, 1979.

¹ Also released as News Release, IR-2191, dated December 28, 1979.