Rev. Rul. 60-2

Advice has been requested as to factors which should be considered in applying Part 5(b)(4) of Revenue Ruling 57-163, C. B. 1957-1, 128, at 147, relating to the discontinuance or suspension of employer contributions, in the case of a profit-sharing plan with an indefinite employer contribution formula.

Under the provisions of Part 5(b)(4) of Revenue Ruling 57-163, a qualified profit-sharing plan must provide that upon discontinuance of employer contributions to the plan, the rights of employees in the amounts contributed must vest. A discontinuance of contributions is in effect a termination of a qualified plan, except that the formal steps to accomplish that result have not been taken. On the other hand, a suspension is a temporary cessation of contributions which may or may not ripen into a discontinuance.

In determining whether a suspension constitutes a discontinuance, whether or not the plan contains a definite employer contribution formula, there should be taken into consideration all factors of whatever character or degree, in addition to the actual provisions of the plan itself, that may be recognized as properly bearing upon, or are of assistance in determining answers to, the following questions: (1) whether the employer may merely be calling an actual discontinuance of contributions a suspension of such contributions in order to avoid the requirement of full vesting as in the case of a discontinuance, or for any other reason; (2) whether contributions are recurring and substantial; (3) whether there is any reasonable probability that the lack of contributions will continue indefinitely; and (4) whether, as of the end of any year for which no substantial contribution has been made, the lack of full vesting for employees whose services have already terminated has produced the prohibited discrimination in favor of continuing participants.

In any case in which a suspension may properly be considered a discontinuance, the discontinuance should be recognized as becoming effective not later than the closing day of the year following the last year for which a substantial contribution was made.

Advice has also been requested as to the acceptability of provisions which provide for vesting of participants' interests in a profit-sharing plan, in the event of suspension of employer contributions, under a plan containing the following conditions: (a) The board of directors shall determine the amount of each annual employer contribution to the plan;

(b) If such board shall fail to make a determination, a contribution shall be made by the employer in accordance with a schedule of percentages which vary in proportion to the net-profit bracket into which the employer's profits fall for the year;

(c) Employer contributions shall be considered suspended if at any time the aggregate of all contributions previously made drops below an amount equal to three percent of the aggregate of the covered compensation of participants since the inception of the plan; and

(d) If a suspension, as defined in (c), is found to exist and the board fails to authorize a contribution sufficient to satisfy the minimum limitation of three percent of covered compensation, then participants' accounts are to become fully vested.

The foregoing provisions raise the question whether the deferment of full vesting in a year during which (a) the employer has profits but makes no contribution and (b) the total contributions to date are at least equal to the three-percent limitation described above, will be acceptable within the purview of Part 5(b)(4) of Revenue Ruling 57-163.

In determining whether a suspension of contributions has ripened into a discontinuance for the purpose of requiring full vesting of participants' accounts, a conclusion can not be based solely on the relationship between aggregate employer contributions and aggregate covered compensation during the prior operation of the plan.

Under the proposed provisions here in question, vesting would occur only when aggregate contributions drop below an amount equal to three percent of aggregate covered compensation. Such condition might not arise for a period of years after contributions have actually been suspended if, for example, contributions made prior to the suspension had been made at a substantially higher rate.

Consequently, it is concluded that provisions in a plan which defer the full vesting of participants' accounts, during a period in which employer contributions are suspended, until the aggregate of all employer contributions falls below three percent of the total compensation paid participants since the inception of the plan, will not meet the requirements of section 401(a) of the Internal Revenue Code of 1954 or Part 5(b)(4) of Revenue Ruling 57-163.