Rev. Proc. 56-22

A profit-sharing plan is defined in section 39.165-1(a)(2) of Regulations 118, and also in section 29.165-1(a) of Regulations 111, both as amended by T. D. 6189, page 972 of this Bulletin, approved July 2, 1956, as follows:

A profit-sharing plan * * * is a plan established and maintained by an employer to provide for the participation in his profits, by his employees or their beneficiaries, based on a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as illness, disability, retirement, death, or severance of employment. * * *

This definition of a profit-sharing plan differs primarily from the definition set forth in such regulations prior to the aforesaid amendment, in that the following clause is omitted, "* * * based on a definite predetermined formula for determining the profits to be shared * * *."

The definition of a stock bonus plan is essentially the same under both Regulations 118 and Regulations 111 in that it "* * * is a plan established and maintained by an employer to provide benefits similar to that of a profit-sharing plan except that the contributions by the employer are not necessarily dependent upon profits and the benefits are distributable in the stock of the employer company."

Thus, there no longer is a requirement that a qualified profit-sharing or stock bonus plan contain a definite predetermined formula for determining the profits to be shared.

Accordingly, in the administration of the established procedure for issuing advance determination letters as to the qualification of pension, profit-sharing, and stock bonus plans, through the appropriate offices of District Directors of Internal Revenue, it will no longer be material whether or not a new profit-sharing or stock bonus plan contains a definite predetermined formula for determining the profits to be shared, provided, however, that such plan is established on a permanent and continuing basis. In cases of amendments of profit-sharing and stock bonus plans which contain such formulas, and with respect to which a favorable determination letter had been issued, if the amendment is designed only to remove the definite predetermined formula for determining the profits to be shared, the previously issued determination letter will apply to the plan as amended, provided, also, that such plans are established as permanent and continuing plans. Plans as so amended are not to be resubmitted for further determination and no new determination letter will be issued.

It should be noted, however, that a plan (whether or not it contains a definite predetermined formula for determining the profits to be shared with the employees) does not qualify under section 401(a) of the Internal Revenue Code of 1954 if the contributions to the plan are made at such times or in such amounts that the plan in operation discriminates in favor of officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. Section 39.165-1(a)(4) of Regulations 118 (similar in Regulations 111) also points out that "The law is concerned not so much with the form of any plan as it is with its effects in operation."

Thus, although a favorable determination letter may have been issued with respect to the qualification of a plan, if, in its operation, it results in discrimination in favor of employees who are officers, shareholders, supervisors, or highly compensated, it will fail of qualification.