Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-36

1969-1 C.B. 128

Sec. 401

IRS Headnote

An employees' retirement plan adopted by a new corporation does not qualify under section 401(a) of the Code if it provides credit for services performed by an employee while he was the sole proprietor of a predecessor business.

Full Text

Rev. Rul. 69-36

Advice has been requested whether an employees' retirement plan established by a new corporation may meet the qualification requirements of section 401(a) of the Internal Revenue Code of 1954, where it provides credit for service performed by an employee while he was the sole proprietor of a predecessor business.

A sole proprietorship established an employees' retirement plan that met the requirements of section 401 of the Code. The plan required two years of service for participation and provided benefits for the sole proprietor and all the common-law employees.

Subsequently, the proprietorship was incorporated. The former sole proprietor and his common-law employees became employees of the new corporation. The retirement plan established by the proprietorship was then adopted, with appropriate modifications, by the corporation. The corporate plan continued the eligibility, contribution, and vesting provisions that were in the self-employed plan. Credit toward meeting the two-year-service requirement was specifically given for services performed for the predecessor business, the sole proprietorship.

Section 1.401-10(b)(3) of the Income Tax Regulations provides that the term "employee" does not include a self-employed individual when the term "common law" employee is used or when the context otherwise requires that the term "employee" does not include a self-employed individual.

Part 2(j)(1) of Revenue Ruling 65-178, C.B. 1965-2, 94, provides that, except to the limited extent applicable to the participation of self-employed individuals in plans of an unincorporated employer, after December 31, 1962, partners are not employees and therefore are not eligible to participate in a qualified plan. Neither are they to be credited for service as partners prior to becoming employees in a successor corporation, either for prior service benefits or for meeting the eligibility requirements. The reasoning expressed in  Revenue Ruling 65-178 is equally applicable where the self-employed individual was the sole proprietor, rather than a partner, of the predecessor business.

Accordingly, the plan adopted by the corporation in this case does not meet the qualification requirements of section 401(a) of the Code.