Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-79

1973-1 C.B. 194

Sec. 401

IRS Headnote

A profit-sharing plan that failed to meet the coverage requirements in one year may qualify in the following year when all the qualification requirements are met.

Full Text

Rev. Rul. 73-79

Advice has been requested whether an employees' profit-sharing trust met the requirements of section 401(a) of the Internal Revenue Code of 1954 for the year 1971.

A corporation maintained an employees' profit-sharing plan and trust that covered all salaried employees. For many years, the plan met the applicable requirements of section 401(a) of the Code, including the requirements of section 401(a)(3) with respect to coverage. However, a number of participants terminated their employment in January 1970. These terminations resulted in participation in the plan, for the 1970 calendar taxable year of the employer and the trust, being limited to two of the employer's ten employees, both of whom were shareholders. Consequently, the plan did not meet the coverage requirements of section 401(a)(3) of the Code for that year. See Rev. Rul. 66-13, 1966-1 C.B. 73.

In 1971, the employer amended the plan to provide for the participation of all employees irrespective of whether they were salaried employees. That amendment also provided that contributions made by the employer in 1970 and the earnings thereon would be reallocated to all participants in the same manner allocations would have been made if plan participation had not been limited to salaried employees during that year. Section 401(a) of the Code provides for the qualification of an employees' profit-sharing trust that meets the requirements of that section. Section 401(a)(3) of the Code requires that the plan benefit either (1) a percentage of the employees, as described in section 401(a)(3)(A), or (2) such employees as qualify under a classification set up by the employer and determined not to be discriminatory in favor of employees who are officers, shareholders, supervisors, or highly compensated. Section 401(a)(4) of the Code requires that contributions or benefits provided under the plan must not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

In general, a qualified status must be maintained throughout the entire taxable year of the trust in order for the trust to obtain any exemption for such year. See section 1.401-1(c) of the Income Tax Regulations. However, a plan will satisfy the coverage requirements of section 401(a)(3) of the Code during the whole of any taxable year of the plan if it satisfies those requirements on at least one day in each quarter of the taxable year. See section 401(a)(6) of the Code and section 1.401-3(g) of the regulations. Thus, it can be seen that a plan must satisfy the requirements of section 401(a)(3) on a year-to-year basis.

Revenue Ruling 72-368, 1972-2 C.B. 220, holds that the failure of a pension, profit-sharing or stock bonus trust to meet the requirements of section 401(a) of the Code in the year it is established does not, of itself, prevent the trust from qualifying in some future year when it does meet the requirements of that section. Revenue Ruling 72-368 also states that this is true even though contributions made to the trust in the year it is established remain in the trust in the future year.

In this case, as in Revenue Ruling 72-368, the failure of the trust to meet the requirements of section 401(a) of the Code in an earlier year does not, of itself, prevent the trust from qualifying under section 401(a) in the subsequent year when it does meet the requirements of that section. However, the trust must meet all the requirements for qualification in the subsequent year, including those of section 401(a)(3) of the Code, relating to coverage, as well as those of section 401(a)(4), relating to discrimination in contributions or benefits.

In this case, the coverage requirements of section 401(a)(3) of the Code were met for the year 1971. Furthermore, the amounts allocated to participants' accounts during the year in which the coverage requirements were not met have been reallocated, in part to the new participants, in a manner that is not discriminatory under section 401(a)(4) of the Code.

Accordingly, it is held that the employees' profit-sharing trust in this case met the requirements of section 401(a) of the Code for the year 1971.