Rev. Rul. 89-52

1989-1 C.B. 110, 1989-15 I.R.B. 8.

                       Internal Revenue Service

                                 Revenue Ruling

        QUALIFICATION; PARTICIPANTS RIGHT TO EXERCISE CONTROL OF ASSETS

                           Published: April 10, 1989

Section 401. - Qualified Pension, Profit-Sharing, and Stock Bonus Plans, 26 CFR 1.401-1: Qualified pension, profit-sharing and stock bonus plans.

  Qualification; participants right to exercise control of assets. A plan does not qualify under section 401(a) of the Code where plan participants have the right to acquire, hold and dispose of an amount attributable to their account balances in the plan.

ISSUE

  Did a written instrument create a qualified trust under section 401(a) of the Internal Revenue Code if participants have the right to acquire, hold and dispose of amounts attributable to their account balances in the plan?

FACTS

  An employer adopted a written instrument intended to be a trust forming part of a qualified defined contribution plan. The instrument permits a participant to hold an amount equal to his account balance in the plan. Thus, a participant may invest or reinvest the amounts as the participant determines is appropriate. However, the participant must segregate such investments from such funds and periodically account for them to the trustee named in the instrument. Furthermore, the participant must return the investments to the trustee upon separation from service to be used to provide retirement benefits for the participant.

LAW AND ANALYSIS

  Section 401(a) of the Code provides that a trust created or organized in the United States and forming part of a stock bonus, pension or profit-sharing plan of an employer will constitute a qualified trust if certain conditions are met.

  Section 1.401-1(a)(3) of the Income Tax Regulations provides that a qualified trust under section 401(a) of the Code must be created or organized in the United States and must be maintained at all times as a domestic trust in the United States.

  The term 'trust' is not a term of art or of fixed content, and its meaning for the purposes of employee trusts under section 401(a) of the Code is not necessarily the same as under state law or as under other sections of the Internal Revenue Code. Tavannes Watch Co. v. Commissioner, 176 F.2d 211, 215 (2d Cir. 1949).

  Generally, for a trust to be qualified under section 401(a) of the Code, the trust must be a valid trust under the law of the jurisdiction in which the trust is located. See section 1.401-1(a)(3)(i) of the regulations. However, even if the trust is valid under local law, the arrangement may be required to satisfy certain other requirements in order to be considered a trust for purposes of section 401(a). For example, Rev. Rul. 69-231, 1969-1 C.B. 118, holds that a qualified trust under section 401(a) of the Code must be in writing, even though oral trusts are valid in some states.

  In Rev. Rul. 71-437, 1971-2 C.B. 185, the Service considered the qualification of a noncontributory money purchase pension plan that permitted the trustee to make two year loans to plan participants secured by the account balance. The revenue ruling concluded that the plan was not qualified because there was 'a tacit understanding between the parties that collection is not intended.' Therefore, these so-called 'loans' were effectively distributions that violated the requirements for qualification under section 401(a) of the Code.

  Similarly, the participants may not have rights which effectively eliminate the trust arrangement required for qualification under section 401(a) of the Code. While a qualified trust may permit a participant to elect how amounts attributable to the participant's account-balance will be invested (see Rev. Rul. 55-354, 1955-1 C.B. 396), it may not allow the participant to have the right to acquire, hold and dispose of amounts attributable to the participant's account balance at will. See also Rev. Rul. 60-323, 1960-2 C.B. 148, modifying Rev. Rul. 56-693, 1956-2 C.B. 282. To give the participants such rights effectively eliminates the trust arrangement.

HOLDING

  The written instrument described in this case did not create a qualified trust under section 401(a) of the Code because participants have the right to acquire, hold and dispose of an amount attributable to their account balances in the plan.

DRAFTING INFORMATION

  The principal author of this notice is Jane Kesten of the Employee Plans Technical and Actuarial Division. For further information regarding this notice, please contact the Employee Plans Technical and Actuarial telephone assistance service between the hours of 1:30 p.m. and 4:00 p.m. Eastern Time, Monday through Friday on (202) 566-6783/6784 (not a toll-free number). The telephone number of Ms. Kesten is (202) 343-0729 (also not a toll-free call).

Rev. Rul. 89-52, 1989-1 C.B. 110, 1989-15 I.R.B. 8.