A corporation that participates in a joint venture is required to take employees of the joint venture into account in determining whether the corporation's profit-sharing_plan_meets the requirements of section 401 (a) of the Code.

26 CFR 1.401-4: Discrimination as to contributions or benefits.

Rev. Rul. 68-370

Advice has been requested whether a corporation that participates in a joint venture is required to take employees of the joint venture into account in determining whether the corporation's profit-sharing plan meets the requirements of section 401 (a) of the Internal Revenue Code of 1954.

M corporation and X, an unrelated corporation, are general contractors engaged in the construction business. They entered into a joint venture for the performance of construction contracts awarded to the joint venture directly or assigned to it by M or X. The joint venture has its own bank account and its own employees. None of these employees has ever, at any time, performed services directly for M or X. The joint venture pays the taxes imposed on its employees' wages by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act and withholds income tax on their wages.

M established a noncontributory profit-sharing plan for its employees under which it agreed to contribute, annually, ten percent of its net earnings.

To qualify under section 401 (a) of the Code a profit-sharing plan must meet the specific coverage and nondiscrimination requirements set forth therein.

The joint venture of the two corporations is a partnership within the meaning of sections 761 (a) and 7701 (a) (2) of the Code. A partnership is not itself a taxable entity for Federal income tax purposes but rather is merely the aggregate of the constituent partners. See sections 701 through 703 of the Code and the Income Tax Regulations thereunder. Once the requisite employment relationship is established between the partnership and the individuals who are rendering services to the partnership, such relationship is also established between each corporate partner and the employees for purposes of sections 401 through 404 of the Code. This conclusion does not encroach upon the general view that employment for pension trust, profit-sharing, and stock bonus plan purposes is the same as employment for such public programs as the Federal Unemployment Tax Act, since the essential employment relationship must still exist between the partnership and the individual rendering services. The sole effect of such conclusion is to attribute to each partner the employment relationship that exists between the partnership and the individuals. Compare Revenue Ruling 60-379, C.B. 1960-2, 156, which involves employees of a corporation who were temporarily transferred to the corporation's joint venture.

Since the employees of the joint venture in this case are considered employees of M, it is held that such employees, and M's distributive share of the compensation paid to them, must be taken into account in determining whether M's profit-sharing plan meets the coverage and nondiscrimination requirements set forth in section 401(a) of the Code.

Life insurance protection purchased under a qualified plan is considered to have been paid first from employer contributions and trust income, and is includible in employees' gross income, unless the plan provides that employees' contributions are first applied; PS No. 32 superseded.

26 CFR 1.401-4: Discrimination as to contributions or benefits.

(Also Section 72; 1.72-16.)

Rev. Rul. 68-390

Advice has been requested concerning the treatment of the net term cost of life insurance protection purchased under a qualified plan that does not specify whether employer or employee contributions are being used to purchase the insurance.

An employer established a contributory employees' pension plan meeting the requirements for qualification under section 401(a) of the Internal Revenue Code of 1954. The plan, which is funded by ordinary life insurance contracts plus an auxiliary fund, does not specify whether employee contributions are to be applied to the purcase of life insurance protection, to fund retirement benefits, or partly to each.

Section 401(a) (4) of the Code provides that the contributions or benefits provided under a qualified plan must not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Section 72(m) (3) of the Code provides that any contribution to a qualified plan, which is allowed as a deduction under section 404, and any income of a related exempt trust, which is determined to have been applied to purchase life insurance protection, is includible in the gross income of the participant for the taxable year when so applied. PS No. 32, dated September 20, 1944, provides that a pension plan, which requires contributions by participating employees equal to five percent of their respective salaries and provides benefits through the purchase of individual annuity contracts with a life insurance element, may qualify under the provisions of section 165 (a) of the Internal Revenue Code of 1939 (now section 401(a) of the 1954 Code), even though it provides that the contributions of the respective participants shall be first applied to the cost of the life insurance element and the balance to the cost of the annuity feature. The application of the participants' contributions first to the cost of the life insurance element will not generally be considered discriminatory, since such application normally does not affect the total employer contribution to the plan for the benefit of such participants.

Thus, PS No. 32 indicates that effect will be given to the terms of a qualified plan in determining whether employee contributions are used to provide life insurance protection. On the other hand, there is no basis for holding that employee contributions are used to purchase life insurance protection unless the plan so provides.

Revenue Ruling 55-747, C.B. 1955-2, 228, as amplified by Revenue Ruling 66-110, C.B. 1966-1, 12, states that the rates set forth therein may be used to determine the cost of current life insurance protection required to be included in the gross income of an employee who is furnished insurance protection under a qualified trust. These rates are, in effect, the costs of one-year net term premiums.

In view of the foregoing, it is held that the net term cost of life insurance protection in this case will be considered to have been paid first from employer contributions and trust income and will be includable in the gross incomes of the employees in the taxable year when so applied.

PS No. 32 is hereby superseded, since the provisions thereof are restated in this Revenue Ruling.

Qualification of the profit-sharing plan of an employer that contains a years-of-service factor in the formula used for allocation of contributions; PS No. 28 superseded.

26 CFR 1.401-4: Discrimination as to contributions or benefits.

Rev. Rul. 68–6521

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in PS No. 28, dated September 2, 1944, relating to whether the profit-sharing plan of an employer that contains a years-of-service factor in the formula used for allocation of contributions meets the requirements of section 401(a) (4) of the Internal Revenue Code of 1954 and section 1.401-4 of the Income Tax Regulations.

The profit-sharing plan of a corporation, which became effective July 1, 1967, provides for participation of all employees who have completed three full years of service with the corporation. Out of a total of 689 employees, 464 meet the eligibility requirements and participate in the plan. The formula for determining the profits of the corporation to be shared provides for a contribution equal to ten percent of the annual profits. The profits for the fiscal year ended June 30, 1967, amounted to $3,200,000 and, accordingly, $320,000 was paid to the fund. This amount was allocated among the plan participants on the basis of one unit for each full $100 of compensation, limited to a maximum of 200 compensation units, multiplied by the number of full years of completed service, as set forth in the tabulation below.

1 Prepared pursuant to Revenue Procedure 67-6, C.B. 1967-1, 576.

Section 401 (a) (4) of the Code provides that a trust forming part of a profit-sharing plan of an employer will not constitute a qualified trust if the contributions or benefits provided under the plan discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. However, under section 1.401-4(a) (2) (iii) of the regulations, variations in contributions or benefits may be provided so long as the plan, viewed as a whole for the benefit of employees in general, does not discriminate in favor of the employees enumerated above. Thus, contributions or benefits that vary by reason of an allocation formula that takes into consideration years of service, or other factors, are not prohibited unless such formula results in prohibited discrimination."

Limiting the maximum compensation units to 200 results in an effective ceiling of $20,000 on compensation to be taken into account and prevents discrimination in favor of employees whose earnings exceed that amount. That ceiling, however, does not prevent discrimination with respect to employees whose earnings are below $20,000 and who have the least number of years of service. Thus, an employee in Group 9 participates to the extent of six percent of his salary, and the percentage increases until Group 4 is reached, for which 20 percent is provided on a salary of $20,000. The fact that a $50,000 salaried participant derives but 8.8 percent of his compensation does not offset the discrimination that exists in favor of other highly compensated groups. Accordingly, under the facts stated, the profit-sharing plan of the corporation, containing a years-of-service factor in the formula for the allocation of contributions, does not meet the requirements of section 401(a) (4) of the Code and section 1.401-4 of the regulations.

See Revenue Ruling 68-653, below, and Revenue Ruling 68-654, page 179, which also involve profit-sharing plans with allocation formulas that take into consideration years of service.

PS No. 28 is hereby superseded, since the position stated therein. is restated under current law in this Revenue Ruling.

Qualification of an employees' profit-sharing plan providing for the allocation of contributions under a formula that takes into consideration years of service; I.T. 3685 superseded.

26 CFR 1.401-4: Discrimination as to contributions or benefits.

Rev. Rul. 68-653 1

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3685, C.B. 1944, 324, relating to whether a profit-sharing plan providing for the allocation of contributions under a formula that takes into consideration years of service meets the requirements of section 401(a) (4) of the Internal Revenue Code of 1954 and section 1.401-4 of the Income Tax Regulations.

Under the profit-sharing plan of the employer company, which became effective January 1, 1967, all employees who have completed three years of service are eligible to participate. The company has

1 Prepared pursuant to Revenue Procedure 67-6, C.B. 1967-1, 576.

216 employees, of which number 134 are covered by the plan. Contributions are made by the company only to the extent of 10 percent of its annual profits or 15 percent of the total compensation of all participants in the plan, whichever is lesser. The annual profits for the calendar year 1967 amounted to $2,000,000 and the total compensation of all participants was $1,000,000. Accordingly, $150,000 was contributed for that year. Under the allocation formula, the latter amount was allocated among the participants on the basis of one unit for each $100 of compensation and one unit for each year of completed service, in accordance with the following tabulation:

*Salary at median point multiplied by number of employees.

Section 401 (a) (4) of the Code provides that a trust forming part of a profit-sharing plan of an employer will not constitute a qualified trust if the contributions or benefits provided under the plan discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated. However, under section 1.401-4(a) (2) (iii) of the regulations, variations in contributions or benefits may be provided so long as the plan, viewed as a whole for the benefit of employees in general, does not discriminate in favor of the employees enumerated above. Thus, contributions or benefits which vary by reason of an allocation formula that takes into consideration years of service, or other factors, are not prohibited unless such formula results in prohibited discrimination.

In this case, such discrimination is not present since employees in the lowest salary group with a minimum of three years of service participate to the extent of 15.35 percent of salary, and as the salaries increase the percentages decrease, with the result that the highest paid employee, having 40 years of service, participates to the extent of 14.415 percent of salary.

Accordingly, under the facts stated, the profit-sharing plan providing for an allocation of contributions under a formula that takes into consideration years of service, meets the requirements of section 401 (a) (4) of the Code and section 1.401-4 of the regulations.

See Revenue Ruling 68-654, below, and Revenue Ruling 68-652, page 176, which also involve profit-sharing plans with allocation formulas that take into consideration years of service.