rr-09-32.pdf

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Part l

Section 401. – Qualified Pension, Profit-sharing, and Stock Bonus Plans

Paid Time Off Contributions at Termination of Employment

Rev. Rul. 2009-32

ISSUES

(1) Do the amendments described below to an existing qualified profit-
sharing plan requiring or permitting certain contributions to the plan of the
dollar equivalent of unused paid time off at a participant’s termination of
employment cause the plan to fail to meet the requirements of § 401(a)
and, if applicable, § 401(k) of the Internal Revenue Code (Code)?

(2) When is a participant required to recognize gross income with respect to
the contributions to the qualified profit-sharing plan and payments to the
participant as described below?

FACTS

For purposes of each situation below, it is assumed that the employer is a
corporation to which subchapter C of Chapter 1, Subtitle A of the Code applies;
that each participant is an individual who accounts for gross income under the
cash receipts and disbursements method of accounting and has a calendar year
taxable year; that all employees of the employer are eligible to participate in the
paid time off plan (the PTO plan) on substantially the same terms and conditions;
that prior to its amendment, the PTO plan qualifies as a bona fide sick and
vacation leave plan for purposes of § 409A and § 1.409A-1(a)(5) of the Income
Tax Regulations; that payments under the PTO plan for unused paid time off
constitute payment for unused accrued bona fide sick, vacation, or other leave
for purposes of § 1.415(c)-2(e)(3)(iii)(A);

that all payments for paid time off
(whether paid for used or unused time off) are made from the general assets of
the employer; and that the employer has two-week pay periods. For this
purpose, a paid time off plan refers to a sick and vacation pay or leave plan
under which a participant may take paid leave without regard to whether the
leave is due to illness or incapacity.

Situation 1

Company X maintains the Company X PTO Plan (X PTO Plan), under
which all participants are granted up to 240 hours of paid time off each January 1
(prorated for new hires commencing employment during the calendar year), with

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the number of hours depending solely on the participant’s number of years of
service. For this purpose, salaried employees are treated as working 8 hours per
work day. Under the X PTO Plan, a participant at the end of the year may carry
over to the following year an amount of unused paid time off not to exceed a
specified number of hours (the carryover limit), and any hours of unused paid
time off in excess of the carryover limit are forfeited. If a participant terminates
employment, the dollar equivalent of any hours of unused paid time off remaining
at the termination of employment are paid to the terminated participant within 60
days after the termination of employment, with the dollar equivalent determined
as the number of hours of unused paid time off multiplied by the terminated
participant’s hourly rate of compensation for the pay period during which the
participant terminates employment (determined for salaried employees by
treating the employee as working 8 hours per work day).

Company X also maintains the Company X Profit Sharing Plan (X Profit
Sharing Plan), which is a profit-sharing plan that, without regard to the
amendment described in this Situation 1, meets the requirements of § 401(a).
The X Profit Sharing Plan includes a qualified cash or deferred arrangement
under § 401(k) that provides for elective contributions and that does not provide
for catch-up contributions under § 414(v). The X Profit Sharing Plan has a
calendar year plan year and limitation year. The X Profit Sharing Plan provides
that amounts for unused paid time off paid by the later of 2½ months after
termination of employment with Company X or the end of the limitation year that
includes the date of the severance from employment are treated as
compensation under the plan for purposes of § 415, to the extent permissible
under § 415. The X Profit Sharing Plan provides that § 415 compensation is
determined using only amounts actually paid during the limitation year.

In December 2008, Company X amended the X Profit Sharing Plan and
the X PTO Plan, effective January 1, 2009, to provide that the dollar equivalent of
any unused paid time off at the time of a participant’s termination of employment
is forfeited under the X PTO Plan and is contributed to the X Profit Sharing Plan
and allocated to the participant’s account as of the first day of the second pay
period beginning immediately after the participant’s termination of employment,
to the extent the contribution (in combination with prior annual additions) does
not exceed the applicable limitations under § 415(c). Under the X Profit Sharing
Plan, contributions of the dollar equivalent of paid time off are in addition to other
contributions under the plan and are treated as nonelective contributions. Under
the terms of the X PTO Plan, the dollar equivalent of any unused paid time off
that is not contributed to the X Profit Sharing Plan is paid to the terminated
participant within 60 days after the termination of employment. For these
purposes, the dollar equivalent of the unused paid time off is determined as the
number of hours of unused paid time off multiplied by the terminated participant’s
hourly rate of compensation for the pay period during which the participant
terminates employment (determined for salaried employees by treating the
employee as working 8 hours per work day).

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C is an employee of Company X who participates in the X PTO Plan and
the X Profit Sharing Plan. C's employment terminates on October 1, 2009. As of
the close of business on October 1, 2009, C has 12x hours of unused paid time
off, and earns $25 per hour, and so has unused paid time off with a dollar
equivalent of $300x. 12x hours does not exceed the sum of the hours in the
remaining work days for 2009 plus the carryover limit.

A contribution of $300x to the X Profit Sharing Plan on behalf of C, in
combination with prior annual additions, would not cause C’s total contributions
and annual additions to exceed the limitations under § 415(c) for the 2009
limitation year. Company X contributes $300x to the X Profit Sharing Plan on
October 19, 2009, and allocates this amount to C’s account under the X Profit
Sharing Plan, effective as of October 19, 2009.

Situation 2

The facts are the same as in Situation 1
, except that C's employment
terminates on December 28, 2009, and any payment for unused paid time off on
account of termination will be paid to C in 2010 and will be the only payment of
compensation that C will receive from Company X in 2010. C has 12x hours of
unused paid time off and earns $25 per hour, and therefore, has unused paid
time off with a dollar equivalent of $300x. The 12x hours of unused paid time off
does not exceed the sum of the hours in the remaining work days for 2009 plus
the carryover limit. The $300x does not exceed the § 415(c) applicable dollar
limit for 2010. Company X contributes $150x to the X Profit Sharing Plan on
January 18, 2010, and allocates the amount to C’s account under the X Profit
Sharing Plan as of January 18, 2010. This contribution is not treated as a
contribution to the X Profit Sharing Plan for 2009. Company X pays the
remaining $150x to C on January 18, 2010.

Situation 3

Company W maintains the Company W PTO Plan (W PTO Plan), under
which participants ratably accrue up to 240 hours of paid time off each calendar
year on a pay-period basis beginning on January 1. For this purpose, salaried
employees are treated as working 8 hours per work day. Under the W PTO Plan,
a specified number of unused paid time off hours remaining as of the close of
business on December 31 may be carried over to the following year, and any
hours of unused paid time off in excess of the carryover limit are forfeited. If a
participant terminates employment, the dollar equivalent of any hours of unused
paid time off remaining at the termination of employment are paid to the
terminated participant within 60 days after the termination of employment, with
the dollar equivalent determined as the number of hours of unused paid time off
multiplied by the terminated participant’s hourly rate of compensation for the pay

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period during which the participant terminates employment (determined for
salaried employees by treating the employee as working 8 hours per work day).

Company W also maintains the Company W Section 401(k) Plan
(W 401(k) Plan), which is a profit-sharing plan that, without regard to the
amendment described in this Situation 3, meets the requirements of § 401(a).
The W 401(k) Plan includes a qualified cash or deferred arrangement under
§ 401(k) that does not provide for catch-up contributions under § 414(v). The
W 401(k) Plan has a calendar year plan year and limitation year. The W 401(k)
Plan provides that for purposes of §§ 401(k) and 415(c), amounts contributed to
the plan are taken into account for the year in which falls the date the amounts
are allocated to the participant’s account under the plan. The W 401(k) Plan also
provides that amounts for unused paid time off paid by the later of 2½ months
after termination of employment with Company W or the end of the limitation year
that includes the date of the severance from employment, are treated as
compensation under the plan for purposes of § 415, to the extent permissible
under § 415(c). The W 401(k) Plan provides that, for purposes of § 415,
compensation is determined by including only amounts actually paid during the
limitation year.

In December 2008, Company W amended the W 401(k) Plan and the
W PTO Plan, effective January 1, 2009, to provide that a participant may elect to
reduce all or part of the dollar equivalent of any unused paid time off at the time
of a participant’s termination of employment and have that amount contributed by
Company W and allocated to the participant’s account under the W 401(k) Plan
as of the first day of the second pay period beginning immediately after the
participant’s termination of employment, to the extent that the contribution (in
combination with prior annual additions) does not exceed the applicable
limitations under § 415(c) and to the extent the contributions (in combination with
prior elective deferrals) do not exceed the applicable limitation under
§ 401(a)(30). Under the terms of the W 401(k) Plan, contributions of the dollar
equivalent of paid time off are in addition to other contributions and treated as
elective contributions. Under the terms of the W PTO Plan, the dollar equivalent
of any unused paid time off that is not contributed to the W 401(k) Plan is paid to
the employee on the first day of the second pay period beginning immediately
after the participant’s termination of employment. For these purposes, the dollar
equivalent of the unused paid time off is determined as the number of hours of
unused paid time off multiplied by the terminated participant’s hourly rate of
compensation for the pay period during which the participant terminates
employment (determined for salaried employees by treating the employee as
working 8 hours per work day).

D is an employee of Company W who participates in the W PTO Plan and
the W 401(k) Plan. D terminates employment on October 1, 2009. As of the
close of business on October 1, 2009, D has 15x hours of unused paid time off,
and earns $20 per hour, and so has unused paid time off with a dollar equivalent

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of $300x. 15x hours does not exceed the sum of the hours in the remaining work
days for 2009 plus the carryover limit.

D has a valid and timely election in effect to have 70% of the dollar
equivalent of the unused paid time off contributed to the W 401(k) Plan. The
contribution of $210x (70% of $300x) would not exceed the applicable limitations
under §§ 401(a)(30) and 415(c). Company W contributes $210x to the W 401(k)
Plan on October 19, 2009, and allocates that amount to D’s account under the
W 401(k) Plan as of October 19, 2009. Company W pays the remaining $90x to
D on October 19, 2009.

Situation 4

The facts are the same as in Situation 3, except that D’s employment
terminates on December 28, 2009, and any payment for unused paid time off on
account of termination will be paid to D in 2010 and will be the only payment of
compensation that D will receive from Company W in 2010. As of the close of
business on December 28, 2009, D has 15x hours of unused paid time off, and
earns $20 per hour, and so has unused paid time off with a dollar equivalent of
$300x. 15x hours does not exceed the sum of the hours in the remaining work
days for 2009 plus the carryover limit.

D has a valid and timely election in effect to have 70% of the dollar
equivalent of the unused paid time off contributed to the W 401(k) Plan. The
contribution of $210x (70% of $300x) would not exceed the applicable limitations
under §§ 401(a)(30) and 415(c). Company W contributes $210x to the W 401(k)
Plan on January 18, 2010 and allocates that amount to D’s account under the
W 401(k) Plan as of January 18, 2010. Company W pays the remaining $90x to
D on January 18, 2010.

LAW

Section 401(a) 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 for the exclusive benefit of its employees or their beneficiaries
constitutes a qualified trust under that section if a series of conditions is met.
Section 401(a)(4) provides as one of those conditions that the contributions or
benefits provided under the plan do not discriminate in favor of highly
compensated employees (within the meaning of § 414(q)). A plan maintained
pursuant to a collective bargaining agreement is deemed to satisfy the
nondiscrimination requirements. In other cases, under the regulations under
§ 401(a)(4), the amount of nonelective contributions under a profit-sharing plan
must satisfy either a design-based safe harbor or a test based on the
contributions made for individual participants.

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Section 401(a)(30) of the Code provides that in the case of a trust which is
part of a plan under which elective deferrals (within the meaning of § 402(g)(3))
may be made with respect to any individual during a calendar year, such trust
does not constitute a qualified trust unless the plan provides that the amount of
such deferrals under such plan and all other plans, contracts, or arrangements of
an employer maintaining such plan may not exceed the amount of the limitation
in effect under § 402(g)(1)(A) for taxable years beginning in such calendar year.
Under § 402(g)(3), elective contributions under a qualified cash or deferred
arrangement are included in the definition of elective deferrals.

Section 401(k)(2)(A) provides, in pertinent part, that a qualified cash or
deferred arrangement is any arrangement which is part of a profit sharing plan or
stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan,
which meets the requirements of § 401(a), and under which a covered employee
may elect to have the employer make payments as contributions to a trust under
the plan on behalf of the employee, or to the employee directly in cash.

Section 1.401(k)-1(a)(3)(i) provides that a cash or deferred election is any
election by an employee to have the employer either: (A) provide an amount to
the employee in the form of cash or some other taxable benefit that is not
currently available or (B) contribute an amount to a trust, or provide an accrual or
other benefit, under a plan deferring the receipt of compensation.

Section 1.401(k)-6 defines nonelective contributions as employer
contributions (other than matching contributions) with respect to which the
employee may not elect to have the contributions paid to the employee in cash or
other benefits instead of being contributed to the plan. Section 1.401(k)-6
defines elective contributions as contributions made pursuant to a cash or
deferred election under a cash or deferred arrangement (whether or not
qualified).

Under § 401(k)(3)(A)(ii), elective contributions under a qualified cash or
deferred arrangement generally must satisfy the actual deferral percentage test.
Section 1.401(k)-2(a)(4)(i) provides generally that for purposes of the actual
deferral percentage test, elective contributions are taken into account for a year if
the elective contribution is allocated to the participant’s account under the plan as
of a date within that year, and certain other requirements are satisfied.

Section 402(a) provides that any amount actually distributed to any
distributee by an employees’ trust described in § 401(a) which is exempt from tax
under § 501(a) is taxable to the distributee in the taxable year of the distributee in
which distributed, under § 72. Section 72(t) provides, in pertinent part, that the
income tax applicable to any amount a participant receives from a qualified plan
generally is increased by an amount equal to 10 percent of the portion of the
amount includible in gross income unless such amounts are distributed on or

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after the date on which the participant attains age 59½ or after the participant’s
separation from service after attainment of age 55.

Section 402(e)(3) provides, in pertinent part, that contributions made by an
employer on behalf of an employee to a trust which is part of a qualified cash or
deferred arrangement (as defined in § 401(k)(2)) are not treated as distributed or
made available to the employee nor as contributions made to the trust by the
employee merely because the arrangement includes provisions under which the
employee has an election whether the contribution will be made to the trust or
received by the employee in cash.

Section 415(a)(1)(B) provides that a trust which is part of a pension, profit-
sharing, or stock bonus plan does not constitute a qualified trust under § 401(a) if
in the case of a defined contribution plan, contributions and other additions under
the plan with respect to any participant for any taxable year exceed the limitation
of § 415(c). Section 415(c)(1) provides that contributions and other additions
with respect to a participant exceed the limitation of § 415 if, when expressed as
an annual addition to the participant’s account, the annual addition is greater
than the lesser of $40,000 or 100 percent of the participant’s compensation.
Section 415(d)(1)(C) provides that the Secretary shall adjust annually the
$40,000 amount for increases in the cost-of-living in accordance with regulations
prescribed by the Secretary.

Section 1.415(c)-1(b)(1)(i) generally defines the term “annual addition” as
the sum, credited to a participant’s account for any limitation year, of (A)
employer contributions; (B) employee contributions; and (C) forfeitures. Under
§ 1.415(c)-1(b)(6), an annual addition generally is treated as credited to the
account of a participant for a particular limitation year if it is allocated to the
participant’s account under the terms of the plan as of any date within that
limitation year.

Section 415(c)(3)(A) provides that in general, the term “participant’s
compensation” means the compensation of the participant from the employer for
the year. Section 1.415(c)-2(b)(1) provides that, for purposes of § 415,
compensation includes amounts received for personal services actually rendered
in the course of employment with the employer maintaining the plan, to the extent
that the amounts are includible in gross income (or to the extent the amounts
would have been received and includible in gross income but for certain
elections, including an election described in § 402(e)(3)). However, under
§ 1.415(c)-2(b)(2), contributions by an employer to a plan of deferred
compensation (other than certain elective contributions, including contributions
described in § 402(e)(3)) are not included in compensation for purposes of § 415.

Section 1.415(c)-2(e)(1)(i) states in pertinent part that, in order to be
taken into account for a limitation year, compensation within the meaning of
section 415(c)(3) must be actually paid or made available to an employee (or, if

8
earlier, includible in the gross income of the employee) within the limitation year.
Section 1.415(c)-2(e)(1)(ii) states in pertinent part that, except as otherwise
provided in § 1.415(c)-2(e), in order to be taken into account for a limitation year,
compensation within the meaning of section 415(c)(3) must be paid or treated as
paid to the employee (in accordance with the rules of § 1.415(c)-2(e)(1)(i)) prior
to the employee’s severance from employment with the employer maintaining the
plan.

Section 1.415(c)-2(e)(3) provides that a plan may provide that certain
amounts are included in the participant’s compensation (within the meaning of
§ 415(c)(3)) if those amounts are paid by the later of 2½ months after severance
from employment with the employer maintaining the plan or the end of the
limitation year that includes the date of severance from employment with the
employer maintaining the plan, and those amounts would have been included in
the definition of compensation had they been paid prior to the employee’s
severance from employment with the employer maintaining the plan.
Section 1.415(c)-2(e)(3)(iii)(A) provides that an amount is described in
§ 1.415(c)-2(e)(3)(iii) (and therefore may be included in § 415(c) compensation
subject to certain conditions) if the amount is payment for unused accrued bona
fide sick, vacation, or other leave, but only if the employee would have been able
to use the leave if employment had continued.

Section 451(a) and §1.451-1(a) provide that an item of gross income is
includible in gross income in the taxable year in which it is actually or
constructively received by a taxpayer using the cash receipts and disbursements
method of accounting. Under §1.451-2(a), income is constructively received in
the taxable year during which it is credited to a taxpayer’s account, set apart or
otherwise made available so that the taxpayer may draw on it at any time.
However, income is not constructively received if the taxpayer’s control of its
receipt is subject to substantial limitations or restrictions.

Section 409A(a)(1)(A)(i) provides, in pertinent part, that if at any time
during a taxable year a nonqualified deferred compensation plan fails to meet
certain requirements set forth under § 409A(a), or is not operated in accordance
with such requirements, all compensation deferred under the plan for the taxable
year and all preceding taxable years shall be includible in gross income for the
taxable year to the extent not subject to a substantial risk of forfeiture and not
previously included in gross income. Section 409A(a)(1)(B) provides, in pertinent
part, that any compensation required to be included in gross income under
§ 409A(a)(1)(A) for a taxable year shall be subject to the additional taxes set
forth in § 409A(a)(1)(B).

Section 409A(d)(1) provides that the term “nonqualified deferred
compensation plan” means any plan that provides for the deferral of
compensation, other than: (A) a qualified employer plan and (B) any bona fide
vacation leave, sick leave, compensatory time, disability pay, or death benefit

9
plan. Section 409A(d)(2) provides, in pertinent part, that the term “qualified
employer plan” means any plan, contract, pension, account or trust described in
§ 219(g)(5)(A) or (B) (without regard to § 219(g)(5)(A)(iii)).
Section 219(g)(5)(A)(i) refers to a plan described in § 401(a), which includes a
trust exempt from tax under § 501(a).

ANALYSIS

Situation 1

The amendment to the X Profit Sharing Plan to require certain
contributions of the dollar equivalent of unused paid time off to the X Profit
Sharing Plan does not cause the X Profit Sharing Plan to fail to meet the
requirements of § 401(a), provided that the contributions satisfy the requirements
of § 401(a)(4) (in combination with other contributions and forfeitures allocated
for the year). Because C is not provided a right to elect a payment of cash for
unused paid time off in lieu of a plan contribution, Company X’s contribution of
$300x to the X Profit Sharing Plan is not an elective contribution that is made
pursuant to a cash or deferred election within the meaning of § 401(k)(2)(A) and
§ 1.401(k)-(1)(a)(3)(i). Rather, Company X’s contribution to the X Profit Sharing
Plan is a nonelective employer contribution within the meaning of § 1.401(k)-6.

The amount contributed and allocated for each participant will vary based
on the amount of the participant’s unused paid time off. Thus, the contributions
for unused paid time off are likely to preclude a plan from satisfying a design-
based safe harbor under § 401(a)(4). Therefore, testing based on the
contributions made for individual participants generally will be required.

The contributions made pursuant to the arrangement must also not
exceed the limitations under § 415(c) (in combination with prior annual additions).
Because the contribution of $300x was allocated to C’s account as of October
12, 2009, and made on that date (before the end of the 30 day period following
the deadline for Company X to file its income tax return), the contribution is
subject to the limitations under § 415(c) applicable for the 2009 limitation year
and is taken into account for § 401(a)(4) purposes for the 2009 plan year. Under
the facts presented, the contribution of $300x (in combination with prior annual
additions) does not exceed the limitations of § 415(c) for 2009.

If the requirements of § 401(a)(4) are met, the amount contributed will be
included in C’s gross income in accordance with § 402(a) only when the amount
is distributed to C. Like any other distribution from the X Profit Sharing Plan, the
distribution of amounts attributable to the dollar equivalent of unused paid time
off is subject to an additional 10% income tax under § 72(t) unless the distribution
satisfies one of the exceptions described in § 72(t), such as being made on or
after the date on which the participant attains age 59½ or after the participant
separates from service after attainment of age 55.

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The amendment to the X PTO Plan and the operation of the plan in
accordance with the terms of the amendment do not cause the X PTO Plan to fail
to qualify as a bona fide sick and vacation leave plan for purposes of § 409A and
§ 1.409A-1(a)(5).

Situation 2

The amendment to the X Profit Sharing Plan to require certain
contributions of the dollar equivalent of unused paid time off to the X Profit
Sharing Plan does not cause the X Profit Sharing Plan to fail to meet the
requirements of § 401(a) of the Code, provided that the contributions made
pursuant to the amendment satisfy the requirements of § 401(a)(4) (in
combination with other contributions and forfeitures allocated for the year).
Because C is not provided a right to elect a payment of cash for unused paid
time off in lieu of a contribution to the X Profit Sharing Plan, Company X’s
contribution of $150x to the X Profit Sharing Plan is not an elective contribution
that is made pursuant to a cash or deferred election within the meaning of
§ 401(k)(2)(A) and § 1.401(k)-(1)(a)(3)(i). Rather, Company X’s contribution to
the X Profit Sharing Plan is a nonelective employer contribution within the
meaning of § 1.401(k)-6.

The contributions made pursuant to the arrangement must also not
exceed the limitations under § 415(c) (in combination with prior annual additions).
Because the contribution is allocated to C’s account on January 18, 2010, and
made on that date (before the end of the 30 day period following the deadline for
Company X to file its income tax return), the contribution is subject to the
limitations under § 415 applicable for the 2010 limitation year and is taken into
account for § 401(a)(4) purposes for the 2010 plan year. Under the facts, none
of the $300x exceeds the applicable § 415(c)(1)(A) dollar limit for 2010, so the
$150x contribution also would not exceed the applicable § 415(c)(1)(A) dollar
limit. However, under § 415(c)(1)(B), the $150x contribution must also not
exceed 100 percent of compensation for the 2010 limitation year. Because the
$150x contribution is a nonelective contribution, it is not taken into account as
compensation for purposes of § 415. However, because the paid time off could
have been carried over and used in 2010 had C remained employed, the
payment of the remaining $150x to C on January 18 can be included as § 415
compensation for 2010. Accordingly, the allocation of $150x to C’s account will
provide an allocation of 100 percent of compensation and will not exceed the
§ 415(c) limitations for the 2010 limitation year.

If the requirements of § 401(a)(4) are met, the amount contributed will be
included in C’s gross income in accordance with § 402(a) only when the amount
is distributed to C. Like any other distribution from the X Profit Sharing Plan, the
distribution of amounts attributable to the dollar equivalent of unused paid time
off is subject to an additional 10% income tax under § 72(t) unless the distribution

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satisfies one of the exceptions described in § 72(t), such as being made on or
after the date on which the participant attains age 59½ or after the participant
separates from service after attainment of age 55.
Under the facts of Situation 2, C terminates employment in 2009, but the
contribution to the X Profit Sharing Plan and the cash payment to C occur in
2010. Under the X PTO Plan as amended, the dollar equivalent of unused paid
time off is not paid, set apart, or otherwise made available so that C may draw on
it either (i) during the 2009 calendar year or (ii) upon conversion in 2009 to a
contribution to a qualified plan or cash payment in 2010. Therefore
, such amount
is not includible in C's gross income in 2009 under the doctrine of constructive
receipt and § 451. In addition, the amendment to the X PTO Plan and the
operation of the plan in accordance with the terms of the amendment do not
cause the X PTO Plan to fail to qualify as a bona fide sick and vacation leave
plan for purposes of § 409A and § 1.409A-1(a)(5). The $150x payment is
includible in C’s gross income in 2010, the taxable year in which it is paid to C.
Situation 3

The amendment to the W 401(k) Plan to permit certain contributions of the
dollar equivalent of unused paid time off to the W 401(k) Plan does not cause the
W 401(k) Plan to fail to meet the requirements of §§ 401(a) and 401(k), provided
that the contributions (taking into account other contributions, prior deferrals, and
prior annual additions, as applicable) satisfy the nondiscrimination requirements
of § 401(k) and the applicable limitations of §§ 401(a)(30) and 415(c).

Because D is provided a right to elect either a payment of cash or a plan
contribution for the dollar equivalent of unused paid time off that may not be
carried over to the following year, Company W’s contribution of $210x to the
W 401(k) Plan is an elective contribution. Because the contribution is allocated
to D’s account as of October 19, 2009, and is made on that date (before the end
of the 30 day period following the deadline for Company W to file its income tax
return), the contribution is subject to the limitations under § 415 applicable for the
2009 limitation year. The contribution is also subject to the limitations on elective
deferrals under § 401(a)(30) applied for 2009 and the actual deferral percentage
nondiscrimination testing under § 401(k)(3)(A)(ii) and § 1.401(k)-2 for the 2009
plan year.

Under the facts presented, the allocation of $210x to D’s account (in
combination with prior annual additions) does not cause the plan to exceed the
limitations of § 415(c). Although the dollar equivalent of the unused paid time off
was made available to D in 2009, pursuant to § 402(e)(3) the $210x is not treated
as made available to D because the amount was contributed to the plan as part
of a qualified cash or deferred arrangement. Accordingly, if the nondiscrimination
requirements of § 401(k) and the limitations of § 401(a)(30) are met, the amount
contributed will be included in D’s gross income in accordance with § 402(a) only

12
when the amount is distributed to D. Like any other distributions from the
W 401(k) Plan, the distribution of amounts attributable to the dollar equivalent of
unused paid time off is subject to the additional 10% income tax under § 72(t) if
the distribution does not meet one of the exceptions of § 72(t), such as being
made on or after the date on which the participant attains age 59½ or after the
participant separates from service after attainment of age 55.

In addition, the amendment to the W PTO Plan and the operation of the
plan in accordance with the terms of the amendment do not cause the W PTO
Plan to fail to qualify as a bona fide sick and vacation leave plan for purposes of
§ 409A and § 1.409A-1(a)(5). The $90x payment is includible in D’s gross
income in 2009, the taxable year in which it is paid to D.

Situation 4

The amendment to the W 401(k) Plan to permit certain contributions of the
dollar equivalent of unused paid time off to the W 401(k) Plan does not cause the
W 401(k) Plan to fail to meet the requirements of §§ 401(a) and 401(k), provided
that the contributions (taking into account other contributions, prior deferrals, and
prior annual additions, as applicable) satisfy the nondiscrimination requirements
of § 401(k) and the applicable limitations of §§ 401(a)(30) and 415(c).

Because D is provided a right to elect either a payment of cash or a plan
contribution for the dollar equivalent of unused paid time off that may not be
carried over to the following year, Company W’s contribution of $210x to the
W 401(k) Plan is an elective contribution. Because the contribution is made on
January 18, 2010, and is allocated as of that date (before the end of the 30 day
period following the deadline for Company W to file its income tax return), the
contribution is subject to the limitations under § 415 applicable for the 2010
limitation year. The contribution is also subject to the limitations on elective
deferrals under § 401(a)(30) applied for 2010 and the actual deferral percentage
nondiscrimination testing under § 401(k)(3)(A)(ii) and § 1.401(k)-2 for the 2010
plan year.

As an elective contribution, the $210x may be treated as compensation for
purposes of § 415, so that D’s total 2010 compensation for purposes of § 415(c)
is $300x (the $210x elective contribution plus the $90x payment). Under the
facts presented, the allocation of $210x to D’s account (in combination with prior
annual additions) will not cause the plan to exceed the limitations of § 415(c).
Although the dollar equivalent of the unused paid time off was made available to
D in 2010, pursuant to § 402(e)(3) the $210x will not be treated as made
available to D because the amount was contributed to the plan as part of a
qualified cash or deferred arrangement. Accordingly, if the nondiscrimination
requirements of § 401(k) and the limitations of § 401(a)(30) are met, the amount
contributed will be included in D’s gross income in accordance with § 402(a) only
when the amount is distributed to D. Like any other distributions from the

13
W 401(k) Plan, the distribution of amounts attributable to the dollar equivalent of
unused paid time off is subject to the additional 10% income tax under § 72(t) if
the distribution does not meet one of the exceptions of § 72(t), such as being
made on or after the date on which the participant attains age 59½ or after the
participant separates from service after attainment of age 55.

Under the facts of Situation 4, D terminates employment in 2009, but the
contribution to the X Profit Sharing Plan and the cash payment to D occur in
2010. Under the X PTO Plan as amended, the dollar equivalent of unused paid
time off is not paid, set apart, or otherwise made available so that D may draw on
it either (i) during the 2009 calendar year or (ii) upon conversion in 2009 to a
contribution to a qualified plan or cash payment in 2010. Therefore
, such amount
is not includible in D's gross income in 2009 under the doctrine of constructive
receipt and § 451. In addition, the amendment to the W PTO Plan and the
operation of the plan in accordance with the terms of the amendment do not
cause the W PTO Plan to fail to qualify as a bona fide sick and vacation leave
plan for purposes of § 409A and § 1.409A-1(a)(5). The $90x payment is
includible in D’s gross income in 2010, the taxable year in which it is paid to D.

HOLDING

(1) Under the facts presented, the amendments requiring or permitting certain
contributions of the dollar equivalent of unused paid time off to a qualified
profit-sharing plan do not cause the plan to fail to meet the qualification
requirements of § 401(a), provided that the contributions satisfy the
applicable requirements of §§ 401(a)(4) and 415(c) and, where applicable,
§§ 401(k) and 401(a)(30).

(2) Under the facts presented, assuming the applicable qualification
requirements are satisfied, a participant does not include in gross income
contributions of the dollar equivalent of unused paid time off to the profit-
sharing plan in accordance with § 402(a) until distributions are made to
the participant from the plan and does not include in gross income an
amount paid for the dollar equivalent of unused paid time off that is not
contributed to the profit-sharing plan until the taxable year in which the
amount is paid to the participant.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Robert Gertner, Roger Kuehnle,
and Alice Lynch of the Employee Plans, Tax Exempt and Government Entities
Division. Questions regarding this revenue ruling may be sent via e-mail to
retirementplanquestions@irs.gov
.