Rev. Rul. 55-368

Advice has been requested with regard to the tax consequences of distributions from a pension trust which has been held to be qualified under section 401(a) of the Internal Revenue Code of 1954 and exempt under section 501(a) of the Code, upon discontinuance of the plan, where funds are distributed to the employee participants who in turn pay them over to the trustees of a new plan also qualified under section 401(a) of the Code.

A savings and loan association that had been a member of the Retirement Fund of the Federal Home Loan Bank, System, which fund had been held to meet the requirements of section 401(a) of the Code, desired to sever its connection with the System and fund its pension obligations to its employees under its own plan, which plan was also to qualify under section 401(a) of the Code. Under the bylaws of the System it was required that, upon discontinuance by an employer of participation in the System, the contributions of both the employer and employees be distributed to the employee participants. As a condition precedent to the establishment of its new plan the association required that each and every one of its employees participating in the System sign an agreement requiring them to deposit in the new trust all funds received from the System.

Section 402(a) of the Code provides that the amount actually distributed or made available to any distributee by an employees' trust described in section 401(a) which is exempt from the tax under section 501(a) shall be taxable in the year in which so distributed or made available.

It is held that the distribution of all funds of a pension trust to the employee participants, each of whom has previously executed and who thereafter carries out a legally enforceable agreement to pay over his distributive share to a new pension trust which, like the former, constitutes a qualified trust under section 401(a) of the Internal Revenue Code of 1954, is considered a transfer of funds from one such trust to another through the agency of the employees, who will realize no taxable income from such transactions. The deferment of taxation to the participants granted with respect to the employer's contributions and any earnings credited to the participants will accordingly continue until such subsequent time as they may be distributed or made available to the distributees. See Revenue Ruling 55-317, page 329, this Bulletin, involving a similar issue, but with respect to city employees having certain options not present in this case