Rev. Rul. 56-673

Advice has been requested with regard to the tax consequences and the qualification, under the applicable provisions of the Internal Revenue Code of 1954, of an employees' contributory pension plan established in the year 1954, but for which a trust agreement was not executed until 1956, two years after the plan had been in operation.

During the taxable year 1954, a corporation established a contributory employees' pension plan. The employer's and the employees' contributions under the plan were used to purchase retirement income endowment contracts from an insurer on behalf of the employees. Although a trust agreement was not executed, an officer of the corporation acted in the capacity of a trustee and held possession of the individual contracts even though, under its terms, the contracts were owned by the employees.

Because of a misunderstanding of the legal requirements, the corporation believed the plan to be a qualified pension plan. Specific rules governing eligibility, retirement dates, benefits, etc., were established just as though it were a qualified plan. The employees also understood that they were the beneficiaries of a qualified plan. Under this assumption, the corporation did not, therefore, report its contributions in 1954 and 1955 as additional compensation to its employees.

In 1956, two years later, the corporation executed a trust agreement containing all the provisions of the corporation's pension plan. An officer of the corporation was named as the trustee. All participants in the pension plan transferred ownership of their individual policies to the trustee. Under the plan as so executed, the contemplated benefits are provided through the trustee's purchase of the policies from the insurer.

For the two years prior to 1956, the year in which a written trust agreement was actually executed and the trustee acquired title to the individual retirement income endowment contracts previously previously purchased for participating employees, the pension plan was not administered through a trust which met all the requirements of section 401(a) of the Code, or, in fact, through a trust of any kind. See Mim. 6394, C.B. 1949-1, 118. At most, during the taxable years prior to that in which the trust agreement was executed, the corporation officer acting as a trustee under the plan was merely a custodian or bailee of the individual contracts purchased for the employees.

Under section 404(a)(5) of the Code and the regulations pertaining thereto, the employer is entitled to a deduction for contributions to a nontrusteed and nonqualified plan if the employees' rights are nonforefitable at the time the contribution is paid.

P.S. No. 65 /1/, dated November 10, 1950, holds that a group permanent life insurance contract (which term also comprehends a group retirement income endowment insurance contract) is not an `annuity contract' within the meaning of section 22(b)(2)(B) of the 1939 Code (corresponding to section 403(b) of the 1954 Code). However, since all payments under such a contract are subject to specific provisions of the contract and are, therefore, under the direct administration of the insurer, benefits provided for employees are taxable to them in the same manner as if provided under a qualified trust except that the capital gains provisions of section 165(b) of the 1939 Code (corresponding to section 402(a)(2) of the 1954 Code) are not applicable to such benefits.

Accordingly, for the two years prior to 1956, since the participating employees were the unqualified owners of their individual retirement income endowment contracts, although not actually having possession of such contracts, the employees were not entitled, in such years, to the deferred tax treatment of employer contributions to the plan on their behalf, whether or not the nontrusteed plan met the requirements of section 401(a)(3), (4), (5), and (6) of the 1954 Code for those years. Also, in view of the holding in P.S. No. 65, supra , and because the type of individual contracts purchased under the plan prior to the establishment of the trust prevented its consideration as an annuity contract, the plan could not be considered as a qualified plan prior to the year in which the trust agreement was executed.

1 Not published in the Bulletin.