Rev. Rul. 56-213

Advice has been requested whether the qualification of an employees' retirement plan, under section 401(a) of the Internal Revenue Code of 1954, and the exemption from tax, under section 501(a) of the Code, of the trust forming a part thereof, will be adversely affected if a participant, who has been separated from the plan because of not meeting minimum work period requirements or termination of service, has been granted an annuity or cash settlement under the plan and later meets such requirements, or is re-employed and, as a result, is reinstated as a participant in the plan.

The M company established an employees' retirement plan the entire costs of which are paid by the company. Any regular full-time employee who has been in the employ of the company for five years is eligible for participation in the plan if he is under the normal retirement age of 65 years. The plan is held to qualify under section 401(a) of the Code and the trust forming a part thereof is exempt from tax under section 501(a) of the Code.

Under the terms of the plan if, for any reason other than death or disability, an employee terminates his employment before he has completed five years as a member of the plan, he shall have no rights under the plan. After five or more years as a participant, if (1) at the time his employment is terminated the employee is not more than ten years from his normal retirement date, he shall be vested with only the company's payment allocated for his benefit for each prior year of participation, or, if (2) the employee is more than ten years from his normal retirement date, he shall be vested with an amount equal to the lesser of (a) the sum of the company's payments allocated for his benefit for each prior year of participation or (b) a percentage of his average basic earnings, which percentage shall be the sum of (i) one percent for each year of employment prior to becoming a participant in the plan plus (ii) four percent for each year of participation as a member of the plan. Amounts so vested are payable as retirement income beginning on his normal retirement date or, at the option of the employee, he may elect to receive a cash payment in lieu of all or any part of his retirement income.

The plan also provides that if a terminated employee is subsequently re-employed prior to normal retirement date, he shall be considered a new employee for purposes of the plan except that his retirement benefits as a new member shall be reduced by any benefits vested in him on account of his previous participation in the plan.

The question is raised whether the plan would continue to meet the requirements of section 401(a) of the Code if employees were subsequently reinstated to membership in the plan after their eligibility for participation had terminated in the following circumstances:

1. The employee's eligibility for participation had been terminated under the rules relating to minimum work periods and the employee had elected and been granted either an immediate annuity or a cash payment in lieu thereof.

2. The employee's eligibility was similarly terminated and, after re-employment, he requested and was granted either an immediate annuity or a cash payment in lieu of an annuity with respect to his period of prior service.

3. The employee's service was fully terminated by resignation or by discharge (as compared to the case where under the rules relating to minimum work periods he was no longer eligible) and he requested and was granted either an immediate annuity or cash in lieu thereof.

It is held, that, if the terms of the plan are uniformly applied and the full actuarial equivalent of the amount already vested in the participant is deducted from the amount of the pension to be paid as a result of service rendered after the reinstatement of the employee, the qualification of the plan, under section 401(a) of the Code, and the exemption from tax, under section 501(a) of the Code, of the trust forming a part thereof, will not be adversely affected by any reinstatements to active participation in the plan.