Rev. Rul. 59-402

Advice has been requiested relative to the application of Mimeograph 6020, C.B. 1946-1, 74, regarding the deductibility, under section 404(a)(2) of the Internal Revenue Code of 1954, of contributions to an annuity plan where, prior to the issuance of a group annuity contract or annuity contracts, the plan is evidenced by documents outside such contract or contracts and is sufficiently complete to constitute, in fact, an annuity plan.

Mimeograph 6020, supra , relates, in general, to the conditions under which contributions of an employer, toward the purchase of retirement annuities, are deductible under section 23(p)(1)(B) of the 1939 Code (corresponding to section 404(a)(2) of the 1954 Code) and states, in part, that a plan which is represented by a group annuity contract or by annuity contracts is not in effect before such contract is, or contracts are, executed and issued.

An employer commits itself to purchase group annuity coverage for its employees, through the establishment of an annuity plan which is set forth in writing and agreed to be the board of directors. (In the case of an unincorporated employer, the plan is duly acknowledged in writing by the employer.) Proper journal entries reflecting this purchase obligation are made upon the records of the corporation. The overallplan is binding upon the employer although some of the administrative details have not been completed.

After such agreement is reached and the annuity plan communicated to the insurance company which will issue the contract, the insurance company must express the contract in the usual policy forms and then, in most cases, submit the contract to the state insurance department for final approval. This requirement does not affect the obligation of the employer to provide for its employees the type of coverage which was agreed upon by the employer's board of directors.

The employer, during the taxable year, makes an irrevocable payment of some or all of the first year's obligation under the contract. Accordingly, based on the foregoing, it is held, that where the requisites of an annuity plan, which is separate and apart from a group annuity contract or annuity contracts, are met, the plan may be in effect for purposes of qualification under section 401(a)(3), (4), (5), and (6) of the 1954 Code if the following steps are taken before the close of the taxable year involved:

(a) a resolution by the employer's board of directors (or execution of an acknowledgement in the case of an unincorporated employer), setting forth a definite plan for the purchase of retirement annuities under a group annuity contract, under which a liability is created to provide the intended benefits;

(b) an application is made by the employer with an insurance company for the group annuity contract, or annuity contracts;

(c) an acceptance of the application by an insurance company stating that it will issue the contract, or contracts (subject to any necessary approval by a state authority);

(d) the preparation of the contract or contracts, or of complete abstracts thereof, in sufficient detail to define all the terms of the contract or contracts to be issued;

(e) an irrevocable part payment on account of the premiums due under the contract; and

(f) a communication of the plan to the employees.

Provided that, not later than the time prescribed by law for filing the return for the taxable year of establishment of the plan (including extensions thereof), the group annuity contract, or annuity contracts, is, or are, executed and issued and all premiums have been paid in accordance with the terms set forth under such contract or contracts.

Mimeograph 6020, supra , is hereby modified to the extent that it is inconsistent with, or does not reflect, the foregoing.