Rev. Rul. 61-79

Advice has been requested whether the qualification of a contributory employees' pension plan will be adversely affected by an amendment to the plan making it noncontributory and providing for the refund of employee contributions.

An employer established a contributory employees' unit benefit pension plan which satisfied the requirements of section 401(a) of the Internal Revenue Code of 1954. Subsequently, the plan was amended to make it noncontributory and to provide for the return of their contributions to the employees. The employer did not assume liability for costs previously funded by employee contributions. The amendment did not affect employee participation in the plan.

Section 401(a) of the Code provides, among other things, 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 his employees or their beneficiaries shall constitute a qualified trust if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.

In Revenue Ruling 55-14, C.B. 1955-1, 302, an employer who had established a qualified, contributory, insured annuity plan proposed to eliminate the requirement for employee contributions, have the insurer return prior employee contributions to the employees, and make up the deficit by employer contributions to the insurer. The ruling holds that the refunds of employee contributions do not constitute taxable income to the recipients and that amounts paid by the employer as reimbursement to the insurer for amount refunded to the employees would be deductible from taxable income of the employer as a supplementary cost of annuity credits. The effect of such refunds of employee contributions upon the qualification of the plan is not specifically discussed in the ruling.

It is implicit in the holding of Revenue Ruling 55-14 that employer make-up contributions continued to be deductible under section 23(p)(1)(A)(iii) of the 1939 Code (section 404(a)(1)(C) of the 1954 Code) since the refund of employee contributions, under these circumstances, did not adversely affect the qualification of the plan.

The elimination of employee contributions, in cases where the employer does not assume the liability for pension costs previously funded by employee contributions, will generally result in a reduction of plan benefits. However, whether or not an employer who changes a pension plan from a contributory to a noncontributory one assumes liability for the cost previously funded by employee contributions is not, of itself, determinative of the question as to the continued qualification of the plan. The determinative factor is whether the amendment results in the discrimination in favor of officers, shareholders, supervisory, or highly compensated employees prohibited by section 401(a). In the absence of such discrimination, such an amendment would not, of itself, adversely affect qualification of the plan.

Accordingly, it is held that in any case in which a contributory employees' pension plan is amended so as to eliminate employee contributions, with a provision for the refund of employee contributions, and the employer does not assume the liability for costs previously funded by employee contributions, such an amendment even though it necessitates a curtailment of benefits would not adversely affect the qualification of the plan unless it resulted in the discrimination prohibited by section 401(a) of the Code.

Revenue Ruling 55-14, C.B. 1955-1, 302, is hereby amplified.