Rev. Rul. 57-213

Advice has been requested whether the trustees of an employees' qualified profit-sharing trust which was intended to comply with Revenue Ruling 54-51, C.B. 1954-1, 147, may use trust funds attributable to earnings, capital gains, and forfeitures in the payment of premiums on life insurance contracts; and whether the program of providing current life insurance protection may be continued after normal retirement date, upon continuation of employment by a participant who elects not to retire, if the limitation as to the proportion of trust funds so expendable is applied.

Revenue Ruling 54-51, supra , holds that an investment by a profit-sharing trust in an ordinary life insurance contract for each insurable participant under the trust will be considered incidental and subordinate to the primary purpose of an employees' qualified profit-sharing plan where (1) the aggregate premiums for the life insurance contract in the case of each participant is less than one-half of the aggregate of the contributions allocated to him at any particular time, and (2) the plan shall require the trustee to convert the entire value of the life insurance contract at or before retirement to provide periodic income so that no portion of such value may be used to continue life insurance protection beyond retirement.

Conversely, the use of 50 percent or more of the aggregate accumulated credits of participants for the purchase of the life insurance contract would have the effect of the plan's primarily providing life insurance benefits, which would cause the trust to fail of qualification under section 401(a) of the Internal Revenue Code of 1954.

Accordingly, it is held that a trust will not fail of qualification under section 401(a) of the Code if the use of any funds of a profit-sharing trust to purchase ordinary life insurance is limited by an amount which, when added to the total amount of the contributions and forfeitures previously allocated to the purchase of ordinary life insurance for the participant, is less than one-half of the total contributions and forfeitures allocated to the account of the employee. Since the test enunciated in Revenue Ruling 54-51, supra, is in terms of the contributions and not the trust fund, earnings, capital gains and losses of the trust are not taken into account in determining the amount of trust funds which may be used to pay premiums on ordinary life insurance contracts. It is also held that the program of providing current life insurance protection in a qualified employees' profit-sharing plan may be continued after normal retirement date, during the period of continued employment of a participant who elects not to retire, if the above stated limitation as to the proportion of funds so expendable is applied.

Revenue Ruling 54-51, supra , is accordingly amplified.