Rev. Rul. 58-544

Advice has been requested as to the time at which, under the retirement plan described below, employees reach retirement age for the purpose of determining when the exclusion from gross income of disability pension benefits is no longer applicable. Under the retirement plan of N company employees are not required to make contributions. Notice of the plan benefits is printed in a handbook furnished all employees.

The plan provides (a) that any male employee who has reached the age of 60 years, and whose term of employment has been 20 or more years, or any female employee who has reached the age of 55 years, and whose term of employment has been 20 or more years shall, if he or she requests, or may at the discretion of the company retirement committee, be retired from active service and, upon such retirement, shall be granted a service pension.

The plan provides (b) that any employee whose term of employment has been 30 years or more or any male employee who has reached the age of 55 and whose term of employment has been 25 or more years, or any female employee who has reached the age of 50 years and whose term of employment has been 25 or more years may, if the case is approved by the committee as appropriate for such retirement, be retired from active service and, upon such retirement, be granted a service pension.

The plan provides (c) that any employee who has become totally disabled, (nonservice-connected disability) and whose term of employment has been 15 years or more, shall upon retirement by reason of such disability be granted a pension, provided that if, at the time of such retirement the employee is qualified for a service pension, a service pension shall be granted instead of a disability pension. A disability pension shall continue so long as the employee is prevented by such disability from resuming active service with the company. If the employee recovers sufficiently to resume active service, the disability pension shall be discontinued and if the employee reenters the service of the company at that time, the period of absence on disability pension shall be considered as a leave of absence and not as a break in the continuity of the employee's service.

The annual pension allowance for each employee retired with a pension on account of age, length of service or disability shall be for each year of his term of employment one percent of the average annual pay during the ten years immediately preceding retirement, provided, however, that the committee may at its discretion base such pension upon the average annual pay of the ten consecutive years of service during which the retired employee was paid the highest rate of wages. The minimum pension, except in cases covered by (b) shall be $100 per month for a person who has attained age 65 and $75 per month for one who has not yet attained age 65.

With an exception that is not here pertinent every officer or employee becoming 65 years of age shall retire at the end of the month in which that age is reached.

Under the administration of the pension provisions of the plan, an employee who is retired for disability but, by reason of his term of employment and/or age, receives a service pension, subsequently recovers before attaining age 65, and wishes to return to work will, upon approval of the company doctor and those authorized to approve employment, be permitted to reenter the service of the company. Upon his reentering the company's service, the service pension payments are discontinued. The time absent is treated as a leave of absence without credit for time absent and upon restoration to the payroll, the employee is given immediate credit for service accrued prior to retirement. Any additional service accrued between date of reentering the service and date the employee again retires is added to the prior service and is credited in computing the ultimate pension rate. The policy of the company with respect to a pensioner reentering service is the same for an employee retired with a service pension granted under (b) above because of the proviso in (c) and an employee retired with a disability pension granted under the first provision of (c).

Section 105(d) of the Code provides that wages or payments in lieu of wages received by an employee pursuant to the provisions of a wage continuation plan for a period during which the employee is absent from work on account of personal injuries or sickness are excludable from gross income subject to the limitations stated in that section.

Section 1.105-4(a) of the Income Tax Regulations provides that section 105(d) is applicable only if the wages or payments in lieu of wages are paid pursuant to a wage continuation plan. A wage continuation plan includes plans under which payments are continued as long as the employee is absent from work on account of personal injury or sickness and plans under which benefits are continued until the employee either is able to return to work or reaches retirement age. An employee is not absent from work if he is not expected to work because, for example, he has reached retirement age. If a plan provides that an employee, who is absent from work on account of personal injury or sickness will receive a disability pension as long as he is disabled, section 105(d) is applicable to any payments which such employee receives under this plan before he reaches retirement age. Section 105(d) does not apply to the payments which such an employee receives after he reaches retirement age.

Revenue Ruling 57-76, C. B. 1957-1, 66, provides that retirement age will be deemed to be the lowest age specified in the appropriate written employee's pension or annuity plan at which the employee, had he not been disabled and had he continued in such employment, would have had the right to retire without the consent of the employer and receive retirement benefits based on service to date of retirement computed at the full rate set forth in the plan i. e., without actuarial or similar reduction because of retirement before some later specified age, provided, however, that such retirement age corresponds with the employer's actual practice and is reasonable in view of all the pertinent facts and circumstances.

Under the plan herein described the lowest age at which a male employee can be retired, without consent of the company is age 60 and a female employee is age 55 with 20 years or more of service. Therefore, a male employee will reach normal retirement age when he is 60 years of age and has had 20 years or more of service and a female employee will reach normal retirement age when she is 55 years of age and has had 20 years or more of service. Where an employee is retired for disability after 15 years of service, but will not meet the 20 year service requirement before he reaches the compulsory retirement age of 65, retirement age for excluding disability annuity payment is 65 years.

Accordingly, the payments which an employee of the N company receives under the wage continuation plan prior to the time such employee reaches normal retirement age may be excluded from his or her gross income to the extent provided in section 105(d) of the Code.