Rev. Rul. 60-73

Advice has been requested as to a method of conforming an employees' trusteed money-purchase pension plan so as to qualify under section 401(a) of the Internal Revenue Code of 1954 when the plan provides that forfeitures, arising from termination of employment, in an amount not in excess of one percent of the employer's contributions, shall be reallocated to the accounts of remaining participants.

Under the provisions of an employees' trusteed money-purchase pension plan, the employer contributions are two percent of earnings for the first year, three percent of earnings for the second year, and four percent of earnings thereafter. To the extent possible, each contribution by the employer is first satisfied out of the employer's contribution credit account.

The `units' arising from forfeitures upon termination of employment, for reasons other than death, are to revert to the trust fund and to be reallocated on the next succeeding valuation date to members' accounts in proportion to the total undistributed units then credited to such accounts. However, the value of such units that may revert to the trust fund may not exceed one percent of the total employer contributions during the immediately preceding plan year. Units which cannot revert to the trust fund because of this limitation are credited to the employer's contribution credit account. These are used to reduce the next succeeding employer contributions, as stated above, and are allocated to members' accounts as a part of such employer contributions.

The units representing employer contributions on a member's behalf are determined by dividing each such contribution by the then applicable unit value.

The units arising from forfeitures, and which revert to the trust fund instead of being used to reduce the employer's contribution, are not anticipated in any way by discount for expected terminations of employment or otherwise.

Section 1.401-1(b)(1)(i) of the Income Tax Regulations states that a pension plan within the meaning of section 401(a) of the Code is one established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement. Such benefits are not definitely determinable if funds arising from forfeitures on termination of service, or other reason, may be used to provide increased benefits for the remaining participants instead of being used to reduce the amount of contributions by the employer. See also Revenue Ruling 109, C.B. 1953-1, 288.

Thus, the instant plan must be amended to conform to the above regulations in order to be considered as qualifying under section 401(a) of the Code. Any one of the following three procedures will be acceptable:

1. Amend the provision which specifies that units arising from forfeiture upon termination of employment would revert to the trust fund to be reallocated to the members' amounts, so that no such units revert to the trust fund to be reallocated to individual accounts. Instead, all such units would be credited to the employer's contribution credit account and used to reduce the next succeeding employer contributions.

2. Amend the provision which states the rates for employer contributions, so that the rates set forth would be merely nominal rates. The actual rates of employer contributions would be one percent less than such nominal rates, i.e. , the employer would actually contribute at the rates of one and ninety-eight hundredths percent, two and ninety seven-hundredths percent, and three and ninety six-hundredths percent, instead of at the nominal rates of two percent, three percent, and four percent.

The difference between the nominal rates and the actual rates of contribution would represent an allowance for anticipated forfeitures arising from terminations of employment. The units to be credited to each member would, however, be based upon the nominal rates of contribution rather than the actual rates. Thus, the employer's actual contributions would be reduced by one percent to allow for anticipated forfeitures, but the number of units credited to members' accounts on the basis of such contributions would be unchanged.

3. In determining the units which represent employer contributions on a member's behalf, amend the plan to provide that the number of units to be credited to a member's account would be ascertained by dividing each employer contribution by 100/101 of the then applicable unit value, instead of by the full unit value. The effect of such amendment would be to increase the number of units credited to each member from employer contributions by one percent, by reason of anticipated forfeitures.

This result would be the same as if the number of units to be credited to each member were based upon nominal employer contributions at the rate of two and two hundredths percent, three and three hundredths percent, and four and four hundredths percent, with the actual company contributions being at the rates of two percent, three percent, and four percent as now specified in the plan. In this case, also, the difference between the nominal and actual contribution rates would represent an allowance for future terminations of employment. This result is similar to that discussed in method 2 above, except that the employer's actual contributions would remain unchanged, and the number of units credited to members' accounts on the basis of such contributions would be increased by one percent.

The result in both method 2 and method 3 above would not violate the principle in the regulations that forfeitures may not be reallocated in a manner which would make the benefits indefinite, inasmuch as the amount of forfeitures to be reallocated would already have been anticipated.