Rev. Rul. 68-243

Advice has been requested whether `public disability benefits' as defined in the plan described below constitute `retirement benefits created under State or Federal law' within the meaning of section 401(a)(5) of the Internal Revenue Code of 1954 and are acceptable offsets against benefits under a qualified employees' pension plan.

An employer established a pension plan that was intended to qualify under section 401(a) of the Code. The plan provides that benefits thereunder will be offset by public disability benefits. The term `public disability benefits' is defined in the pension plan as including (1) disability payments under any workmen's compensation law or occupational diseases law (except fixed statutory payments for the loss of any bodily member) or (2) any disability damages recovered from the employer under common law.

Section 401(a)(5) of the Code provides that a plan shall not be considered discriminatory merely because the contributions or benefits of or on behalf of the employees under the plan differ because of any retirement benefits created under State or Federal law.

The effect of section 401(a)(5) of the Code is to permit total benefits, inclusive of those provided under the social security or similar program, to be used for comparative purposes. See Part 4(j) of Revenue Ruling 65-178, C.B. 1965-2, 94. A program, like the social security program, that requires employer contributions and makes benefits available to the general public is a similar program for purposes of Part 4(j) of Revenue Ruling 65-178.

Further, section 401(a)(5) of the Code does not provide for the offset of benefits under a qualified plan by disability damages recovered from an employer in a common law action. Such disability damages are not paid under a program similar to the social security program and offsetting retirement benefits by disability damages of this type would result in the plan being used to satisfy the employer's liability for damages.

Since the benefits payable under a workmen's compensation law or occupational diseases law are available to the general public, it is held that benefits payable under such laws are acceptable as an offset against benefits payable under the qualified pension plan in the instant case. However, benefits under the plan may not be offset by disability damages recovered by an employee in a common law action against the employer.