Rev. Rul. 68-385

The Internal Revenue Service has been asked to state its position concerning the time at which employees reach "retirement age" for the purpose of determining whether disability pension payments should be excluded from gross income under section 105(d) of the Internal Revenue Code of 1954 and section 1.105-4(a)(3)(i) of the Income Tax Regulations.

Subject to certain limitations, section 105(d) of the Code excludes from gross income amounts received by an employee under the provisions of a wage continuation plan if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of personal injuries or sickness. Section 1.105-4(a)(3)(i) of the regulations provides, in effect, that section 105(d) is applicable to disability pension payments only until the employee reaches "retirement age."

The Service has consistently followed the definition of "retirement age" as published in Revenue Ruling 57-76, C.B. 1957-1, 66, and modified by Revenue Ruling 61-6, C.B. 1961-1, 15. These Revenue Rulings held that "retirement age" will be deemed to be the lowest age specified in the appropriate written employees' 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.

Sections 1.105-4(a) and 1.79-2(b)(3) of the regulations, as set forth in Treasury Decision 6888, C.B. 1966-2, 23, and clarified by Treasury Decision 6919, C.B. 1967-1, 22, define "retirement age." In part, section 1.105-4(a) of the regulations, as amended, provides as follows:

(2)(i)--Section 105(d) is applicable only if the wages or payments in lieu of wages are paid pursuant to a wage continuation plan. The term "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. It includes * * * plans under which benefits are continued until the employee either is able to return to work or reaches retirement age. * * *.

(3)(i)(a)--Section 105(d) applies only to amounts attributable to periods during which the employee would be at work were it not for a personal injury or sickness. Thus, 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 a personal injury or sickness, will receive a disability pension or annuity as long as he is disabled, section 105(d) is applicable to any payments which such an employee receives under this plan before he reaches retirement age as defined in (b) of this subdivision, but section 105(d) does not apply to the payments which such an employee receives after he reaches such retirement age. * * *

(b) The term retirement age as used in (a) of this subdivision has the same meaning as that term has in paragraph (b)(3) of Section 1.79-2, except that, for purposes of applying the provisions of paragraph (b)(3)(i) of Section 1.79-2 in the case of payments received by the employee to which this section applies, the retirement age of the employee is to be determined only with regard to the particular pension or annuity plan under which such payments are made.

Section 1.79-2(b)(3) of the regulations provides:

Retirement age.--For purposes of section 79(b)(1) and this section, the meaning of the term "retirement age" is determined in accordance with the following rules--

(i)(a) If the employee is covered under a written pension or annuity plan of the employer providing such individual group-term life insurance on his life (whether or not such plan is qualified under section 401(a) or 403(a)), then his retirement age shall be considered to be the earlier of--

(1) The earliest age indicated by such plan at which an active employee has the right (or an inactive individual would have the right had he continued in employment) to retire without disability and without the consent of his employer and receive immediate retirement benefits computed at either the full rate or a rate proportionate to completed service as set forth in the normal retirement formula of the plan, i.e., without actuarial or similar reduction because of retirement before some later specified age, or

(a) The age at which it has been the practice of the employer to terminate, due to age, the services of the class of employees to which he last belonged.

(b) For purposes of (a) of this subdivision, if an employee is covered under more than one pension or annuity plan of the employer, his retirement age shall be determined with regard to that plan which covers that class of employees of the employer to which the employee last belonged. If the class of employees to which the employee last belonged is covered under more than one pension or annuity plan, then the employee's retirement age shall be determined with regard to that plan which covers the greatest number of the employer's employees.

(ii) In the absence of a written employee's pension or annuity plan described in subdivision (i) of this sub-paragraph, retirement age is the age, if any, at which it has been the practice of the employer to terminate, due to age, the services of the class of employees to which the particular employee last belonged, provided such age is reasonable in view of all the pertinent facts and circumstances.

(iii) If neither subdivision (i) or (ii) of this subparagraph applies, the retirement age is considered to be age 65.

The application of the rules stated above is illustrated by the following examples:

Example (1).--The M company has a formal retirement annuity plan which is covered by a contract issued by an insurance company. It provides a regular retirement annuity beginning at age 62 for any employee who has remained at work with the company until age 62. It also provides a disability pension to any employee who becomes totally and permanently disabled.

The regular annuity at age 62 is equal to two percent of the employee's total earnings with the company. Employees with 15 years or more of service may retire at age 55 on an actuarially reduced annuity.

For the purpose of excluding disability pension benefits pursuant to section 1.105-4(a)(3)(i) of the regulations, employees of M reach retirement age at age 62.

Example (2).--The N company retirement plan provides that the employer will contribute each year an amount equal to eight percent of each employee's compensation into a retirement trust, which amount is credited to individual employee accounts. Each employee's account is also credited soon after the year-end with investment earnings at the average rate earned on the trust's assets. When an employee reaches age 65, the amount accumulated in his account is used to purchase a single premium annuity from an insurance company, or, at the employee's option, will be applied in accordance with annuity tables adopted by the plan trustees to pay him an annuity from the trust. An employee may also continue working, with the consent of the employer, after age 65, but there are no more credits to his account other than the investment earnings. In such case, the amount accumulated at actual retirement is applied to purchase or pay an annuity, as aforesaid.

If the employee should become disabled before age 65, the amount accumulated in his account at the time he becomes disabled is paid to him at the rate of $50 a month until exhausted or until he reaches age 65, if sooner. In the latter event, the balance is applied to pay an annuity to him in accordance with the aforesaid tables. An employee may also retire at his own request any time after reaching age 55 and have the amount accumulated in his account applied either to purchase an annuity for him or to pay an annuity to him from the trust, based on his age at actual retirement.

For the purpose of excluding disability pension benefits pursuant to section 1.105-4(a)(3)(i) of the regulations, the retirement age of an employee covered by this plan is age 65, because the amount of annuity purchasable with the accumulation in the employee's account in case of retirement before age 65 is automatically reduced actuarially in accordance with insurance company annuity rates and the annuity tables adopted by the trustees.

Example (3).--Sections 504 and 508 of the Civil Service Retirement Act Amendments of 1966, Title V of Public Law 89-504, 80 Stat. 288, at 301 and 302, changed the age and service requirements for payment of certain unreduced retirement benefits to eligible civilian employees who retire or are separated on or after July 18, 1966. See 5 U.S.C. Section 8336. In general, an employee may elect to retire and receive an immediate annuity, the amount of which is not actuarially or similarly reduced, at any time after he meets one of the following age and service conditions:

(1) Age 55 with 30 years of service.

(2) Age 60 with 20 years of service.

(3) Age 62 with 5 years of service.

With certain exceptions, retirement is compulsory at age 70 after 15 years of service. If an employee becomes disabled after completing 5 years of civilian service and before meeting the above specified age and service requirements, he may be retired on a disability annuity.

For the purpose of excluding disability annuity payments from gross income pursuant to section 1.105-4(a)(3)(i) of the regulations, a civilian employee of the United States Government who is covered by the Civil Service Retirement Act and who retires on disability on or after July 18, 1966, reaches retirement age at the earliest applicable time indicated below (in each instance, the period of service is computed as though the employee had not been disabled and had continued to work at employment covered under the act):

(1) At age 55, if on that date the employee has completed 30 years or more of service.

(2) Upon completion of 30 years of service, if such date occurs after the employee reaches age 55, but before he reaches age 60.

(3) At age 60, if on that date the employee has completed 20 years or more of service.

(4) Upon completion of 20 years of service, if such date occurs after the employee reaches age 60, but before he reaches age 62.

(5) At age 62, if on that date the employee has completed 5 years or more of service.

(6) Upon completion of 5 years of service if such date occurs after the employee reaches age 62. Inasmuch as disability retirement can only be granted after 5 years of civilian service, a disability retiree who would reach retirement age only under (6) above would be at retirement age on the date he retired for disability and would not be entitled to exclude any of his disability retirement payments under section 105(d).

The above ages according to the indicated service also apply in the case of investigatory employees who qualify for the special provisions of section 6(c) of the Civil Service Retirement Act of May 29, 1930, as amended, 5 U.S.C. 8336(c).

Civilian employees of the United States, including investigatory employees, who are covered by the Civil Service Retirement Act and who retired on disability before July 18, 1966, reach retirement age for section 105(d) purposes at the earliest applicable time indicated below (again, the period of service is computed as though the employee had not been disabled and had continued to work at employment covered under the Act):

(1) At age 60, if on that date the employee has completed 30 years or more of service.

(2) Upon completion of 30 years of service, if such date occurs after the employee reaches age 60, but before he reaches age 62.

(3) At age 62, if on that date the employee has completed 5 years or more of service.

(4) Upon completion of 5 years of service, if such date occurs after the employee reaches age 62. As indicated previously, since disability retirement is granted under the Act only after 5 years of civilian service, a disability retiree who reached retirement age for section 105(d) purposes only under (4) would not be entitled to any section 105(d) exclusion with respect to his disability retirement payments.

Example (4).--The retirement plan of O company is uninsured and unfunded. Notice of the plan benefits is printed in a handbook furnished all employees.

Under the plan, an employee who has at least 20 years of service may retire at age 60 on a pension, the yearly amount of which is equal to 40 percent of his average salary for the five years immediately preceding retirement. He may also retire at any time after reaching age 50 if he has at least 20 years of service, but his pension is the actuarial value at that time of the pension he would have received had he remained in the service to age 60, except in case of disability retirement.

If the employee becomes totally and permanently disabled after completing 20 years of service, he may retire regardless of his age and receive a pension computed at 40 percent of his average salary for the last five years without the actuarial reduction.

For the purpose of excluding a pension received on account of disability, pursuant to section 1.105-4(a)(3)(i) of the regulations, the retirement age of an employee of O is age 60.

Example (5).--The P corporation has a limited number of employees. It has no formal wage continuation or retirement plan, but it has a custom of continuing the salaries of all employees who are absent from work on account of personal injuries or sickness for short periods and of granting pensions to key employees who become totally and permanently disabled. All employees have knowledge of this custom. In 1955 two key employees were retired from service on account of total and permanent disability at ages 59 and 73, respectively, and received disability pensions. There are at present four active full-time key employees. Their respective ages are 33, 56, 58, and 76.

For the purpose of excluding disability pensions pursuant to section 1.105-4(a)(3)(i) of the regulations the retirement age of all key employees of P is age 65.

Example (6).--R company has a written pension plan which provides normal retirement benefits computed at a flat rate (not varied by years of service) for all employees after 30 years of service. Employees who become disabled after 20 years of service but before completing 30 years of service may retire with benefits in proportion to completed service payable immediately. A, an employee of R who was employed on his 24th birthday, retires at age 45 on account of disability and receives a disability pension pursuant to this plan. For purposes of section 1.105-4(a)(3)(i) of the regulations, A reaches retirement age at age 54.

See section 72 of the Code and section 1.72-15 of the regulations for the exclusion from gross income of portions of amounts received as an annuity or as a distribution from an employee's trust or annuity plan and for the applicability of section 72 to accident or health plans. See sections 104 and 105(e) of the Code for the exclusion from gross income of certain amounts received under an accident and health plan.

Revenue Ruling 57-76 and Revenue Ruling 61-6 are hereby superseded.