Rev. Rul. 62-152

The Internal Revenue Service has formulated the following guides for determining whether disability benefits under an employees' pension or annuity plan, intended to qualify under section 401(a) of the Internal Revenue Code of 1954, are properly integrated with disability benefits under the Social Security Act.

An employees' pension plan provides for a normal retirement benefit integrated with social security benefits in accordance with the guides set forth in Mimeograph 6641, C.B. 1951-1, 41, as modified by Revenue Ruling 61-75, C.B. 1961-1, 140. Besides the normal retirement benefit, the plan provides for a benefit payable upon `total and permanent disability.'

1. General rule .-Such disability benefits will be considered properly integrated with disability benefits provided by the Social Security Act if the requirements set forth in paragraphs 2 and 3 below are satisfied.

2. Limitation on amount of disability benefits .-(a) Except as provided in (b) or (c) of this paragraph, the amount of the disability benefits payable for life or until recovery from disability, if that occurs before normal retirement age in an excess plan (see paragraph 4(d) of Mimeograph 6641) of either the fixed benefit or unit credit type, may not exceed 60 percent of the maximum normal retirement benefit which would be permitted, if the employee's service had continued to his normal retirement date, by the rules of paragraphs 5, 6, 7, and 8 of Mimeograph 6641, as modified by Revenue Ruling 61-75 (or paragraph 7 of Revenue Ruling 61-75, but without actuarial reduction by reason of disability benefits commencing before age 65). This amount should be based upon average compensation, determined upon retirement for disability, no greater than the average permitted by paragraph 2 of Revenue Ruling 61-75.

(b) In the case of a fixed benefit plan, if the ratio that the actual number of years of service of the employee upon retirement for disability bears to the total number of years of service he would have had if he had remained in service until normal retirement date exceeds 6/10 , then such higher ratio may be used instead of the 60 percent factor mentioned in the first sentence of (a) above.

(c) In the case of a unit benefit plan, if the amount of the maximum uniform unit credits permitted by paragraph 12 (a), (b), or (c) (whichever is applicable) of Mimeograph 6641, as modified by Revenue Ruling 61-75, which have accrued to the time of the employee's retirement for disability, without actuarial reduction by reason of commencement of disability benefits before age 65, exceeds the amount determined in (a) above, then such larger amount may be used.

(d) In the case of plans with stepped-up benefit rates, the above limits are to be applied in a manner consistent with the method set forth in paragraph 16 of Mimeograph 6641.

(e) In the case of a pension plan of the offset type referred to in paragraph 15 of Mimeograph 6641, benefits payable to a disabled employee before age 65 will be considered properly integrated with disability benefits payable under the Social Security Act if such disability benefits are determined uniformly in accordance with compensation or service or both for all covered employees (with no employee or no portion of compensation excluded by reason of a minimum compensation requirement), and if reduced by no more than 64 percent of the actual disability benefit received by the employee under the Social Security Act in effct in 1961. After normal retirement age, when old-age benefits under the Social Security Act become payable, the offset may be that provided in paragraph 8 of Revenue Ruling 61-75.

(f) Minimum benefits and salary or wage brackets for disability benefits may be provided in accordance with the rules of paragraph 17 of Mimeograph 6641, as modified by paragraph 5 of Revenue Ruling 61-75.

3. Conditions for payment of integrated disability benefits .-If a pension plan is to provide total and permanent disability benefits which are integrated with the disability benefits payable under the Social Security Act, the plan benefits must not only be properly limited as to amount, as set forth above, but must also be payable under eligibility conditions which are as stringent as those required for payment of disability benefits under that Act. In order to be eligible for total and permanent disability benefits under the Social Security Act, an `insured' individual must have had the equivalent of five years of covered employment, must be totally and permanently disabled, and must have been so disabled for at least six months. Total and permanent disability is defined in the Act as the inability `to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.'

If the eligibility conditions for disability retirement in a pension plan are as stringent as those under the Social Security Act, an individual receiving disability benefits under the terms of the plan should also be entitled to disability benefits under the Act.

Therefore, the disability benefits under a pension plan will be properly integrated with the disability benefits under the Social Security Act if disability benefits are paid under the plan only when the employee is also entitled to disability benefits under the Social Security Act. This requirement does not apply in the case of a pension plan of the offset type, described in paragraph 2(e) above, if the plan provides for payment of the full disability benefits (without offset) when disability benefits are not payable under the Social Security Act.

4. Advance determinations .-Some employers are reluctant to tie the payment of disability benefits under a plan to adjudication of disability under the Social Security Act. There would be no objection, as far as integration is concerned, to a plan's requirement for disability benefits being more stringent than those in the Social Security Act.

On the other hand, benefits paid to a disabled employee under an excess plan will obviously not be integrated with disability benefits under the Social Security Act and will probably be discriminatory within the meaning of section 401(a) of the Code, if another employee, similarly disabled, who is excluded from the plan by a minimum compensation requirement, is not entitled to disability benefits under that Act. Therefore, if a pension plan provides that its `integrated' disability benefits will be payable only to employees entitled to disability benefits under the Act, and the plan is found to qualify in all other respects, a favorable advance determination under section 401(a) will be issued. In the absence of such a provision (except as permitted in the last sentence of paragraph 3 above and in paragraph 5 below), a favorable advance determination as to qualification of the plan will not be issued, since the actual operation of the plan's disability benefit provision will determine whether the plan's disability benefit is in operation properly integrated with disability benefits under the Social Security Act. In any event, the plan will be considered discriminatory if the disability benefits paid fail to satisfy paragraphs 2 and 3 above or paragraph 5 below.

5. Integration with normal retirement benefits .-If disability benefits may be paid under eligibility conditions which do not satisfy the provisions of paragraph 3 above, such benefits are not integrated with the disability benefits of the Social Security Act and must satisfy the integration requirements relating to early retirement benefits (set forth in paragraphs 9 and 12 of Mimeograph 6641, as modified by Revenue Ruling 61-75), if they are to be integrated at all under a plan qualified under section 401(a) of the Code. For the purpose of determining the amount of such `disability' benefits, it will not be acceptable to use a disabled life mortality table in the computation of equivalent actuarial values.

Disability experience depends to a large extent on the definition of disability, economic conditions, and the attitude of the employees and plan administrators regarding utilization of the disability provision. For this reason, particularly in the case of a plan with a liberal definition of disability, there is little likelihood that the actual value of the `disabled' life annuities provided by the plan, determined on the basis of an arbitrarily selected disabled life table, will be close to the value of the early retirement benefits determined in accordance with Mimeograph 6641 and Revenue Ruling 61-75. Any such plan requiring integration with Social Security benefits would be discriminatory within the meaning of section 401(a) of the Code if in operation the disability benefits involve additional employer costs not provided for by the reserves for normal retirement benefits. Whether the discrimination will occur, therefore, depends primarily on factors, other than the plan provisions themselves, which cannot be evaluated in advance. Accordingly, a favorable advance determination as to the qualification of the plan will not be issued if the plan provides disability benefits designed to integrate under the provisions relating to early retirement benefits but which uses a disabled life mortality table for the purpose of determining the amount of such `disability' benefits.