Rev. Rul. 66-143

Advice has been requested concerning the permissible limits of `incidental' life insurance provided under pension plans of the money-purchase type which are funded by a combination of ordinary life insurance policies and a separate fund, and also, whether insurance premiums subject to such limits may be computed in accordance with the table contained in Revenue Ruling 55-747, C.B. 1955-2, 228, or any other table reflecting the net cost of pure life insurance protection.

Revenue Ruling 54-51, C.B. 1954-1, 147, sets forth the principle that if amounts allocated to the respective participants in any type of qualified plan are to be used to provide such participants with life insurance protection, the life insurance feature must be incidental and subordinate to the primary purpose of the plan, which is to permit the employees or their beneficiaries to participate in a plan of deferred compensation. See section 1.401-1(b)(1)(i) and (ii) of the Income Tax Regulations.

In the case of a profit-sharing plan which provides for the use of trust funds, which have not been accumulated fro at least 2 years, to purchase and pay premiums on ordinary life insurance contracts, the insurance feature is deemed to be incidental if: (1) the aggregate of life insurance premiums for each participant is less than one-half of the aggregate of the contributions allocated to the credit of the participant at any particular time, and (2) the plan requires the trustee to convert the entire value of the life insurance contract at or before retirement into cash, to provide periodic income so that no portion of such value may be used to continue life insurance protection beyond retirement, or to distribute the contract to the participant. See Rev. Rul. 54-51, as amplified by Rev. Rul. 57-213, C.B. 1957-1, 157, and Rev. Rul. 60-84, C.B. 1960-1, 159.

In a pension or annuity plan funded with insurance contracts, the life insurance benefit is deemed to be incidental where the insurance benefit is no greater than 100 times the monthly annuity, e.g., $1,000 of life insurance for each $10 of monthly annuity. See Rev. Rul. 60-83, C.B. 1960-1, 157.

Therefore, the determination of whether life insurance protection is incidental for participants in pension plans of the fixed benefit and unit benefit types is based upon the application of a ratio of the death benefit to the monthly annuity benefit. In the case of a profit-sharing plan, since benefits are not predetermined, the determination is based upon a ratio of the aggregate premiums paid to the aggregate contributions.

A plan with a formula requiring a contribution of a specified percentage of the compensation of participating employees, regardless of profits, is not a profit-sharing plan but may be a pension plan of the money-purchase type. See P.S. No. 24, dated September 2, 1944. A pension plan of the money-purchase type is, however, similar to a profit-sharing plan in that in both plans the employer's annual contribution is determined in accordance with a stated procedure, with the amount of any subsequent benefits or distributions flowing from these contributions.

Accordingly, it is held that in the case of a pension plan of the money-purchase type which provides for the use of trust funds to purchase and pay premiums on ordinary life insurance contracts, the insurance feature will be deemed incidental if (1) the aggregate of the premiums for life insurance in the case of each participant is less than one-half of the aggregate of the contributions allocated to him at any particular time, and (2) the plan requires the trustee to convert the entire value of the life insurance contract at or before retirement into cash, to provide periodic income so that no portion of such value may be used to continue life insurance protection beyond retirement, or to distribute the contract to the participant at retirement.

The question of the allowance of `incidental' life insurance protection under a qualified plan was considered by the United States Board of Tax Appeals in Raymond J. Moore, et al. v. Commissioner , 45 B.T.A. 1073 (1941), acquiescence, C.B. 1944, 20. The issue involved was whether an employees' pension plan could qualify if, in addition to pension benefits, it provided life insurance protection under the terms of the insurance company's policies used to fund the pension. It was held that the mere fact that the policies, under which the pension benefits were funded, incidentally provided life insurance protection, did not case the plan to fail of qualification as a pension plan. The initial life insurance protection provided under the policies in that case equalled 100 times the monthly annuity. The cost of the pure insurance element in the type of retirement income contracts involved in the Moore case varied according to age at issue, but in every case was less than 25 percent of total premiums.

In essence, a 25-percent limitation on pure insurance protection is applicable under a profit-sharing plan or a pension plan of the money-purchase type since the 50-percent limitation on amounts credited to a participant's account, which may be expended for premiums on ordinary life insurance contracts under such plans, recognizes and takes into account the fact, as stated in Revenue Ruling 61-164, C.B. 1961-2, 99, that only approximately one-half of the premiums paid for such a contract are for the pure insurance protection, the remainder being applied to the building up of a reserve.

Accordingly, it is held that the 50-percent limitation under Revenue Ruling 54-51, in the case of a profit-sharing plan, and the foregoing similar limitation applicable to pension plans of the money-purchase type, is to be applied to the aggregate amount of the actual premiums paid under the ordinary life insurance contracts which are purchased as part of the plan and the amount of such premiums may not be determined by use of the table contained in Revenue Ruling 55-747 or any other table of rates which merely reflect the net cost of pure life insurance protection.