Rev. Rul. 68-453

Advice has been requested whether the death benefits described below are `incidental' within the meaning of section 1.401-1(b)(1)(i) of the Income Tax Regulations.

Retirement benefits in the pension plan under consideration are funded by typical level premium ordinary life insurance contracts plus employer contributions to an auxiliary fund in which separate accounts are maintained for each participant. The face amount of the life insurance contracts purchased for a participant equals 100 times his anticipated monthly normal retirement benefit. The cash value of these contracts at normal retirement age is used to provide part of the participant's normal retirement benefit. The balance of that benefit is provided from the participant's account in the auxiliary fund. A participant's account in the auxiliary fund is equal to the accumulation of the level amounts which, with interest at 4 percent per annum, and with the cash value of the contracts on his life, will be sufficient to provide his anticipated normal retirement benefits.

In the event of the participant's death before normal retirement date, a death benefit is payable to his beneficiary, equal to the greater of (a) the proceeds of the ordinary life insurance contracts or (b) the sum of (i) the reserve under the life insurance contracts plus (ii) the employee's account in the auxiliary fund. The proceeds of the life insurance contracts will be payable to the beneficiary in either case, and, if (b) is applicable, the additional amount required will be paid from the auxiliary fund.

The death benefit described above is approximately equal to the death benefit provided under a typical level premium retirement income contract with a face amount of 100 times the anticipated monthly retirement benefit. The latter death benefit has been accepted as `incidental' within the meaning of section 1.401-1(b)(1)(i) of the regulations Revenue Ruling 61-121, C.B. 1961-2, 65. Accordingly, it is held that the death benefit provided in the pension plan under consideration is `incidental' within the meaning of the foregoing section of the regulations, and would not preclude the plan from qualifying under section 401(a) of the Internal Revenue Code of 1954.

On the other hand, a death benefit equal to the sum of the proceeds of the ordinary life insurance contracts plus the amount of the employee's account in the auxiliary fund would exceed the death benefit under a typical level premium retirement income contract with a face amount of 100 times the anticipated monthly retirement benefit, and would not be `incidental' within the meaning of section 1.401-1(b)(1)(i) of the regulations, and would preclude the plan from qualifying.