Rev. Rul. 68-31

Advice has been requested whether pre-retirement death benefits equal to the greater of (a) 100 times the monthly retirement benefit being purchased under a money-purchase pension plan funded with retirement income policies or (b) the cash surrender value of such a policy, will be considered incidental within the meaning of section 1.401-1(b)(1)(i) of the Income Tax Regulations.

An employer established a pension plan intended to qualify under section 401(a) of the Internal Revenue Code of 1954. The plan provides that, upon his retirement, each participant shall be entitled to the monthly retirement income that can be purchased by annual premiums equal to ten percent of the participant's annual compensation. All benefits are provided through the purchase of retirement income contracts. These contracts provide for a death benefit equal to the greater of (a) 100 times the monthly retirement income being purchased at the time of the participant's death or (b) the cash surrender value of the policy.

Section 1.401-1(b)(1)(i) of the regulations states that a qualified pension plan may provide for the payment of incidental death benefits through insurance or otherwise.

It was recognized, in Revenue Ruling 60-83, C.B. 1960-1, 157, that this provision of the regulations may be satisfied as to pre-retirement death benefits under a pension plan if such benefits do not exceed the greater of (a) 100 times the monthly retirement income provided under the plan or (b) the reserve of any policy being used to provide such benefits. There the plan is fully insured this can be done by purchasing retirement income contracts. It may also be accomplished under a split-funded arrangement by using ordinary life insurance contracts and an auxiliary fund to assure that the 100 to 1 ratio will not be exceeded.

Revenue Ruling 54-51, C.B. 1954-1, 147 (as amplified by Revenue Ruling 57-213, C.B. 1957-1, 157, and Revenue Ruling 60-84, C.B. 1960-1, 159), provides that the insurance feature of a profit-sharing plan will be 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 (a) 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 (b) to distribute the contract to the participant at retirement.

Revenue Ruling 66-143, C.B. 1966-1, 79, states, that the limitations applicable to the incidental use of trust funds to purchase ordinary life insurance contracts under a qualified profit-sharing plan are similarly applicable to pension plans of the money-purchase type.

Revenue Ruling 66-143 applies the limitations relating to incidental benefits under a profit-sharing plan to a money purchase plan because under both plans the employer's contributions are determined in accordance with a stated procedure, with the amount of any subsequent benefits or distributions flowing from those contributions. However, a money-purchase pension plan is also similar to other types of pension plans in that retirement benefits can be definitely determined since they are based on the stated contributions required under the plan. Hence, the test set forth in Revenue Ruling 66-143 is not the exclusive test for determining whether the death benefits provided under a money-purchase pension plan are incidental; death benefits which meet the test described in Revenue Ruling 60-83 are also incidental.

Accordingly, pre-retirement death benefits provided under the instant plan will be considered incidental within the meaning of section 1.401-1(b)(1)(i) of the regulations.

Revenue Ruling 66-143 is hereby clarified.