Rev. Rul. 70-184

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in PS No. 26, dated September 2, 1944.

The question presented is whether past service cost under an employees' pension trust may be liquidated in the manner described below and still meet the requirements of sections 401(a) and 404(a)(1)(C) of the Internal Revenue Code of 1954.

The plan provides that the employer is to make annual contributions thereunder in an amount sufficient to pay the normal cost of the plan for the year. The plan also provides that, until the entire past service cost is liquidated (regardless of the number of years involved), the employer is to contribute an additional amount of not less than two percent nor more than ten percent of such cost as of the date the plan was established but, in any event, enough to keep the unfunded past service cost at any time from exceeding the unfunded past service cost as of the date of establishment of the plan.

The plan contains a provision restricting the employer contributions that may be used to provide benefits for the 25 highest-paid employees in accordance with section 1.401-4(c) of the Income Tax Regulations.

Section 401(a)(4) of the Code provides that a plan will not meet the requirements of section 401(a) if the contributions or benefits provided thereunder discriminate in favor of employees who are officers, supervisors, or highly compensated.

Any method provided for funding past service credits, including the method contained in the instant case, will be acceptable if it does not result in prohibited discrimination. Although there is no advance assurance that past service benefits under a plan containing the funding limits prescribed here will be funded so as to preclude prohibited discrimination, the funding provision in this plan, along with the restrictions on benefits for the highest paid employees, will generally not cause prohibited discrimination.

If past service or other supplementary pension or annuity credits are provided by a qualified plan, section 404(a)(1)(C) of the Code allows as a deduction for any taxable year in addition to the normal cost of the plan, contributions in an amount not in excess of ten percent of the cost that would be required to completely fund or purchase such pension or annuity credits. That section does not, however, require any particular rate of contributions or any particular period of funding.

Accordingly, it is held that the provision of the plan in this case for funding past service credits is consistent with section 404(a)(1)(C) of the Code and does not prevent this plan from meeting the requirements of section 401(a).

PS No. 26 is hereby superseded since the position stated therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.