Rev. Rul. 70-611

Advice has been requested whether the spouse's death benefit described below, which is part of a pension plan intended to qualify under section 401(a) of the Internal Revenue Code of 1954 may be regarded as "incidental" within the meaning of section 1.401-1(b)(1)(i) of the Income Tax Regulations.

A unit benefit pension plan covers all employees who were hired before age 55. All continuous service since the most recent date of hire counts as credited service. Normal retirement age under the plan is age 65. The plan provides that if an employee dies after attainment of age 55 and completion of 10 years of credited service, but before actual retirement, a benefit shall be payable to his spouse in the form of a straight life annuity, commencing immediately upon the employee's death. The amount of the spouse's benefit equals the portion of the employee's normal retirement benefit accrued on account of credited service up to the date of death, except that such spouse's benefit is reduced actuarially if the spouse is more than 5 years younger than the deceased employee.

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. Revenue Ruling 66-143, C.B. 1966-1, 79, holds that death benefits are considered incidental in a money-purchase type of pension plan if, for any individual, the cost of such benefits does not exceed 25 percent of the total cost. The same limitation may be applied to determine whether death benefits in other types of pension plans are incidental within the meaning of the foregoing section of the regulations.

Actuarial computations have been made, showing that the cost of the spouse's benefit described above, expressed as a percentage of the total cost of the benefits under the plan, varies according to age at hire, but generally does not exceed 25 percent for any individual. In the few possible situations where the cost can exceed 25 percent, the amount of the excess is inconsequential.

Accordingly, it is concluded that in the present case, the spouse's benefit may be regarded as "incidental" within the meaning of section 1.401-1(b)(1)(i) of the regulations.

Similar actuarial computations show that when a spouse's benefit in the form of a straight life annuity equals the employee's accrued benefit (or a constant percentage, no greater than 100 percent, thereof), the cost of the spouse's benefit as a percentage of the cost of the total benefits under the plan, for a given set of actuarial assumptions, is a function of the age an employee must have attained at the time of his death in order for his spouse to be eligible for the spouse's benefit. A similar relationship holds when the spouse's benefit in the form of a straight life annuity equals the employee's anticipated normal retirement benefit (or a constant percentage, no greater than 100 percent, thereof), which is the pension that would have been payable to the participant on normal retirement date if he had continued in service to that date earning the compensation in effect at the time of death. (The cost when the death benefit is based on the accrued benefit also varies according to age at hire, but this variation has been eliminated in what follows by considering only a minimum age at hire which results in the maximum cost.) If the plan is not a unit credit plan such as that described above, the accrued benefit for this purpose equals the anticipated normal retirement benefit multiplied by the ratio (not in excess of 100 percent) of the number of actual years of service at the date of death to the number of years of service that the employee would have had if his service had continued until normal retirement date.

Actuarial computations have also been made to determine the maximum percentage of accrued benefit, or anticipated normal retirement benefit, that can be paid as a spouse's benefit and still have the spouse's benefit qualify as an incidental death benefit under the principle set forth in this Revenue Ruling. These computations have been made for quinquennial ages which the employee must have attained at death in order for his spouse to be eligible for the spouse's benefit. The table set forth below has been developed on the basis of these computations. A spouse's benefit of a straight life annuity which is equal to a specified percentage of an employee's accrued benefit and which commences immediately upon the employee's death will be deemed to be incidental, within the meaning of section 1.401-1(b)(1)(i) of the regulations if, for a given eligibility age in column (1), the specified percentage does not exceed the percentage shown in column (2). Also, an otherwise similar benefit equal to a specified percentage of an employee's anticipated normal retirement benefit will be deemed to be incidental within the meaning of that section of the regulations if, for a given eligibility age in column (1), the specified percentage does not exceed the percentage shown in column (3).

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The foregoing table does not apply in any case where the spouse's benefit is not directly proportional to the accrued benefit or anticipated normal retirement benefit, as the case may be, or where the facts otherwise differ materially from the facts given for the plan described in this Revenue Ruling, for example, where there is a significant limitation on the years of actual service which may be credited for the purpose of computing the spouse's benefit.