Rev. Rul. 71-296

Advice has been requested whether a pension plan fails to qualify under section 401(a) of the Internal Revenue Code of 1954, if it grants discretion to the trustee to determine the option under which distributions will be made.

The plan provides a lifetime monthly retirement benefit beginning at age 65, based on a participant's average compensation. The plan also provides that the present value (computed on the basis of reasonable actuarial assumptions), at time of retirement, of a participant's pension benefits may be (1) used to purchase an annuity contract from an insurance company, (2) used to provide a reduced pension over the joint lives and the life of the last survivor of the participant and his spouse, or (3) paid out in equal installments over a ten-year period. In all cases, the determination of which mode of distribution shall be selected is solely within the discretion of the trustee of the trust forming a part of the pension plan. Participants' interests under the plan are fully vested prior to retirement.

Section 401(a)(4) of the Code provides that a plan will not qualify under section 401 unless there is no discrimination in contributions or benefits in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Section 1.401-1(b)(1)(i) of the Income Tax Regulations provides that a pension plan within the meaning of section 401(a) of the Code is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement.

Revenue Ruling 71-24, C.B. 1971-1, 114, provides that:

The normal retirement age is the time from which definitely determinable benefits under a pension plan become fixed and payable. An employee who has reached such age and has fulfilled the service requirement and other uniformly applicable provisions of the plan must be permitted to retire and to commence receiving the benefits payable thereunder. Arrangements, however, may be mutually made for continued employment beyond normal retirement age. In such event, provision may be made with respect to the treatment of the pension benefits such as, for example, payment as though the employee had actually retired, deferment to actual retirement without increment for the interval between the normal retirement date and actual retirement, or actuarial equivalent on actual retirement of the benefit at normal retirement age. Whatever provisions are made, however, must be uniformly applied to all participants.

Similarly, pension plans may include various modes of settlement for payment of benefits provided that under each mode the distribution has the same value (computed on the basis of reasonable actuarial assumptions) as a distribution determined under any other mode of settlement provided for under the plan, and each participant is entitled to a fully vested right in the benefit payable under the plan. In an insured plan, any type of benefit that is provided under the options contained in the insurance contract is the actuarial equivalent of any other option. Consequently, discretion in the trustee to determine under which option benefits will be paid does not result in the prohibited discrimination.

In this case, the present value of all periodic amounts payable under any one option is equal to the present value of all periodic amounts payable under any other option.

Accordingly, it is held that this pension plan does not fail to qualify merely because it grants discretion to the trustee to determine the option under which distributions will be made.