Rev. Rul. 71-152

Advice has been requested concerning the determination of the amount that may be returned to an employer as an actuarial error upon the termination of a pension plan that met the requirements of section 401(a) of the Internal Revenue Code of 1954.

The plan was terminated for business necessity by an amendment that also provided for the discharge of liabilities under the plan by commuting the payments, without the purchase of insurance company contracts. Pursuant to the plan provisions already in effect, the participants' interests thereunder became nonforfeitable at the time of the termination.

Trust funds must not be used for purposes other than for the exclusive benefit of employees or their beneficiaries prior to the termination of the trust and the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, and only then may recovery be had in the case of a pension trust to the extent of any surplus existing because of an actuarial error. See section 1.401-2(b)(1) of the Income Tax Regulations. In determining whether any surplus exists on termination of a trust, and the amount thereof, all liabilities, contingent as well as fixed, with respect to employees and their beneficiaries under the trust must be taken into account. Fixed liabilities are the amounts required to provide the benefits payable to those who have become entitled to them. Contingent liabilities are the benefit credits accrued up to the time of termination of the trust for employees (and their beneficiaries) who might have become entitled to benefits if the trust had been continued indefinitely. See section 1.401-2(b)(2) of the regulations. If such liabilities are to be discharged by commuting the payments (other than through the purchase of insurance company contracts), the value thereof at the time of the termination of the trust must be determined for this purpose by use of assumptions no less conservative in any respect than were used in determining costs during the previous life of the trust, and no discount for severances other than death may be assumed.

It is held that any funds remaining after discharging all liabilities, as computed in accordance with the manner described above, may be considered surplus arising from actuarial error and returned to the employer.