Rev. Rul. 72-577

Advice has been requested whether a pension plan containing the provisions described below qualifies under section 401(a) of the Internal Revenue Code of 1954.

The plan, as required by section 1.401-4(c)(1) of the Income Tax Regulations, contains limitations on the amount of employer contributions that may be used to provide benefits for each of the 25 highest paid employees whose anticipated annual retirement benefit will exceed $1,500 and which will become payable within the ten-year period after the effective date of the plan. On the other hand, however, the plan further provides that those limitations shall not restrict the payment of any benefit provided for under the terms of the plan. Several modes of settlement are provided for under the plan, including an option, on the part of an employee, to elect a lump-sum cash distribution.

Section 401(a)(4) of the Code provides that a plan may qualify if the contributions or benefits do not discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Section 1.401-4(c)(1) of the regulations requires certain restrictions on the distribution of benefits under plans that provide benefits for employees who are among the 25 highest-paid employees of the employer if their anticipated annual retirement benefit will exceed $1,500. Section 1.401-4(c)(4) of the regulations provides that the restrictions required by section 1.401-4(c)(1) to prevent discrimination may be exceeded, for the purpose of making current retirement income benefit payments to retired employees who would otherwise be subject to such restrictions if, among other conditions, the benefits are to be paid in the form of level annuity payments. Compare, however, Revenue Ruling 61-10, C.B. 1961-1, 143, which holds that a lump-sum distribution, in an amount in excess of that otherwise permitted, may be made provided an agreement, adequately secured, guarantees the repayment of any part of the distribution that is restricted.

The provision, permitting the unrestricted payment of any benefit provided for under the terms of the plan, would permit the lump-sum cash distribution of benefits to an employee who is in the highest-25 category mentioned in section 1.401-4(c)(1) of the regulations without providing security for repayment, if repayment is necessary, of any such distribution. Such a provision is not authorized by the exception set forth in section 1.401-4(c)(4) of the regulations.

Accordingly, it is held that this plan does not qualify under section 401(a) of the Code.