Rev. Rul. 72-241

Advice has been requested whether the plans described in the situations below meet the requirement of section 1.401-1(b)(1) of the Income Tax Regulations that benefits payable to the beneficiary of an employee in a qualified pension or profit-sharing plan must be incidental to the primary purpose of distributing accumulated funds to the employee.

Situation 1. A plan provides that a participant may elect, upon retirement at or after age 65, to have more than one-half of the funds accumulated for his benefit under the plan immediately paid to him in a lump sum, with the remaining funds being used to purchase an annuity contract that provides for specified equal installments payable monthly thereafter to the participant, or his beneficiary in the event of his death, until the funds and the increments thereon are fully exhausted.

Situation 2. A profit-sharing plan provides that, beginning at age 65, an employee will receive equal or unequal annual installments until the funds plus increments are exhausted. The amount of each installment may vary only in accordance with a formula contained in the plan. However, each annual installment may not be less than three and one-half percent of the funds available at retirement, plus the employee's pro rata share of the annual increment in the trust fund. Any balance in the employee's account at the time of the employee's death is payable to his designated beneficiary.

Situation 3. One of the benefit payment options under a plan permits the payment of equal monthly installments for a period of thirty years. These payments must commence at the normal retirement age of 65, and are payable to the employee or his designated beneficiary if he dies before the end of the thirty year period.

Situation 4. A settlement option in a profit-sharing plan provides that the trustee may use the funds in a participant's account to purchase an annuity contract at the normal retirement age of 65. The commencement of regular monthly annuity payments and the amount thereof are adjusted to best meet the need of the retiring participant. At the participant's death, any remaining funds inure to his designated beneficiary.

Section 401(a) of the Code prescribes the requirements which must be met for qualification of a trust forming part of a pension, profit-sharing, or stock bonus plan.

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. A pension plan may provide for the payment of incidental death benefits through insurance or otherwise. See section 1.401-1(b)(1)(i) of the regulations. Similarly, in a profit-sharing plan, funds must be distributed to the employee, with payments to others being merely incidental. See Rev. Rul. 56-656, C.B. 1956-2, 280. That Revenue Ruling also holds that an employees' plan that permits a participant to irrevocably elect, prior to retirement, to have all or part of his interest in the plan, which would otherwise become available to him during his lifetime, paid only to his designated beneficiary after his death will fail to meet the requirements of section 401(a) of the Code. See also section 1.401-1(b)(1)(ii) of the regulations.

In view of the foregoing, the funds accumulated under a qualified plan are intended primarily for distribution to employee-participants and not to designated beneficiaries or others.

Accordingly, it is held that any settlement option under such a plan (other than an option contemplated in Revenue Ruling 72-240, page 108, this Bulletin) will meet the requirement of section 1.401-1(b)(1) of the regulations that benefits payable to the beneficiary of an employee must be incidental to the primary purpose of distributing accumulated funds to the employee, if it contains certain provisions whereby the present value of the payments to be made to the participant is more than 50 percent of the present value of the total payments to be made to the participant and his beneficiaries.

Applying the foregoing criteria to the situations described above, the following conclusions have been reached:

Situation 1. Under the plan provision in this case, a retired participant will always receive more than one-half of the funds accumulated for his benefit at retirement and his beneficiaries less than one-half. Thus, this provision meets the requirement that benefits payable to the beneficiary of an employee in a qualified pension or profit-sharing plan must be incidental to the primary purpose of distributing accumulated funds to the employee.

Situation 2. In this case, the cost or present value of the payments to be made to the employee, while living, exceeds one-half of the funds accumulated for the employee's benefit at retirement. Therefore, this provision also meets the requirement that benefits payable to the beneficiary of an employee in a qualified plan must be incidental to the primary purpose of distributing the accumulated funds to the employee.

Situation 3. The settlement option in this case provides that benefits will commence at age 65 and continue over a thirty year period. The cost, or present value of payments to be made to the employee, while living, exceeds one-half of the funds accumulated for the participant's benefit at the time of his retirement. It is concluded that the provision in this plan meets the requirement that benefits payable to the employee's beneficiary in a qualified plan must be incidental to the primary purpose of distributing funds to the employee.

Situation 4. The plan provision in this case does not specify the time the annuity is to commence, the amount of each installment, or the duration of payments under the contract. Thus, it is possible for the trustee to select a mode of settlement which would result in a participant's beneficiary receiving more than one-half of the benefits derived from the funds accumulated on behalf of the employee. Therefore, this provision does not meet the requirement that benefits payable to the employee's beneficiary in a qualified plan must be incidental to the primary purpose of distributing funds to the employee.