Rev. Rul. 73-238

Advice has been requested whether a pension plan qualifies under section 401(a) of the Internal Revenue Code of 1954 if former employees may continue to earn additional credits for years after separation from the service of the employer.

A state established a pension plan for the members of the state legislature. Each participant is required to contribute $500 each year. At age 60 or upon completion of 35 years of credited service, a participant is entitled to a benefit of $20 per month for each year of credited service. The plan also provides that if a participant shall cease to be a member of the legislature after at least eight years of participation in the plan, but before he reaches age 60, he may continue his membership in the plan. Such separated member may continue his participation in the plan either as a noncontributing special member or as a contributing special member. A noncontributing special member will not be entitled to any additional credited service. A contributing special member will contribute each year the same amount ($500) that he would have contributed had he remained a member of the legislature and he will be entitled to credited service for each such year.

Section 401(a) of the Code provides for the qualification of a plan of an employer for the exclusive benefit of his employees if the plan meets all the requirements of that section.

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. Section 1.401-1(b)(4) of the regulations provides that a plan is for the exclusive benefit of employees even though it may cover former employees and employees who are temporarily on leave.

Rev. Rul. 69-493, 1969-2 C.B. 88, holds that a plan does not qualify under section 401(a) of the Code if it provides benefits for persons who are not the employees of the organization maintaining the plan.

Although section 1.401-1(b)(4) of the regulations permits a qualified plan to cover former employees of the employer, such coverage is allowed only for the purpose of providing pension benefits for the period during which the individuals were the employees of the employer and does not contemplate additional credit for periods after the termination of the employee's service. The plan in this case provides benefits, not only for the employee's service for the employer, but also (if a former employee so elects), for the period between the termination of the employee's service and the time he reaches retirement age. Under these circumstances, the plan provides benefits for periods during which the individuals were not the employees of the organization maintaining the plan.

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