Rev. Rul. 57-76

Advice has been requested as to the time at which employees reach retirement age for purposes of excluding from gross income disability pension benefits referred to in section 1.105-4(a) of the Income Tax Regulations under the Internal Revenue Code of 1954.

Subject to certain limitations, section 105(d) of the Code excludes from gross income amounts received by an employee pursuant to the provisions of a wage continuation plan "if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of personal injuries or sickness." The exclusion applies at a weekly rate of $100.

Section 1.105-4(a) of the Income Tax Regulations provides in part as follows:

(2)(i)--Section 105(d) is applicable only if the wages or payments in lieu of wages are paid pursuant to a wage continuation plan. The term "wage continuation plan" * * * includes plans under which payments are continued as long as the employee is absent from work on account of personal injury or sickness. It includes * * * plans under which benefits are continued until the employee either is able to return to work or reaches retirement age. * * *.

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(3)(i). * * * an employee is not absent from work if he is not expected to work because, for example, he has reached retirement age. If a plan provides that an employee, who is absent from work on account of personal injury or sickness, will receive a disability pension as long as he is disabled, section 105(d) is applicable to any payments which such an employee receives under this plan before he reaches retirement age, but section 105(d) does not apply to the payments which such an employee receives after he reaches retirement age.

It is held that, for the purpose of excluding an employee's disability pension from gross income pursuant to section 1.105-4(a)(3)(i) of the Income Tax Regulations, "retirement age" will be deemed to be

(1) The lowest age specified in the appropriate written employees' pension or annuity plan at which the employee, had he not been disabled and had he continued in such employment, would have had the right to retire without the consent of the employer and receive retirement benefits based on service to date of retirement computed at the full rate set forth in the plan, i. e., without actuarial or similar reduction because of retirement before some later specified age, provided, however, that such retirement age corresponds with the employer's actual practice and is reasonable in view of all the pertinent facts and circumstances; or

(2) in the absence of a written employees' pension annuity plan meeting the requirements of (1) above, the age, if any, at which it has been the practice of the employer to terminate, due to age, the services of the class of employees to which the particular employee belongs, provided such age is reasonable in view of all the pertinent facts and circumstances; or

(3) if neither (1) nor (2) is applicable, age 65, the retirement age (as defined in (1) above) generally specified in the old-age and survivors insurance provisions of the Social Security Act and the age at which the retirement income credit provided by section 37 of the Code generally becomes effective.

In any instance where the retirement age as defined above appears to be substantially higher with respect to one class of employees than it is for another class of employees or for employees generally, the facts will be carefully examined to determine whether such higher age is a bona fide retirement age.

The application of the rules stated above is illustrated by the following examples:

Example (1). The M company has a formal retirement annuity plan which is covered by a contract issued by an insurance company. It provides a regular retirement annuity beginning at age 62 for any employee who has remained at work with the company until age 62 or who has completed 15 years or more of service with the company. It also provides a disability pension to any employee who becomes totally and permanently disabled.

The regular annuity at age 62 is equal to two percent of the employee's total earnings with the company and for this purpose the period during which the employee receives a disability pension is considered as a period of service. Employees with 15 years or more of service may retire at age 55 on an actuarially reduced annuity.

The disability pension is equal to two percent of the employee's total earnings with the company. If the employee has less than 15 years of service when he becomes disabled, the disability pension is continued for a maximum of 60 months. If he has at least 15 years of service, the disability pension continues until the employee reaches age 62, at which time his regular retirement annuity commences.

For the purpose of excluding disability pension benefits pursuant to section 1.105-4(a)(3)(i) of the Income Tax Regulations, employees of the M company reach retirement age at age 62.

Example (2). The N company retirement plan provides that the employer will contribute each year an amount equal to eight percent of each employee's compensation into a retirement trust, which amount is credited to individual employee accounts. Each employee's account is also credited soon after the year-end with investments earnings at the average rate earned on the trust's assets. When an employee reaches age 65, the amount accumulated in his account is used to purchase a single premium annuity from an insurance company, or, at the employee's option, will be applied in accordance with annuity tables adopted by the plan trustees to pay him an annuity from the trust. An employee may also continue working, with the consent of the employer, after age 65, but there are no more credits to his account other than the investment earnings. In such case, the amount accumulated at actual retirement is applied to purchase or pay an annuity, as aforesaid.

If the employee should become disabled before age 65, the amount accumulated in his account at the time he becomes disabled is paid to him at the rate of $50 a month until exhausted or until he reaches age 65, if sooner. In the latter event, the balance is applied to pay an annuity to him in accordance with the aforesaid tables. An employee may also retire at his own request any time after reaching age 55 and have the amount accumulated in his account applied either to purchase an annuity for him or to pay an annuity to him from the trust, based on his age at actual retirement.

For the purpose of excluding disability pension benefits pursuant to section 1.105-4(a)(3)(i) of the Income Tax Regulations, the retirement age of an employee covered by this plan is age 65, because the amount of annuity purchasable with the accumulation in the employee's account in case of retirement before age 65 is automatically reduced actuarially in accordance with insurance company annuity rates and the annuity tables adopted by the trustees.

Example (3) The Civil Service Retirement Act of May 29, 1930, 46 Stat. 468, 5 U. S. C. 691, as amended, to October 1956, provides among other things, that certain service or disability retirement benefits will be paid to eligible civilian employees of the United States Government. In general, an employee may elect to retire and receive an immediate service annuity, the amount of which is not actuarially or similarly reduced, at any time after he meets one of the following age and service conditions:

(1) Age 50 with 20 years of service as an investigatory employee.

(2) Age 60 with 30 years of service.

(3) Age 62 with five years of service.

With respect to employees separated from the service before October 1, 1956, provisions of the Act are substantially as follows: The service annuity (in most cases) is equal to one and one-half percent of average annual basic salary for each year of service, or one percent of average annual basic salary plus $25 for each year of service if that amount is larger, but in no case may the annuity exceed 80 percent of average annual basic salary. ("Average annual basic salary" is used to denote the average annual basic salary received by the employee during any five consecutive years of allowable service at the option of the employee.) If an employee retires with less than 15 years of service, he may not elect a joint and survivorship annuity; however, there is no actuarial or similar reduction in the annuity payments. At age 55 after 30 years of service an employee may elect to retire and receive an immediate annuity equal to the annuity computed as above and reduced by one-quarter of one percent for each month the employee is under age 60. Also, an employee who is separated involuntarily through no fault of his own after completing 25 or more years of service may receive an immediate annuity computed and reduced in the same manner. With certain exceptions, retirement is compulsory at age 70 after 15 years of service. If an employee becomes totally disabled after completing five years of civilian service and before meeting specified age and service requirements, he may be retired on a disability annuity computed in the same manner as the service annuity.

For the purpose of excluding disability annuity payments pursuant to section 1.105-4(a)(3)(i) of the Income Tax Regulations, a civilian employee of the United States Government reaches retirement age at the earliest applicable age described in conditions (1), (2) and (3) above.

Example (4). The retirement plan of O company is uninsured and unfunded. Notice of the plan benefits is printed in a handbook furnished all employees.

Under the plan, an employee who has at least 20 years of service may retire at age 60 on a pension, the yearly amount of which is equal to 40 percent of his average salary for the five years immediately preceding retirement. He may also retire at any time after reaching age 50 if he has at least 20 years of service, but his pension is the actuarial value at that time of the pension he would have received had he remained in the service to age 60, except in case of disability retirement.

If the employee becomes totally and permanently disabled after completing 20 years of service, he may retire regardless of his age and receive a pension computed at 40 percent of his average salary for the last five years without the actuarial reduction.

For the purpose of excluding a pension received on account of disability, pursuant to section 1.105-4(a)(3)(i) of the Income Tax Regulations, the retirement age of an employee of O company is age 60.

Example (5). The P corporation has a limited number of employees. It has no formal wage continuation or retirement plan, but it has a custom of continuing the salaries of all employees who are absent from work on account of personal injuries or sickness for short periods and of granting pensions to key employees who become totally and permanently disabled. All employees have knowledge of this custom. In 1955 two key employees were retired from service on account of total and permanent disability at ages 59 and 73, respectively, and received disability pensions. There are at present four active full-time key employees. Their respective ages are 33, 56, 68 and 76.

For the purpose of excluding disability pensions pursuant to section 1.105-4(a)(3)(i) of the Income Tax Regulations the retirement age of all key employees of the P corporation is age 65.

See section 72 of the code for the exclusion from gross income of portions of amounts received as an annuity or as a distribution from an employee's trust or annuity plan. See sections 104 and 105 (e) of the Code for the exclusion from gross income of certain amounts received under an accident and health plan.