Rev. Rul. 61-121

Advice has been requested whether death benefits for widows and children under the provisions of an employees' pension plan intended to qualify under section 401(a) of the Internal Revenue Code of 1954 may be regarded as `incidental' within the meaning of the regulations under that section.

An employees' pension plan covers employees who have completed five years of service, provided they have not been attained normal retirement age 65. The normal annual retirement benefits, for those retiring on or after January 1, 1959, are as follows: for past service, one percent of 1958 compensation multiplied by the number of years of service prior to January, 1, 1959, and after the fifth anniversary of service; for future service, one and one-half percent of annual compensation for each year of participation after December 31, 1958. The minimum normal retirement benefit is $20 per month. Employees contribute three percent of compensation.

Early retirement is permitted in the case of an employee who terminates employment after age 55 with at least ten years of credited service, and the employee is entitled to a deferred annuity beginning at age 65 based on service to the date of the termination of his employment, or, with the consent of the retirement committee, an actuarially equivalent annuity beginning at an earlier age. There is no vesting except in the case of normal or early retirement, and a terminated employee is entitled only to a return of his own contributions accumulated with interest.

Pensions are paid to a widow and minor children of an employee where he dies while in the service of the employer and between the ages of 60 and 64, inclusive, having completed 20 or more years of service of which at least 15 were credited under the plan. The widow's benefit is paid until death or remarriage, and each surviving child not over age 18 is paid a benefit until his 19th birthday. Such benefits are based on the participant's `anticipated retirement income,' which is the pension that would have been payable to the participant at normal retirement date if he had continued in service to that date earning the compensation in effect at the time of death. The widow's benefit is 50 percent of `anticipated retirement income,' with ten percent of such income to each child if there is a widow surviving, or 20 percent of such income to each child otherwise. There is an aggregate maximum of 50 percent of `anticipated retirement income' to all children combined if a widow survives, or 100 percent otherwise. The widow's benefit is reduced actuarially if she was more than ten years younger than her husband.

Section 1.401-1(b)(1)(i) of the Income Tax Regulations permits death benefits in qualified pension plans if those benefits are `incidental.' This provision of the regulations recognizes that in many cases benefits under pension plans are funded by means of typical retirement income contracts, under which the death benefits prior to retirement are equal to 100 times the anticipated monthly lifetime pension, or the accumulated reserve if greater.

Actuarial computations show that the value of a widow's benefit under the plan generally would not exceed the reserve accumulated for the employee's retirement benefits under a level premium method of funding similar to that used in typical retirement income contracts. In the few possible situations where the value of the widow's benefits could exceed the reserve, the amount of the excess would be inconsequential. Also, in view of the circumstances under which the children's benefits are paid in this case, they may be ignored for the purpose of determining whether the death benefits are incidental.

Accordingly, it is held that the death benefits in this case generally would not exceed those that would have been payable had the benefits been funded under typical retirement income contracts and, therefore, may be regarded as `incidental' within the meaning of section 1.401-1(b)(1)(i) of the regulations.