Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-4

1973-1 C.B. 203

Sec. 404

IRS Headnote

Computation of the deductible limits of contributions, under section 404(a)(1) of the Code to a plan providing for pre-retirement death benefits and a retirement annuity funded by level-premium ordinary life insurance contracts and by an auxiliary fund; Revenue Ruling 67-427 superseded.

Full Text

Rev. Rul. 73-4

Advice has been requested as to (1) whether the deductible limit for a pension plan can be claimed partially under subparagraphs (A) and (B) of section 404(a)(1) of the Internal Revenue Code of 1954 and partially under subparagraph (C) of such section and (2) whether, under the following circumstances, the entire amount computed by the taxpayer is deductible under subparagraph (C).

A pension plan provides for death benefits prior to retirement and annuity payments after retirement. Individual level-premium ordinary life insurance contracts, funded from the attained age at purchase, are used to provide both the entire death benefit and that portion of the retirement benefits purchasable by the cash value of the policies. The balance of the retirement benefits is funded through an auxiliary fund from which amounts are withdrawn at retirement, which are sufficient, together with the cash value of the policies, to purchase the full annuity provided by the plan.

The employer computes each year's contribution and the allowable deduction under section 404(a)(1) of the Code as the sum of (1) the amount of the annual life insurance premiums, which corresponds to a limitation determined according to subparagraphs (A) and (B) of section 404(a)(1) of the Code for the benefits provided by the life insurance contracts, plus (2) an amount determined under subparagraph (C) of that section with respect to the portion of benefits funded through the auxiliary fund.

The question is whether the deductible limit for the plan may be determined as the sum of (1) the limitation determined under subparagraphs (A) and (B) for benefits funded through the insurance contracts, plus (2) the limitation determined under subparagraph (C) for benefits funded through the auxiliary fund. A further question is whether the entire amount computed by the taxpayer is deductible under section 404(a)(1)(C) of the Code.

Section 404(a)(1)(C) of the Code specifies that the limitation described therein is "in lieu of the amounts allowable under subparagraphs (A) and (B)." Accordingly, it is held that the employer may not determine the limitation for a single pension or annuity plan in part under subparagraphs (A) and (B) and in part under subparagraph (C) of section 404(a)(1) of the Code.

Section 404(a)(1)(C) of the Code limits the amount deductible in any year to the normal cost of the plan plus 10% of any initial past service cost or other supplementary liability. Subsection 1.404(a)-6(a)(3) of the Income Tax Regulations states that the normal cost may be determined by any generally accepted actuarial method, including a method that expresses normal cost as the aggregate of level amounts with respect to each employee covered under the plan, provided that the method is reasonable in view of the provisions and coverage of the plan, the funding medium, and other applicable considerations.

Although level insurance premiums, by themselves, may be deductible under subparagraphs (A) and (B) of section 404(a)(1) of the Code, they may also be deductible under subparagraph (C) of that section, where the normal cost is considered to be the insurance premiums (the aggregate of level amounts) and where the past service liability is considered to be zero. Accordingly, it is further held that the method used by the employer to compute the entire amount of each year's contribution, as described above, will be considered an acceptable computation of the deductible limit under section 404(a)(1)(C) of the Code.

Revenue Ruling 67-427, 1967-2 C.B. 156, is hereby superseded since the position set forth therein is restated in this Revenue Ruling.