Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 78-56

1978-1 C.B. 116

Sec. 401
Sec. 411
Sec. 412

IRS Headnote

Definitely determinable benefits; funded by insurance contract. Retirement benefits provided under a defined benefit plan, funded by an insurance contract described in section 412(i) of the Code, which provides that the participant will receive the higher of the annuity guaranteed under the insurance contract or the annuity then purchasable with the cash value of the policy, are definitely determinable within the meaning of section 1.401-1(b)(1)(i) of the regulations.

Full Text

Rev. Rul. 78-56

Advice has been requested concerning whether the retirement benefits provided under a defined benefit plan funded solely by certain insurance contracts, which satisfy the requirements of section 412(i) of the Internal Revenue Code of 1954, satisfy the "definitely determinable benefits" requirement of section 1.401-1(b)(1)(i) of the Income Tax Regulations.

It is the common practice of life insurance companies to provide a larger retirement benefit if, at the time the cash surrender value of the insurance policy (or annuity contract) is applied to purchase an annuity, the company's then current annuity purchase rate is more favorable than the annuity purchase rate guaranteed in the policy. Many policies contain a provision which specifies how the calculations of the larger benefit would be made in such circumstances. Where no such provision is incorporated in the policy, the insurance company will provide the larger benefit administratively based on the established practice of the company at the time the cash surrender value is so applied. In either case, the increased benefit arises simply by the substitution of one (lower) purchase rate for the guaranteed rate and the amount of the increased benefit is thereby uniquely determinable at the time the benefit is to be purchased.

An insurance contract described in section 412(i) of the Code requires level annual premium payments from the commencement of an individual's plan participation to the individual's retirement age (or earlier). The contract must satisfy other requirements specified in section 412(i).

Section 411(b)(1)(F) of the Code provides that an employee's accrued benefit under a defined benefit plan funded exclusively by contracts described in section 412(i) must not be less than the cash surrender value of the individual's contracts.

Section 1.401-1(b)(1)(i) of the regulations provides that a plan designated to provide benefits to be paid upon retirement will, for purposes of section 401(a) of the Code, be considered a pension plan if the employer contributions under the plan can be determined actuarially on the basis of definitely determinable benefits.

Rev. Rul. 74-385, 1974-2 C.B. 130, discusses a situation in which a participant's benefit in a defined benefit plan was dependent upon the aggregate amount of the individual's contributions under the plan, which could vary at the discretion of the participant. The ruling held that the benefit formula satisfied section 1.401-1(b)(1)(i) because (1) the plan contained an express formula by which to determine the plan benefit, and (2) the level of plan benefits was not within the discretion of the employer.

In the case of a defined benefit plan funded solely by an insurance contract described in section 412(i), the fact that the cash value of a participant's policy may provide a benefit in excess of the benefit intended by the plan document will not necessarily mean that the benefit is not definitely determinable. The benefit will be considered to be definitely determinable so long as (1) the participant's accrued benefit at all times is determinable under the insurance contract, (2) a plan benefit is uniquely determinable, based on (i) such accrued benefit, (ii) the procedures stated in the insurance contract or established insurance company practice, and (iii) the current annuity purchase rate offered by the insurance company, (3) the current annuity purchase rate is not affected by forfeitures under the plan and (4) none of these factors is within the discretion of the employer (other than by plan amendment).

This revenue ruling considers only the question as to whether benefits are definitely determinable and does not consider any other issue that may arise in connection with the defined benefit plans described above.