Rev. Rul. 83-83

1983-1 C.B. 86.

                       Internal Revenue Service
                                 Revenue Ruling

                     UNION-NEGOTIATED PLAN;  5 YEAR CONTRACT

                            Published: May 31, 1983

26 CFR 1.401-1: Qualified pension, profit-sharing, and stock bonus plans

(Also Sections 404, 412; 1.404(a)-1.)

  Union-negotiated plan;  5 year contract.  A union-negotiated pension plan for hourly paid employees that provides for a fixed rate of contributions and a definite benefit formula that does not involve employer discretion is a permanent program within the meaning of section 1.401-1(b)(2) of the regulations even though the collective bargaining agreement is renegotiated after 5 years.  The plan also meets the requirement that the benefits be definitely determinable and that the deduction limitations and minimum funding be based on the cost of those benefits.  Rev. Rul. 70-257 superseded.

PURPOSE

  The purpose of this revenue ruling is to restate the position in Rev. Rul. 70-257, 1970-1 C.B. 90, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub.L. 93-406, 1974-3 C.B. 1.

ISSUES

  The issues in Rev. Rul. 70-257 are (1) whether under the circumstances described below a permanent program exists within the meaning of section 1.401- 1(b)(2) of the Income Tax Regulations, (2) whether a fixed benefit and a stated rate of contributions meet the requirements in section 1.401-1(b)(1)(i) of the regulations that benefits must be definitely determinable, and (3) whether the deduction limitations and minimum funding requirements will be based on the fixed benefits provided under the plan.

FACTS

  Pursuant to a union-negotiated contract, all hourly paid employees of a company are covered under a defined benefit plan. The benefits and accruals are determined according to a definite formula which does not involve employer discretion.  The entire cost of the plan is funded by company contributions equal to a fixed percentage of wages paid to all participating employees. These contributions are fixed by the collective bargaining agreement.

  The plan will be maintained without change for a period of 5 years and then may be modified in accordance with the terms of a contract then to be negotiated.

LAW AND ANALYSIS

  Section 401(a) of the Internal Revenue Code requires that qualified plans created by an employer must be for the exclusive benefit of the employees or their beneficiaries.

  Section 1.401-1(b)(2) of the regulations provides that the term "plan" implies a permanent program as distinguished from a temporary one.  This section also indicates that the abandonment of a plan for any reason other than business necessity within a few years after it has been put into effect will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees.

  The collective bargaining agreement between the company and the union is to terminate at the end of 5 years, but the plan itself does not provide for cessation at the end of the stated time.  On the basis of the facts presented, the plan was intended, at its inception, to be a continuing and permanent program within the purview of section 401(a) of the Code.  Upon negotiation of the union contract, the company and the union may agree that the plan will be maintained without change, that the plan will be modified in some respect, or that the plan will be terminated.  In this respect, the plan is similar to plans generally in which provision is made for amendment and discontinuance.

  Section 1.401-1(b)(1)(i) of the regulations states that a pension plan is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits.  The benefits under the plan will not fail to be definitely determinable, under section 1.401-1(b)(1)(i) of the regulations, merely because the plan also provides for a stated rate of contributions.

  In this plan, the deduction limitations under section 404(a)(1) of the Code and minimum funding requirements under section 412 are based on the fixed benefits without reference to the projected contributions and based on the assumption that the plan will be continued beyond the 5-year contract period.

HOLDINGS

  (1) A permanent program exists within the meaning of section 1.401-1(b)(2) of the regulations, (2) the plan provides definitely determinable benefits, and (3) the deduction limitations and minimum funding requirements are based on the cost to fund the fixed benefits under the plan.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 70-257 is superseded because the position stated therein is restated under current law in this revenue ruling.

Rev. Rul. 83-83, 1983-1 C.B. 86.