Rev. Rul. 85-15

1985-1 C.B. 132, 1985-8 I.R.B. 6.

QUALIFICATION; INCIDENTAL BENEFITS; PRERETIREMENT SURVIVOR ANNUITY

Published: February 25, 1985

Section 401.-Qualified Pension, Profit-Sharing and Stock Bonus Plans, 26 CFR 1.401-1: Qualified pension, profit-sharing and stock bonus plans.

(Also Section 417.)

  Qualification; incidental benefits; pre-retirement survivor annuity. Guidelines are set forth for determining whether a defined benefit plan will continue to satisfy the incidental death benefit provision of section 1.401- (b)(s)(i) of the regulations after the plan is amended solely to provide a qualified pre-retirement survivor annuity described in section 417(c) of the Code. Rev. Rul. 70-611 modified.

ISSUE

  Whether the defined benefit plan described below will continue to satisfy the incidental preretirement death benefit provision of section 1.401-1(b)(1)(i) of the Income Tax Regulations after the plan is amended solely to add a qualified preretirement survivor annuity described in section 417 of the Code.

FACTS

  The M Corporation established a defined benefit pension plan for its employees in 1979. The plan was qualified under section 401(a) of the Code as it existed immediately prior to the enactment of the Retirement Equity Act of 1984 (REA), Pub. L. 98-397, 1984-51 I.R.B. 11. While the plan did not provide for an early retirement benefit, it did provide for a preretirement death benefit for each plan participant in a lump sum equal to 100 times the participant's anticipated monthly lifetime pension.

  In October 1984, as a result of the enactment of REA, the M Corporation submitted a request for a determination letter with respect to a proposed plan amendment. The proposed amendment would provide a qualified preretirement survivor annuity, as defined in section 417 of the Code, in addition to the existing preretirement death benefit already provided in the plan.

LAW AND ANALYSIS

  Section 1.401-1(b)(1)(i) of the regulations provides, in part, that a pension plan within the meaning of section 401(a) of the Code is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits after retirement. A pension plan may provide for the payment of a pension due to disability and may also provide for the payment of incidental death benefits through insurance or otherwise.

  Rev. Rul. 66-143, 1966-1 C.B. 79, holds that death benefits are considered incidental in a money purchase pension plan if, for any individual, the cost of such benefits does not exceed 25 percent of the total cost. This same limitation may be applied to determine whether preretirement death benefits in other types of pension plans are incidental within the foregoing section of the regulations.

  Rev. Rul. 60-83, 1960-1 C.B. 157, sets forth an alternative safe harbor for a pension or annuity plan funded with insurance contracts. In such an instance, the life insurance benefit is considered incidental where the life insurance benefit is no greater than 100 times an individual participant's anticipated monthly lifetime pension.

  Rev. Rul. 70-611, 1970-2 C.B. 89, provides guidelines for determining whether a preretirement death benefit payable under a defined benefit pension plan that is a spouse's annuity benefit commencing immediately is incidental within the meaning of section 1.401-1(b)(1)(i) of the regulations.

  Rev. Rul. 79-90, 1979-1 C.B. 155, provides, in part, that whenever the amount of a benefit in a defined benefit pension plan is to be determined by a procedure that requires the use of actuarial assumptions, the assumptions to be used must be specified within the plan in a manner that precludes employer discretion.

  Section 401(a)(11) of the Code requires, and section 417(c) of the Code in part defines, a qualified preretirement survivor annuity for purposes of those sections as an annuity for the life of the surviving spouse of a vested plan participant. The amount of the payments under a qualified preretirement survivor annuity cannot be less than what the payments would have been under the plan's qualified joint and survivor annuity if: (1) in the case of a participant who dies after attaining the earliest retirement age under the plan, the participant had retirement with an immediate qualified joint and survivor annuity on the day before the participant's death and (2) in the case of a participant who dies on or before the earliest retirement age under the plan, the participant had separated from service on the earlier of the participant's separation from service or date of death, survived until the earliest retirement age and retired at that time with a qualified joint and survivor annuity.

  In their respective reports on the Retirement Equity Act of 1984, the Committee on Ways and Means, in H.R. Rep. No. 98-655, Part 2, 98th Cong., 2d Sess. 13, and the Committee on Finance in S. Rep. No. 98-575, 98th Cong., 2d Sess. 14, 1984-51 I.R.B. 26, 31, stated: 'Of course, the incidental benefit rule of present law is required to be satisfied with respect to the preretirement survivor benefit.'

  In the case of a defined benefit pension plan, the provision of a lump sum preretirement death benefit and a preretirement survivor annuity will be deemed incidental so long as such benefits considered together are subordinate to the primary purpose of the plan, i.e., providing pension benefits. By stating that the incidental benefit rule of present law must be satisfied with respect to a qualified preretirement survivor annuity, Congress indicated its intent that such an annuity should be considered an ancillary benefit which is an integral part of an incidental preretirement death benefit. Therefore, a plan under which the only preretirement death benefit is a qualified preretirement survivor annuity will satisfy the preretirement incidental death benefit requirement of section1.401-1(b)(1)(i) of the regulations.

  However, the amendment of a defined benefit plan to provide a qualified preretirement survivor annuity where the plan also provides a lump sum preretirement death benefit equal to 100 times the anticipated monthly lifetime pension for a participant will cause the plan's total preretirement death benefit to fail to satisfy the guidelines set forth in Rev. Rul. 60-83 and Rev. Rul. 70-611 and will cause the plan to fail to satisfy section 1.401-1(b)(1)(i) of the regulations.

HOLDING

  A pension plan providing the required qualified preretirement survivor annuity described in section 417 of the Code as the only preretirement death benefit will be deemed to satisfy section 1.401-1(b)(1)(i) of the regulations. However, the adoption of the proposed plan amendment, in the situation described above, will cause that plan's preretirement death benefits to exceed the incidental requirements of the regulations.

  There are, however, several amendments which would enable that plan to satisfy the requirements of both section 401(a)(11) and section 1.401- 1(b)(1)(i). For example, the plan could be amended to eliminate the lump sum preretirement death benefit. Another option would be to offset the plan's existing incidental preretirement death benefit by the value of the qualified preretirement survivor annuity required by section 401(a)(11). In this regard, if life insurance contracts had been purchased by the plan of M Corporation to provide the lump sum preretirement death benefits, the proceeds of such contracts could be paid to the plan's trust with the trust providing (1) the qualified preretirement survivor annuity to a vested participant's surviving spouse and (2) only the excess, if any, of the lump sum preretirement death benefit over the value of the qualified preretirement survivor annuity to the participant's beneficiary (which could also be the surviving spouse). Alternatively, the trust could provide the benefit described in item (1) of the preceding sentence and the insurance contract(s) could provide the amount described in item (2) of the preceding sentence to the beneficiary and the balance to the trust. If under a pension plan, lump sum death benefits are to be offset by the value of a survivor annuity, the plan must specify the actuarial assumptions necessary, including the assumptions for determining the lump sum value of the survivor annuity, in order to make the benefits definitely determinable as required by Rev. Rul. 79-90 and section 401(a)(25).

  A plan will not be treated as failing the requirements of section 1.401- 1(b)(1)(i) of the regulations merely because it provides preretirement death benefits that satisfy such section and also provides for the qualified preretirement survivor annuity described in section 417, so long as such plan is amended to satisfy section 1.401-1(b)(1)(i) for (a) plan years beginning after December 31, 1984, or (b) if later, in the case of a plan maintained pursuant to one or more collective bargaining agreements, plan years beginning on or after the earlier of the date on which the last of the collective bargaining agreements relating to the plan terminates (determined without regard to any extension thereof agreed to after the date of the Retirement Equity Act's enactment), or January 1, 1987. However, a plan must satisfy the requirements of section 1.401-1(b)(1)(i) after it has been amended to conform to REA.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 70-611 is modified.

Rev. Rul. 85-15, 1985-1 C.B. 132, 1985-8 I.R.B. 6.