Rev. Rul. 54-51

Advice is requested whether, on the basis of the following facts, an investment in ordinary life insurance by a profit-sharing trust for each of its insurable participants will disqualify the profit-sharing plan under section 165(a) of the Internal Revenue Code.

The employer has established a profit-sharing plan having acceptable contribution and allocation formulae. Under the plan less than one-half of each amount annually allocated to each respective insurable participant's account is `invested' in an ordinary life insurance contract on his life. The insurer has agreed with the trustee that, if so requested at a later date, the contract will be converted to an insurance income contract which will provide the employee with an annuity benefit for life following his retirement. The ordinary life insurance contracts purchased under the plan are owned by the trustee, but the participant has the right to name a beneficiary to receive the `death proceeds' of such contract upon his death. Under the plan the trustee is required, 1 year prior to the participant's normal retirement date, to apply the funds credited to the participant in the pooled investment account to convert the ordinary life insurance contract on his life to an insurance income contract in the maximum amount permitted under the agreement with the insurer. When an employee has attained normal retirement age, the trustee shall make available to the retiring employee the retirement income as provided by the insurance income contract then in force and, to the extent that any other funds remain in the trust, they shall be applied to purchase a single premium annuity contract, or the trustee may pay such funds to him in equal monthly installments over a fixed period of time.

Section 39.165-1(a)(2) of Regulations 118 defines the term `profit-sharing plan' as follows:

A profit-sharing plan * * * is a plan established and maintained by an employer to provide for the participation in his profits, by his employees or their beneficiaries, based on a definite predetermined formula for determining the profits to be shared and a definite predetermined formula for distributing the funds accumulated under the plan after a fixed number of years , the attainment of a stated age, or upon the prior occurrence of some event such as illness, disability, retirement, death or severance of employment. Italics supplied.

Section 39.23(p)-1 of Regulations 118, pertaining to the deduction of contributions for incidental benefits, states section 23(p) is applicable to all contributions (including contributions to provide incidental benefits such as life insurance protection) under a stock bonus, pension, profit-sharing, or annuity plan.

For the purpose of this ruling, life insurance may be considered `incidental' where (1) the aggregate premiums for life insurance in the case of each participant is less than one-half of the aggregate of the contributions allocated to him at any particular time; and (2) the plan shall require the trustee to convert the entire value of the life insurance contract at or before retirement to provide periodic income so that no portion of such value may be used to continue life insurance protection beyond retirement.

In view of the foregoing, it is held that an investment by a profit-sharing trust in ordinary life insurance contracts under the above stated conditions will not disqualify a profit-sharing plan under section 165(a) of the Internal Revenue code.