Rev. Rul. 55-681

Advice has been requested as to the qualification under section 165(a) of the Internal Revenue Code of 1939 and as to the bases of deduction limits under section 23(p) of the Code of a trusteed pension plan established pursuant to a union contract which requires that the plan be maintained without change for five years and then may be modified in accordance with the terms of a contract then to be renegotiated.

All employees of the company in the instant case who are compensated on an hourly wage basis are covered under a plan which provides for a fixed benefit of $100.00 per month, without offset by social security benefits, commencing at normal retirement age 65 for those employees who have completed 25 years of service at such time and proportionate benefits for those who have then completed at least 15 years of service but less than 25 years. The entire cost of the plan is funded by company contributions which are equal to a fixed percentage of wages paid to all participating employees. An officer of the company certifies that actuarial computations have been prepared which indicate that the expected contributions during the first five years of the plan will be not less than the full costs of prospective pensions for employees expected to retire under the plan during the first five years, nor less than the normal costs plus interest accruing on unfunded past service costs for all employees under the plan during that period. He also certifies that the methods and assumptions used in such computations and the results thereof are accepted by the company as reasonable.

On the basis of the foregoing, two issues have been found to be present, namely, (1) whether the requirements in section 39.165-1(a) of Regulations 118 that a qualified plan must be permanent, as distinguished from a temporary program, is affected by a five-year contract limitation, and (2) whether the provision in the plan for a fixed benefit and a stated rate of contributions violates the requirement in such section 39.165-1(a) that benefits must be definitely determinable. The plan has been found to meet the requirements of section 165(a) of the Code in all other respects. In particular, it is noted that the plan could not discriminate in favor of employees who are officers, directors, supervisors, or highly compensated whether the plan is continued or terminated.

As to permanence, it is observed in the instant case that it is the contract between the company and the union which is to terminate at the end of five years, but that the plan itself does not provide for cessation at the end of the stated time. It is intended to be a continuing and permanent program. Upon renegotiation of the union contract, it may be agreed to maintain the plan without change, it may be modified in some respects, or it may be terminated. In this respect, it is similar to plans generally in which provision is made for amendment and discontinuance. As far as can be determined at the inception of the plan, it is intended as a permanent program within the purview of section 165(a) of the Code.

Regarding definiteness, it is noted that the relationship between the fixed benefits and the stated rate of contributions is supported by an actuarial computation which the employer certified it accepted as reasonable. Further, it is similar to other plans in that it may later be changed or terminated. Accordingly, it is held that the definiteness of the company's pension plan is not adversely affected merely because it provides for a fixed benefit and a stated rate of contributions. This determination, however, is not to be taken as an indication that the Internal Revenue Service is in any way passing on the actuarial soundness of the plan or on the reasonableness of the actuarial computations.

In view of the above, the pension plan of the company in the instant case is held to meet the requirements of section 165(a) of the Code, and the trust forming a part thereof is held to be entitled to exemption under the provisions of such section.

In this type of plan, the deduction limitations under section 23(p) of the Code will be based on the fixed benefits without reference to the contributions and on the assumption that the plan will be continued beyond the five-year contract period.

The principles set forth herein are equally applicable to the unit benefit type of pension plan, such as a plan providing a pension based on a percentage of compensation for each year of service.

P. S. No. 64, dated November 9, 1950, which was concerned only with the application of the foregoing principles to plans of the fixed benefit type, is hereby supplemented