Rev. Rul. 60-281

The Internal Revenue Service has been requested to state its position with respect to the qualification, under section 401(a) of the Internal Revenue Code of 1954, of an employees' pension plan which grants participants the right to withdraw, in addition to their contributions, an amount representing interest thereon.

A provision of an employees' contributory pension plan provides that without terminating his service with the company, a participant may elect to withdraw from the plan, in which event he shall receive, in lieu of all other benefits under the plan, a cash payment equal to the total of his contributions, accumulated with interest at two percent, compounded annually, to the first day of the month in which such withdrawal occurs. Under the plan, this payment is limited to the employee's own contributions and amounts actually earned thereby. The plan was amended to provide that an employee is entitled to withdraw at any time, in addition to his aggregate contributions to date, an amount, in lieu of interest, which would increase in graduated steps from two percent of such contributions after the first year of participation to a maximum of 20 percent after ten years and thereafter.

Revenue Ruling 57-163, C.B. 1957-1, 128, states in Part 2(c)(2) at page 131, that a pension plan may provide incidental benefits prior to normal retirement, such as disability and death benefits, but if it permits participants, prior to severance of employment or termination of the plan, to withdraw all or a part of the funds accumulated on their behalf, except their own contributions on discontinuance of participation, in times of financial need or otherwise, it will fail of qualification under section 401(a) of the Code.

It is the opinion of the Internal Revenue Service that a recognition of an employee's right to withdraw his own contributions carries with it a right to receive any increment actually earned on his contributions to the plan. Thus, under Part 2(c)(2) of Revenue Ruling 57-163, a participant may receive interest actually earned on his own contributions which he withdraws upon termination of his participation in the plan prior to the termination of his employment. However, the amendment to the plan would produce amounts other than those actually earned on the employee's own contributions and would, in effect, constitute a distribution of the employer's contributions. See Rev. Rul. 56-693, C.B. 1956-2, 282.

Accordingly, it is held that an employees' contributory pension plan does not fail of qualification under section 401(a) of the Code merely because it permits a participant to withdraw, upon discontinuance of participation prior to termination of employment, an amount, in addition to his contributions, which represents the increment actually earned on the participant's own contributions. But, it is further held that an employees' pension plan which permits a participant to withdraw, upon discontinuance of participation prior to termination of employment, an amount, in lieu of simple or compound interest, computed by a graduated formula to a maximum of 20 percent after ten years of service, would fail of qualification under section 401(a) of the Code.