Rev. Rul. 57-550

Advice has been requested regarding the method of funding self-administered employee retirement plans when deficits arise after the initial cost of past service benefits has been paid off.

An employer established a self-administered pension plan and trust for the benefit of his employees. The plan and trust were held to meet the requirements of section 401(a) of the Internal Revenue Code of 1954 and the trust to be exempt under section 501(a) of the Code. Although the cost of benefits for past service credits had been fully funded and deductions for the contributions therefor had been taken in accordance with the provisions of section 404(a)(1)(C) of the Code, a deficit in the funding of the plan has occurred in the current taxable year.

Contributions paid by an employer to or under a pension plan are deductible under section 404(a)(1) of the Code, in the taxable year when paid, if the amounts are paid into a pension trust and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 501(a) of the Code. However, the amount of the contribution which is deductible is limited, as provided by subparagraph (A) of section 404(a)(1), to an amount not in excess of five percent of compensation otherwise paid or accrued during the taxable year to all the employees under the trust, plus, as provided by subparagraph (B), any excess over the amount allowable under subparagraph (A) necessary to provide the remaining unfunded cost of past and current service credits distributed as a level amount, or a level percentage of compensation, over the remaining future service of each employee, or, as provided by subparagraph (C), an amount equal to the normal cost of the plan plus an amount not in excess of ten percent of the cost which would be required to completely fund or purchase the past service or supplementary pension or annuity credits as of the date when they are included in the plan, except that in no case shall a deduction be allowed for any amount (other than the normal cost) paid in after such pension or annuity credits are completely funded or purchased.

Where deductions for contributions under a retirement plan are limited to an amount equal to the normal cost plus an amount not in excess of ten percent of the cost of past service credits as provided by section 404(a)(1)(C) of the Code, a current loss arising from a self-administered pension plan, may be considered a current cost similar to additional normal cost, if the loss represents the excess of the actual liability over the expected liability under the plan, where the excess is revealed by a current valuation using the same assumptions as were used in the previous annual valuations; therefore, the additional contributions necessary to fund such deficit may be deducted currently.

However, where the deficit results from a loss in asset values or from a revaluation of liabilities using more conservative assumptions than were previously used, the deficit represents a supplementary cost of prior service credits and should be so treated. Under the deduction limitations of section 404(a)(1)(C) of the Code, the discounted value of such deficit (discounted back to the date the original past service or supplementary credits were included in the plan) may be added to the past service or supplementary base, ten percent of which may be included in the limitation on deductions in each taxable year until it is completely funded and deducted. Such an additional base resulting from revaluation may be treated collectively with the original base.

In those cases where a level cost method and the limitation on deductions provided by subparagraph (B) of section 404(a)(1) of the Code, are used, either a current loss or a deficit, resulting from a revaluation using more conservative assumptions would automatically be spread over the remaining future service of the employees by an increase in the level accrual rate or in the level costs.