Rev. Rul. 65-25

The Internal Revenue Service has been requested to state its position with respect to whether pension or profit-sharing plans which include self-employed individuals will qualify under section 401 of the Internal Revenue Code of 1954, as amended by the Self-Employed Individuals Tax Retirement Act of 1962, Public Law 87-792, C.B. 1962-3, 89, where such plans provide only those pension benefits which are furnished through the purchase of ordinary life insurance, or similar life insurance contracts which provide death benefits greater than 100 times the amount of monthly retirement income available under the contract.

Section 1.401-10(a)(1) of the Income Tax Regulations provides in part that qualified pension, annuity, or profit-sharing plans which include self-employed individuals must meet the requirements of section 1.401-1 through section 1.401-9 of the regulations, relating to requirements applicable to all qualified plans. Section 1.401-1(b)(i) and (ii) requires that death benefits must be incidental under qualified pension and profit-sharing plans.

The principle stated in Revenue Ruling 54-67, C.B. 1954-1, 149, which provides that a qualified pension plan may not provide only such benefits as are furnished through the purchase of ordinary life insurance contracts which are converted to life annuities at normal retirement date, is equally applicable to pension plans which include self-employed individuals. The primary purpose of ordinary life insurance contracts is to provide life insurance protection. The cash reserve created thereunder will provide a relatively small retirement annuity compared to the annuity that a retirement income contract with life insurance of the same face amount will provide. Similarly, other life insurance contracts which provide death benefits greater than 100 times the amount of monthly retirement income are not contracts which provide incidental death benefits. See Revenue Ruling 60-83, C.B. 1960-1, 157. Where a plan provides only those retirement benefits as are afforded through the purchase of such contracts, the plan is not a pension or profit-sharing plan within the meaning of section 1.401-1(b)(i) and (ii) of the regulations.

Accordingly, a pension or profit-sharing plan which includes self-employed individuals will not qualify under section 401 of the Code, if the plan provides only such retirement benefits as are furnished through the purchase of ordinary life insurance contracts, or similar life insurance contracts providing death benefits greater than 100 times the amount of the monthly retirement income available under such contracts.