Rev. Rul. 67-68

Advice has been requested whether two employees' pension plans satisfy the requirements of section 401(a)(8) of the Internal Revenue Code of 1954 and of section 1.401-7(a) of the Income Tax Regulations that forfeitures must not be applied to increase the benefits any employee would receive.

The first case involves a trusteed self-insured plan which provides that forfeitures will be used to reduce the employer's required contributions. The second case involves a nontrusteed group annuity contract under which employer contributions are not allocated to any specific participant but are determined by reference to accrued benefits. In both of these cases, the separation from service of a participant results in the reduction of the employer contributions required to fund accrued benefits for the remaining participants.

Section 401(a)(8) of the Code provides that a trust forming part of a pension plan shall not constitute a qualified trust unless the plan provides that forfeitures must not be applied to increase the benefits any employee would receive under the plan.

Section 1.401-7(a) of the regulations provides that, in the case of a trust forming part of a qualified pension plan, the plan must expressly provide that forfeitures arising from severance of employment, death, or for any other reason, must not be applied to increase the benefits any employee would otherwise receive under the plan at any time prior to the termination of the plan or the complete discontinuance of employer contributions thereunder. The amounts so forfeited must be used as soon as possible to reduce the employer's contributions under the plan. However, a qualified pension plan may anticipate the effect of forfeitures in determining the costs under the plan. Furthermore, a qualified plan will not be disqualified merely because a determination of the amount of forfeitures under the plan is made only once during each taxable year of the employer.

It is not necessary for a pension plan, intended to qualify under section 401(a) of the Code, to contain a specific statement regarding the application of forfeitures, provided that the plan makes it otherwise clear that forfeitures must not be applied to increase the benefits any employee would otherwise receive thereunder.

Both of the pension plans described above contain language the effect of which is that no part of the forfeitures may be used to increase benefits otherwise provided. The provisions requiring the use of forfeitures to reduce the employer's future contributions have the effect of preventing the use of forfeitures to increase benefits otherwise provided under the plans. Accordingly, the requirements of section 401(a)(8) of the Code are satisfied in each case.