Rev. Rul. 60-59

Advice has been requested whether the amendment of an employees' pension plan to provide for the payment of death benefits after retirement will cause such plan and trust, forming a part thereof, to fail to meet the requirements of section 401(a) of the Internal Revenue Code of 1954 and the trust to lose its exempt status under section 501(a) of the Code.

An employer had established an employees' contributory pension plan which had been held to meet the requirements of section 401(a) of the Code. The pension benefits are based on a stated percentage of salary for each year of service subject to a maximum of $30,000 a year.

The pension is for a period certain and life thereafter. The plan is amended to provide that, upon the death of a retired employee, his beneficiary shall be paid an amount equal to fifty percent of one year's base salary as in effect in the year preceding his retirement. This death benefit is subject to a minimum amount of $2,000 and a maximum of $15,000. There is no provision in the plan for payment of a death benefit if death occurs before retirement, other than a refund of the employee's own contributions with three percent interest.

The amendment providing death benefits increases the cost of the retirement plan by approximately seven percent. On the average, the death benefits will cost approximately the same as if the pension benefits were continued one year after the death of the retired member.

Section 1.401-1(b)(1)(i) of the Income Tax Regulations states, in part, that a qualified pension plan may provide for the payment of incidental death benefits by insurance or otherwise. However, the primary purpose of the plan must be to provide systematically for the payment of definitely determinable benefits to the employees over a period of years, usually for life, after retirement.

Revenue Ruling 56-656, C.B. 1956-2, 280, holds that a plan in which an employee could elect, prior to retirement, to have all or part of his interest paid to his beneficiaries after his death would fail to meet the requirements of section 401(a) of the Code. The present case is distinguishable in that it involves a death benefit that is `incidental' within the meaning of section 1.401-1(b)(1)(i) of the regulations.

Accordingly, it is held that a pension plan will not fail to meet the requirements of section 401(a) of the Code merely because it provides a deth benefit in case of death after retirement, which is equal to fifty percent of one year's base salary as in effect in the year preceding the employee's retirement, and which costs less than ten percent of the cost of the pension plan determined by excluding the cost of such death benefit.