Rev. Rul. 68-369

Advice has been requested concerning the allowance for employee contributions under a pension or annuity plan designed to be integrated with benefits provided by the Social Security Act where (1) benefits under the plan are based on "average annual compensation" as that term is defined in paragraph 2 of Revenue Ruling 61-75, C.B. 1961-1, 140, rather than on compensation averaged over the entire period of participation, and (2) the plan does not utilize life insurance contracts to provide part of the benefits.

Paragraph 13 of Mimeograph 6641, C.B. 1951-1, 41, as modified by Revenue Ruling 61-75, provides that in the case of a plan to which employees contribute, the applicable integration limit may be increased by 1/10 of an employee's aggregate contributions exclusive of those applicable to the current cost of insurance or death benefits in excess of the reserve or cash value.

If a plan of the unit-benefit type does not utilize life insurance contracts to provide part of the benefits, and if the benefit rate and employee contribution rate are both applied to actual compensation during each year of participation, the applicable integration limit (expressed as a rate for each year of participation) may be increased by 1/10 of the rate of employee contributions. Note that this results in the same integration limit as the method outlined in paragraph 13 of Mimeograph 6641.

For example, an excess plan of the unit-benefit type that does not utilize life insurance contracts to provide any of the benefits provides a normal retirement benefit equal to 1 1/2 percent of actual compensation in excess of $4,800 for each year of participation, payable on a modified cash refund form upon retirement at age 65. Each participant is required to make regular contributions of 2 1/2 percent of his annual compensation in excess of $4,800. Such plan is integrated, since the normal annual retirement benefit of any participant does not exceed the applicable limit determined as follows:

     1/30 X 37 1/2% = 1 1/4%

In cases where (1) benefits under a plan of the unit-benefit type are based on "average annual compensation" as that term is defined in paragraph 2 of Revenue Ruling 61-75, and (2) the plan does not utilize life insurance contracts to provide part of the benefits, the applicable integration limit (expressed as a rate for each year of participation) may be increased by 1/15 of the rate of employee contributions.

For example, an excess plan of the unit-benefit type does not utilize life insurance contracts to provide any of the benefits, and provides a normal retirement benefit, based on compensation averaged over the period of five consecutive years that will produce the highest average for each participant, equal to 1 percent of such average annual compensation in excess of $4,800 times years of participation, payable on a modified cash refund form upon retirement at age 65. Each participant is required to make regular contributions of 2 1/2 percent of his annual compensation in excess of $4,800. Such plan is integrated, since the normal annual retirement benefit of any participant does not exceed the applicable limit determined as follows:

     1/45 X 37 1/2% = 5/6%