Rev. Rul. 78-178

Advice has been requested whether unemployment compensation benefits constitute "retirement benefits created under State or Federal law" within the meaning of section 401(a)(5) of the Internal Revenue Code of 1954, and may therefore be used as an acceptable offset against benefits under a pension plan qualified under section 401(a) of the Code.

Section 401(a)(5) provides that a plan shall not be considered discriminatory merely because the contributions or benefits of or on behalf of the employees under the plan differ because of any retirement benefits created under State or Federal law.

Section 1.401-4(b) of the Income Tax Regulations limits the State or Federal programs that may be used as an offset so that the total benefits resulting under the plan and under the program must establish an integrated and correlated retirement system satisfying the tests of section 401(a).

Revenue Ruling 68-243, 1968-1 C.B. 157, provides that benefits from programs that require employer contributions and make benefits available to the general public may be offset against benefits under a qualified pension plan.

Unemployment compensation laws do require employer contributions and are available to the general public. The issue is whether unemployment compensation benefits together with qualified pension plan benefits establish an integrated and correlated retirement system. There are many types of benefits under public programs that do not lend themselves to integration with private pension plan benefits. Thus a correlated retirement system could not exist. Only those programs which provide benefits that may be provided under a qualified pension plan may be used as an offset since only then could a correlated retirement system exist. For example, the benefits payable under State or Federal programs because of sickness and maternity, and which include cash benefits and medical services, may not be used as an offset to pension plan benefits because such benefits may not be provided under a qualified pension plan. See section 1.401-1(b)(1)(i) of the regulations.

Unemployment compensation benefits are paid for temporary periods of layoff. Under section 1.401-1(b)(1)(i) of the regulations, a qualified pension plan may not provide layoff benefits. Consequently unemployment compensation falls into the broad category of State and Federal programs that may not be used as an offset to qualified pension plan benefits since such type of benefits may not be provided under a qualified pension plan.

Revenue Ruling 68-243 allows the offsetting of pension plan benefits by the benefits payable under workmen's compensation laws and other occupational diseases laws. These benefits are payable upon an employee's disablement. Section 1.401-1(b)(1)(i) of the regulations specifically allows the payment of pension plan benefits upon disability. Therefore these programs may be used as an offset to plan benefits. Because workmen's compensation laws are distinguishable from unemployment compensation laws, Revenue Ruling 68-243 should not be construed as allowing an offset for unemployment compensation benefits.

This Revenue Ruling is effective on the first day of the first plan year commencing after December 31, 1978.

In the case of a person employed at any time by the employer on or after the effective date of this Revenue Ruling, the offset for unemployment compensation benefits may not be applied on or after the first date after such effective date on which such person is so employed. In the case of a person who leaves the employ of the employer before such effective date and who is not reemployed by the employer on or after such effective date, such offset may be applied to reduce such person's benefits.