Rev. Rul. 70-257

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in PS No. 64, dated November 9, 1950, and Revenue Ruling 55-681, C.B. 1955-2, 585. The questions presented are (1) whether under the circumstances described below a permanent program exists within the meaning of section 1.401-1(b)(2) of the Income Tax Regulations, (2) whether a fixed benefit and a stated rate of contributions meet the requirement in section 1.401-1(b)(1)(i) of the regulations that benefits must be definitely determinable, and (3) whether the deduction limitations will be based on the fixed benefits provided under the plan.

Pursuant to a union contract, all employees of the company who are compensated on an hourly wage basis are covered under a trusteed pension plan that provides for a fixed monthly benefit commencing at normal retirement age 65 for those employees who have completed 25 years of service at such time and proportionate benefits for those who have then completed at least 15 years of service but less than 25 years. The entire cost of the plan is funded by company contributions equal to a fixed percentage of wages paid to all participating employees. An officer of the company certifies that actuarial computations have been prepared indicating that the expected contributions during the first five years of the plan will be not less than the full costs of prospective pensions for employees expected to retire under the plan during the first five years, nor less than the normal costs plus interest accruing on unfunded past service costs for all employees under the plan during that period. He also certifies that the methods and assumptions used in such computations and the results thereof are accepted by the company as reasonable. The plan will be maintained without change for a period of five years and then may be modified in accordance with the terms of a contract then to be renegotiated.

With respect to permanence, section 1.401-1(b)(2) of the regulations provides that the term "plan" implies a permanent program as distinguished from a temporary program. That section also indicates that the abandonment of a plan for any reason other than business necessity within a few years after it has taken effect will be evidence that the plan from its inception was not a bona fide program for the exclusive benefits of employees.

The contract between the company and the union is to terminate at the end of five years, but the plan itself does not provide for cessation at the end of the stated time. On the contrary, on the basis of the facts presented, the plan was intended, at its inception, to be a continuing and permanent program within the purview of section 401(a) of the Internal Revenue Code of 1954. Upon renegotiation of the union contract, the company and the union may agree that the plan will be maintained without change, that the plan will be modified in some respect, or that the plan will be terminated. In this respect, the plan is similar to plans generally in which provision is made for amendment and discontinuance.

Regarding definiteness, section 1.401-1(b)(1)(i) of the regulations states that a pension plan is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits.

The relationship between the fixed benefits and the stated rate of contributions in this case is supported by an actuarial computation that the employer certified it accepted as reasonable. Furthermore, the plan is similar to other plans in that it may later be changed or terminated. The definiteness of this pension plan is not adversely affected merely because it provides for a fixed benefit and a stated rate of contributions. This determination, however, is not to be taken as an indication that the Internal Revenue Service is in any way passing on the actuarial soundness of the plan or on the reasonableness of the actuarial computations.

In this type of plan, the deduction limitations under section 404(a)(1) of the Code are based on the fixed benefits without reference to the projected contributions and are based on the assumption that the plan will be continued beyond the five-year-contract period.

Accordingly, it is held that (1) a permanent program exists within the meaning of section 1.401-1(b)(2) of the regulations, (2) the plan does provide definitely determinable benefits, and (3) the deduction is based on the cost to fund the fixed benefits.

The principles set forth herein are equally applicable to the unit benefit type of pension plan, such as a plan providing a pension based on a percentage of compensation for each year of service.

PS No. 64 and Revenue Ruling 55-681 are hereby superseded since the positions set forth therein are incorporated in this Revenue Ruling.