Rev. Rul. 79-90

Advice has been requested concerning whether a defined benefit pension plan which provides optional forms of benefit at normal retirement age which are "actuarially equivalent" to the normal benefit satisfies the "definitely determinable benefits" requirement of section 1.401-1(b)(1)(i) of the Income Tax Regulations.

The ABC Company established a defined benefit pension plan which provides a normal retirement benefit at age 65 equal to X dollars, payable as a single life annuity. A participant may alternatively select an optional form of annuity, but that annuity will equal the "actuarial equivalent" of the X dollar normal benefit. The plan does not specify what actuarial assumptions will be used to compute this "actuarial equivalent."

Section 1.401-1(b)(1)(i) of the regulations defines a pension plan, within the meaning of section 401(a), as "a plan established and maintained by an employer . . . to provide . . . definitely determinable benefits to his employees . . . after retirement."

Rev. Rul. 74-385, 1974-2 C.B. 130 provides that, in the case of a defined benefit plan, the definitely determinable benefit requirement of section 1.401-1(b)(1)(i) of the regulations is satisfied where the benefits for each participant can be computed in accordance with an express formula contained in the plan that is not subject to the discretion of the employer.

Whenever the amount of a benefit in a defined benefit plan is to be determined by some procedure (such as "actuarial equivalent", "actuarial reserve", or "actuarial reduction") which requires the use of actuarial assumptions (interest, mortality, etc.) the assumptions to be used must be specified within the plan in a manner which precludes employer discretion. For purposes of this revenue ruling, employer discretion includes discretion of the employer, plan administrator, fiduciary, actuary, etc.

Two acceptable fixed standards which satisfy this requirement are:

(1) specifying the actuarial assumptions (interest, mortality, etc.) to be used, or

(2) including a table of adjustment factors to be used.

As an alternative to these fixed standards, the plan may specify a variable standard which provides for self-adjusting changes which are independent of employer discretion.

Two acceptable variable standards are:

(1) specifying that the procedure will be performed by reference to a specified insurance or annuity contract available at the time of benefit determination from a specified insurance company, or

(2) specifying that the interest rate will be a designated percentage of the prime interest rate of a specified bank or banks at the time of benefit determination (while all other assumptions are also specified).

Accordingly, since the subject plan does not sufficiently describe the procedure to be used in benefit computations, and the actuarial assumptions to be used in the computation are not definitely determinable, the plan benefits themselves are held to be not definitely determinable as required by section 1.401-1(b)(1)(i) of the regulations.

This revenue ruling considers only the questions as to whether benefits are definitely determinable. It does not consider whether any change in specified assumptions by plan amendment violates either sections 401(a)(4) or 411(d)(6) of the Code.

Inasmuch as employers may not have been aware that a plan must specify assumptions in these circumstances, this revenue ruling, pursuant to the authority contained in section 7805(b) of the Code, will not be effective for any plan in existence on March 12, 1979 until the first plan year beginning after December 31, 1983. At that time, the ruling will be effective only with respect to participants who either separate from service or accrue benefits on or after the date the ruling applies to the plan. Any determination letter issued to such a plan (where the plan does not specify the assumptions) will indicate that the determination letter may not be relied on with respect to whether benefits are definitely determinable for any plan year beginning on or after December 31, 1983.

This ruling will be immediately effective for any plan not in existence on March 12, 1979.

Despite this delayed effective date, plans which currently specify the actuarial assumptions for equivalence purposes may not remove these assumptions.