Rev. Rul. 81-196

ISSUE

Does the defined benefit pension plan described below satisfy the level annual premium requirement of section 412(i)(2) of the Internal Revenue Code?

FACTS

Plan X is a qualified defined benefit pension plan with a calendar plan year. Prior to 1980, the plan was not a plan described in section 412(i) of the Code. On January 1, 1980, the fair market value of the plan's assets was $100,000. As of January 1, 1980, single premium deferred annuity contracts, with cash surrender values equal to the present value of each participant's accrued benefit, were purchased for $80,000. Level annual premium annuity contracts were also purchased to provide the additional normal retirement benefit under the terms of the plan The excess $20,000 was paid to the insurance company as pre-paid premiums for the level annual premium contracts.

LAW AND ANALYSIS

Section 412(i) of the Code describes certain insurance contract plans that, under section 412(h), are exempt from the minimum funding requirements. Section 412(i)(2) requires that the insurance contracts that fund such a plan must provide for level annual premium payments to be paid extending not later than the retirement age for each individual participating in the plan, and commencing with the date the individual became a participant in the plan (or, in the case of an increase in benefits, commencing at the time such increase becomes effective).

The conversion of an existing defined benefit pension plan to a plan funded in the manner prescribed by section 412(i) would cause level premium payments to commence after the conversion and, thus, at a date later than the beginning of participation for an individual who was a participant before the conversion. Nevertheless, the requirement that payment of level annual premiums commence with the beginning of plan participation will be considered satisfied for all years after a conversion date if: (a) all benefit accruals for each participant after the conversion date (the excess of the total accrued benefit over the benefit accrued as of the conversion date) are funded exclusively by contracts which provide for level annual payments, with respect to the increased accrual, which are to be paid for the period commencing at the time the increased accrual becomes effective and ending not later than the individual's normal retirement age, and

(b) all benefits accrued for each participant prior to the conversion date are fully guaranteed by insurance contracts which have cash values equal to the present value of such accrued benefits.

Because it satisfies these two requirements, Plan X satisfies the level premium payment requirement of section 412(i)(2) of the Code.

Similarly, Plan X would also satisfy the two requirements even if the cost for the single premium contracts was $130,000, provided the employer contributed an additional $30,000 (to supplement current assets of $100,000) in order to purchase contracts which fully guaranteed the benefits accrued prior to the conversion.

This additional contribution would be deductible in accordance with the rules under section 404(a)(1)(A) of the Code.

HOLDING

Plan X satisfies the level annual premium requirement of section 412(i)(2) of the Code.