INTEGRATION WITH SOCIAL SECURITY; GUIDES

Rev. Rul. 86-74

SECTION 1. PURPOSE

The purpose of this revenue ruling is to modify Internal Revenue Service guidelines for determining whether pension, annuity, profit- sharing, and stock bonus plans integrate with benefits provided by the Social Security Act because of changes made by the Social Security Amendments of 1983, Pub. L. 98-21, 1983-2 C.B. 309.

SECTION 2. BACKGROUND INFORMATION.

Section 3.03 of Rev. Rul. 71-446, 1971-2 C.B. 187, defines compensation for purposes of that ruling as either (1) the amount of compensation that would be subject to tax under section 3101(a) of the Internal Revenue Code without the dollar limitation of section 3121(a)(1) of the Code or (2) the amount of compensation determined according to a restrictive definition such as compensation inclusive or exclusive of bonuses, commissions or overtime pay, or as basic compensation, or as the regular rate of compensation provided that whatever definition is used cannot result in prohibited discrimination.

Service guidelines for determining whether plan benefits integrate with benefits provided under the Social Security Act in Rev. Rul. 71-446 and Rev. Rul. 83-97, 1983-2 C.B. 72, assume that age 65 is the age at which unreduced old-age insurance benefits commence under the Social Security Act.

The Social Security Amendments of 1983(1) amended the Code to provide that certain items of deferred compensation are included in the definition of taxable wages and (2) changed the age at which unreduced old-age insurance benefits commence under the Social Security Act for those born after January 1, 1938.

SECTION 3. DEFINITION OF COMPENSATION

Except as provided below, for purposes of Rev. Rul. 71-446, deferred compensation is excluded from the definition of "compensation" in section 3.03 of that revenue ruling. However, in accordance with Rev. Rul. 83-89, 1983-1 C.B. 88, and Rev. Rul. 84-74, 1984-1 C.B. 118, elective contributions (1) under a qualified cash or deferred arrangement described in section 401(k) of the Code or (2) to a tax sheltered annuity described in section 403(b) of the Code may be included in "compensation" under section 3.03 of Rev. Rul. 71- 466.

SECTION 4. OFFSET PLANS

Offset plans, as defined in Rev. Rul. 71-446, base the offset upon the old-age insurance benefit payable under the Social Security Act. The application of section 11 (and section 10.02) of Rev. Rul. 71-446 and the application of Rev. Rul. 83-97 to offset plans is based upon age 65 being the age at which unreduced old-age insurance benefits commence under the Social Security Act. Age 65 remains the age at which unreduced old-age insurance benefits commence for individuals born before January 2, 1938. However, because the age at which unreduced old-age insurance benefits commence for individuals born before January 1, 1938, has been increased by the Social Security Amendments of 1983, the application of section 11 (and section 10.02) of Rev. Rul. 71-446 and the application of Rev. Rul. 83-97 to offset plans with respect to individuals born after January 1, 1938, is modified by substituting for age 65 the age at which unreduced old-age insurance benefits commence.

Example 1:

An offset plan established by an employer covers an employee retiring at normal retirement age 65 and for whom age 67 is the age at which unreduced old-age insurance benefits commence. The plan may comply with Rev. Rul. 71-446, as modified herein, using one of the alternatives in section 11.01 for the period from age 65 to 67 and applying the reductions of section 10.02(1) or section 10.02(2) for that same period by substituting age 67 for age 65 wherever it appears in those sections.

Example 2:

An offset plan defines the normal retirement age as age 65 with the offset at age 65 based upon the old-age insurance benefits payable at age 65. For early retirement or other separation from service before age 65, the plan may satisfy the requirements of the preceding paragraph by using either of the alternatives of section 11.01 of Rev. Rul. 71-446 for the period of service between the age of early retirement or separation from service to age 65. In applying the 1/15 and 1/30 factors of section 10.02(1) pursuant to section 11.02 when applicable in this situation, the age at which unreduced old-age insurance benefits commence is substituted for age 65. Accordingly, the offset at age 65 is reduced by the 1/15 and 1/30 factors multiplied by the applicable number of years (including portions thereof) by which the age of early retirement or separation from service precedes age 65. However, the number of years for which the 1/15 factor applies may not exceed five minus the number of years (including portions thereof) by which the age at which unreduced old- age insurance benefits commence exceeds age 65.

SECTION 5. EXCESS PLANS

For excess plans (including step-rate excess plans), no change is required in the otherwise applicable integration limits determined under sections 5 and 6 of Rev. Rul. 71-446.

SECTION 6. PROSPECTIVE APPLICATION FOR CERTAIN PLANS

For plans in existence on May 27, 1986, that satisfy the Service's requirements for integration with social security benefits before the Social Security Amendments of 1983 and the modifications specified herein but fail to satisfy these requirements because of this change in law and these modifications, pursuant to the authority contained in section 7805(b) of the Code, this revenue ruling is effective only with respect to plan years commencing after December 31, 1986, for plan participants having any service after December 31, 1986. The plan amendments necessary for such plans to satisfy the Service's requirements for integration with social security benefits as modified herein must be adopted by the last day of the first plan year commencing after December 31, 1986, to be effective as of the beginning of that plan year. Under section 411(d)(6), such amendments must not reduce any plan participant's accrued benefit as to the later of the date of adoption or the effective date of the amendments. Because of the nature of necessary plan amendments, the accrued benefits of some plan participants may be increased.

For plans other than those described in the preceding paragraph, this revenue ruling is effective for plan years beginning after May 26, 1986.

SECTION 7. EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 71-446 is modified by the changes specified herein.