Rev. Rul. 54-531

Advice is requested whether any part of lump sum payments made to beneficiaries of deceased employee participants under a pension, profit-sharing or stuck bonus plan qualified under section 165(a) of the Internal Revenue Code of 1939, is subject to the exclusion provided under section 22(b)(1)(B) of the Code.

In the instant case, the plan provides that on termination of a participant's service, before death or retirement, he will not share in the employer's contribution for the year in which such termination occurs, and his account will be reduced by and charged with the portion of the employer's contributions credited to his account as of the 2 next preceding years. The plan further provides that on the retirement or death of a participant the balance in his account shall be distributed.

Under section 39.22(b)(1)-2 of Regulations 118, the exclusion provided by section 22(b)(1)(B) of the Code may be applicable to payments made, on account of the death of an employee, by a trust meeting the requirements of section 165(a) of the Code. The foregoing section of the regulations further provides that the exclusion does not apply to amounts with respect to which the deceased employee possessed, immediately prior to his death, a nonforfeitable right to receive the amounts while living.

If, in the instant case, the employee's services are terminated, other than by death or retirement, he will forfeit the employer's contributions made on his behalf for the year in which the termination occurs plus such contributions for the 2 next preceding years. This portion of the amount paid to a beneficiary of a deceased employee is considered an amount payable solely by reason of the employee's death.

Accordingly, it is held that lump sum payments made on account of the death of an employee, to the extent exceeding the amount that would have been payable had the employee's services been voluntarily terminated immediately prior to death, may be excluded from the beneficiary's gross income, limited to $5,000.