Rev. Rul. 61-75

The Internal Revenue Service has formulated the following guides as a modification of Mimeograph 6641, C.B. 1951-1, 41, for determining whether a pension, annuity, profit-sharing or stock bonus plan integrates with benefits provided by the Social Security Act as amended through 1958.

1. Pertinent regulations. - Section 1.401-3(e) of the Income Tax Regulations, as amended by T.D. 6447, C.B. 1960-1, 163, establishes the general basis for integration of pension, annuity, profit-sharing and stock bonus plans which limit coverage to employees earning in excess of $4,800 a year, or which base contributions or benefits only on compensation in excess of that amount, with benefits provided by the Social Security Act as amended through 1958. This basis is analogous to that provided in paragraph 5 of Mimeograph 6641 for plans meeting certain conditions, but with $4,800 substituted for $3,600.

2. Definition of average annual compensation .-A more liberal definition of `average annual compensation' than that originally provided in the Mimeograph may now be used in such plans, as indicated in section 1.401-3(e)(2)(i) of the regulations. Accordingly, paragraph 4(f) of Mimeograph 6641 is modified to read, `The term `average annual compensation' means the annual compensation averaged over a period of at least five consecutive years, provided a uniform rule is used for all employees. For this purpose it is acceptable to use for each employee the period of five consecutive years which will produce the highest average for him. If an employee has less than five years of service, the average may be taken over his total period of service.'

3. Normal form of retirement benefit other than a straight life annuity .-Paragraph 7 of Mimeograph 6641 is modified by inserting immediately after the colon in the second sentence thereof, `Annuity for 5 years certain and life thereafter-97 percent.'

4. Early retirement or severance benefits .-Paragraph 9(b) of Mimeograph 6641 is modified to read, `If the early retirement or severance benefits are paid in any form other than described in subparagraph (a) above, the value thereof cannot exceed the actuarial value at the time of retirement or severance of the maximum benefits determined in accordance with subparagraph (a). Where the early retirement or severance benefits are paid in the form of an annuity beginning before age 65 (60 for women), this requirement will be deemed to be satisfied if the annual benefits do not exceed the maximum amounts determined in accordance with subparagraph (a) reduced by one-fifteenth thereof for each year that the age of the employee at the time such annuity benefits begin is less than age 65 (60 for women).'

5. Permissible minimum benefits .-Paragraph 17 of Mimeograph 6641 is modified by inserting after the second sentence thereof the following sentence: `These limits on minimum benefits do not apply where (a) there is no minimum compensation requirement for obtaining the minimum benefits and (b) the formula for determining the minimum benefits does not involve integration requirements in any other way.'

6. Other pension and annuity plans .-For pension and annuity plans of the type described in paragraph 1 of this Revenue Ruling, but not meeting the conditions listed in paragraph 5 of Mimeograph 6641, the provisions of the Mimeograph set forth in paragraphs 6, 7 (as modified herein), 8, 9 (as modified herein), 10, 12, 13, 14, 16, and 17 (as modified herein) will apply, but with $4,800 substituted for $3,600.

7. Excess plans with minimum compensation level between $1320 and $4800 .-A pension or annuity plan with minimum compensation level between $1320 and $4800 a year will be considered to be integrated if it satisfies the provisions of paragraph 11 of Mimeograph 6641, but with $4800 substituted for $3600, with $1320 substituted for $1200, and with $750 substituted for $630.

Example: A noncontributory pension plan which limits coverage to employees earning in excess of $3000 a year provides normal annual retirement benefits, upon retirement at age 65 with at least 15 years of service, of 18 percent of average annual compensation in excess of $3000 but not in excess of $4800, plus 36 percent of average annual compensation in excess of $4800, on a 10-years certain and life form. In case of death or severance of employment for other reason before normal retirement, benefits equal to the reserve accumulated on a typical level funding method are paid. Such plan is integrated. This is determined as follows:

(a) Step (1) : $750 divided by $3000 equals 0.25.

(2) : 0.25 x 8/9 x 90 percent equals 20 percent.

(b) Step (1) : The lesser of the 20-percent rate determined in (a) and the actual 18-percent rate provided by the plan is 18 percent.

(2) : $4800 minus $3000 equals $1800.

(3) : 18 percent of $1800 equals $324.

(4) : $324 divided by $4800 equals 6 3/4 percent.

(5) : 6 3/4 percent plus 30 percent equals 36 3/4 percent. Thus the 36-percent rate provided by the plan does not exceed the maximum permissible rate.

(c) The benefits determined by application of the above percentages are appropriately adjusted in cases of severance of employment before normal retirement.

8. Offset plans .-For pension and annuity plans of the type described in the first sentence of paragraph 15 of Mimeograph 6641, where the benefits otherwise provided by the plan formula are reduced or offset by a percentage of the employee's old-age insurance benefit as set forth in the Social Security Act Amendments of 1958, the provisions of paragraph 15 of the Mimeograph will apply, but with 117 percent substituted for 140 percent and with 104 percent substituted for 125 percent.

Example: A pension plan covering all employees regardless of earnings provides normal annual retirement benefits at age 65, on a 10-years certain and life form, of 50 percent of annual compensation as defined in the plan, less 7/8 of the employee's old-age insurance benefit (as set forth in the Social Security Act Amendments of 1958), to which the employee is, or would on filing application be, entitled. In case of early retirement, no offset is applied to the benefits paid before age 65. In case of death before retirement, there is a benefit equal to the greater of the reserve or the total prior contributions, accumulated on a typical level funding method. No benefits, other than in the case of death or early retirement, are payable before age 65. The employees do not contribute. Such plan is integrated because the offset of 7/8 (87.5 percent) of old-age insurance benefits does not exceed the maximum offset permissible in a plan of this type. Such maximum offset for this type of plan is determined as follows:

90 percent times 104 percent equals 93.6 percent.

9. Application of other rulings .-The principles of paragraph 18 of Mimeograph 6641 are hereby extended. Thus, a pension or annuity plan which does not conform to the foregoing provisions of this Revenue Ruling will nevertheless be considered to satisfy the requirements for integration with the Social Security Act if it conforms to the provisions of any one of the following:

(a) Mimeograph 5539, C.B. 1943, 499, as amplified by PS No. 30, dated September 16, 1944, and Part 4(i)(2) of Revenue Ruling 57-163, C.B. 1957-1, 128, at 143-144;

(b) Mimeograph 6641, C.B. 1951-1, 41, as amended by Revenue Ruling 13, C.B. 1953-1, 294, and by paragraphs 2, 3, 4, and 5 of this Ruling; or

(c) Revenue Ruling 56-692, C.B. 1956-2, 287.

A pension or annuity plan will also be considered to satisfy the requirements for integration with the Social Security Act if that portion of the benefits attributable to service prior to any specified date conforms to the provisions of (a), (b), or (c) of this section, and that portion of the benefits attributable to service subsequent thereto satisfies the applicable provisions of this Revenue Ruling.

10. Additional benefits provided by excess earnings .-If, under a pension or annuity plan which involves integration with the Social Security Act, excess earnings of a trust fund or dividends received on contracts may be used to provide additional benefits for the participants, the provisions of Revenue Ruling 60-337, C .B. 1960-2, 151, and PS No. 45, dated January 26, 1945, are also applicable.

11. Profit-sharing or stock bonus plans .-A profit-sharing or stock bonus plan of the type described in paragraph 1 of this ruling will be considered to satisfy the requirements for integration with the Social Security Act only if:

(a) The amount of employer contributions plus forfeitures allocated to any participant in any year does not exceed 9 3/8 percent of his actual compensation for the year in excess of $4800, except that a minimum allocation not exceeding $60 may by provided for each participant in any year that allocations are made:

(c) The plan provides benefits only upon retirement or separation from service;

(c) All contributions are allocated on a nondiscriminatory basis when made; and

(d) The employer does not also have in existence a pension or annuity plan which involves integration with the Social Security Act and which provides for employer contributions or benefits based upon all or part of the same compensation considered under the profit-sharing or stock bonus plan.