Rev. Rul. 84-156

ISSUE

Does a pension plan provision for use of forfeitures in the manner described below satisfy the requirements of section 401(a)(8) of the Internal Revenue Code?

FACTS

A corporation established a money purchase pension plan that provides for the contribution of a specified percentage of each employee's compensation. It also provides that forfeitures will be used to reduce reasonable administrative expenses with any excess to be used to reduce further employer contributions.

LAW AND ANALYSIS

Section 401(a)(8) of the Code provides that a trust forming part of a pension plan will not be qualified unless the plan provides that forfeitures must not be applied to increase the benefits any employee would otherwise receive under the plan.

Section 1.401-7(a) of the Income Tax Regulations requires that forfeitures arising from severance of employment, death, or for any other reason must be used as soon as possible to reduce the employer's contributions to the plan. However, in determining cost under a qualified pension plan, it is permissible to anticipate the effect of forfeitures.

Rev. Rul. 67-68, 1976-1 C.B. 86, states that provisions requiring that forfeitures be applied to reduce employers' future contributions have the effect of precluding the use of forfeitures to increase benefits otherwise provided under the plan and are consistent with section 401(a)(8) of the Code.

The use of forfeitures first to reduce administrative expenses which could have been made up for future contributions and then to reduce future contributions will not be considered inconsistent with the requirement of section 1.401-7(a) of the regulations that forfeitures be used as soon as possible to reduce employer contributions.

HOLDING

The plan provisions for use of forfeitures satisfies the requirements of section 401(a)(8) of the Code.